The distributed ledger technology (DLT) sector is growing quickly, and innovation is paramount to its successful development. Promoters wager it will revolutionise how transactions are processed globally, shifting from an analogue to a digital system. But security and privacy remain concerns for central banks.
So far, regulatory oversight has been slow to catch up, and systems and regulators now need to work together to safeguard the financial system without stifling innovation. The South African Reserve Bank (Sarb) launched a project to test DLT initiatives that comply with payment regulators. The bank’s efforts and success have earned it Central Banking’s FinTech & RegTech Award for Best Distributed Ledger Initiative.
Project Khokha was launched to assess the performance, scalability, privacy, resilience and finality of a DLT solution under conditions as realistic as possible to those in the banking sector. It was designed, built and delivered in less than three months. The network was built on JP Morgan Chase’s Quorum network, using Istanbul Byzantine fault tolerance, Pedersen commitments and range proofs to deliver on the combination of scalability, resilience, confidentiality and finality.
The project created a distributed ledger between participating banks for a wholesale payment system, backed by central-bank deposits, allowing participating banks to pledge, redeem and track balances of the tokenised sovereign currency (rand) on the ledger. Each bank was responsible for the setup of its own node, and these nodes were then distributed.
Part of the project required setting specific measurable goals around transaction time, performance, privacy and security. But the project’s ultimate goal was to adhere to the Principles for Financial Market Infrastructures.
Performance-wise, Khoka’s network looked to scale up the volume of transactions from 70,000 to 200,000 per day, simulating typical South African real-time gross settlement requirements with a view for potential growth. The project also simulated trading a day’s worth of trades in two hours to test whether the network could cope with a day’s loss of processing. In terms of speed, the project’s goals were ‘the faster, the better’. The central bank set a benchmark for 95% of transactions to be validated in under a second, and 99% within two. Security systems were also tested, with all transaction details remaining fully confidential, meaning banks were unable to see each other’s transactions, while Sarb retained visibility.
The project was undoubtedly a success. The network was able to manage the typical daily volume of transactions processed through the South African payments system within two hours, with full transactional privacy and settlement finality.
Transactions were processed within two seconds across a network of geographically distributed nodes, with Sarb able to maintain regulatory oversight across the whole network.