The institution joins a global trend that seeks to simplify payment transactions

 

Brazil is set to become one of the first South American countries to launch a sovereign digital currency, an instrument that’s expected to facilitate both local and cross-border electronic payments and curtail the use of cash.

At the end of May, the economist of the Central Bank of Brazil (BCB), Fábio Araújo, explained that the initial schedule of the CBDC (Central Bank Digital Currency) anticipated starting the pilot this year, but that the programming was delayed. The BCB expects to roll tests starting in 2023, and a good part of 2024, to achieve a launch in the second half of 2024.

CBDCs are a digital and cryptographic evolution of fiat money, such as the Brazilian real, the Argentine peso, and the dollar. Unlike bitcoin and other decentralized cryptocurrencies, these new assets are issued by the government and their regulatory bodies and therefore enjoy their endorsement as well as their oversight. The digital real will be backed by the country’s reserves and will seek a one-to-one parity with the physical real.

The BCB has said its CBDC is being designed for use in payment transactions for physical and online commerce and will also facilitate international transfers while reducing the use of cash. The monetary authority also expects it to lead to the creation of new service models and increased digital financial inclusion.

In addition, Campos Neto stated that, given the project’s importance, the central bank will take the necessary time to develop a useful and sustainable CBDC that’s in line with the standards of other central banks.

To that end, the BCB brought several financial firms, decentralized finance platforms (DeFi), traditional banks, fintechs and cryptocurrency exchanges together in an experimental space to assess the potential uses of its CBDC and its technological feasibility.

The forum is the LIFT Challenge Real Digital and so far, nine projects have been selected for follow-up. Participants include Visa, Itaú, Banco Santander, Bitcoin Market, and the Brazilian banking federation, Febraban.

 

Why digital currency?

The adoption of electronic payments continues to grow worldwide, which has forced regulators to ensure they are keeping up with the latest trends.

Many people see CBDCs as central banks’ response to the boom in cryptocurrencies such as bitcoin and ether, providing tokens to facilitate transactions in virtual environments.

It’s conceivable that sovereign digital currencies could eventually replace their physical counterparts as a means of payment and a store of value, in e-wallets and even the metaverse.

Ultimately, regulators are also counting on the modernization of money to lead to new products, services and business models that will continue to capture the attention of users who remain outside the financial system.

The principal advantage of these sovereign cryptoassets lies in their collateral strength, which is tied to the fiat currency of each country and ensures the legitimacy of their usage, trading and storage.

They also offer a crystal-clear benefit for banks. Decentralized cryptocurrencies —part of their core— are very volatile assets due to the lack of regulation, which makes it difficult for traditional players to use them as a means of payments or guarantee. This wouldn’t be the case with a CBDC.

The technology underlying CBDCs —distributed ledger technology (DLT) such as blockchain— allows central banks to closely monitor financial transactions and holdings of digital money.

Electronic money allows for more reliable transaction records, as there’s no counting of coins or banknotes but rather electronic transactions that leave an indelible mark in registers that can’t be modified.

 

CBDC around the world

A PwC study found that 80% of central banks worldwide are considering launching their own digital currency or have already done so. The first country to issue a CBDC was the Bahamas, which introduced the Sand Dollar in 2020 for use by all its citizens.

That same year, the People’s Bank of China began testing a digital yuan in closed environments. In January of this year, it expanded the experiment by launching a pilot for digital wallets. Initially the currency is expected to be used by commercial banks, allowing customers to transfer money between their bank accounts or between digital wallets.

Brazil is not the only country in the Americas that’s planning to join the cryptocurrency trend. In fact, the Central Bank of the Caribbean already issues DCash, which is circulating in St. Kitts and Nevis, Antigua and Barbuda, St. Lucia, and Grenada. One thing that sets DCash apart is that it’s the only blockchain-based currency that can be used in several countries.

Recently, the president of Argentina issued a decree to facilitate the issuance of virtual assets, which could be a preliminary step towards the development of that country’s own digital currency. Mexico, Peru, and Honduras have also announced that they plan to ride the CBDC wave.

The European Union, meanwhile, is taking a more cautious approach and is still weighing the benefits of a digital euro.

However, no one denies that the future of money will be digital, and this also applies to banking.

 

 

 

Andy Tran