Home Blockchain Brazil’s CBDC strives to overcome data-privacy ‘obstacle’ as pilot tests evolve

Brazil’s CBDC strives to overcome data-privacy ‘obstacle’ as pilot tests evolve

Brazil: the South American country’s central bank is – like many others – piloting CBCD technology (Sao Paolo photo by Bruno Mancini; Pexels); (inset) Fabio Araujo was among the BCB team members discussing Drex during a meeting broadcast by the central bank (Global Government Fintech screenshot from the BCB’s YouTube channel)

Brazil’s central bank has issued an update on its development of a central bank digital currency (CBDC), stating that data-privacy challenges remain an ‘obstacle’ as it rolls the turf for a second phase of pilot tests.

Like many central banks globally, Banco Central do Brasil (BCB) been exploring the launch of a CBDC – which it has named ‘Drex’ – in partnership with external partners, including major technology and payments companies.  

During the first phase of pilot activity, which began last year, those involved have been ‘evaluating the benefits of the programmability of the “Drex Platform”,’ which is described as a ‘multi-asset distributed-ledger technology (DLT) ecosystem where operations with tokenised assets settled wholesale will be simulated’.

But in an update (‘Banco Central atualiza Piloto Drex’ – ‘BCB updates Drex Pilot’) on 6 June (Portuguese only), the central bank states that ‘the privacy technological solutions tested so far, despite evolution over the period, have not demonstrated the necessary maturity to ensure compliance with all legal requirements related to the preservation of privacy and the protection of personal data.’

Fabio Araujo, who is co-ordinator of the ‘Drex Initiative’ in his role in the BCB’s banking operations and payment systems department, states in the update that testing Drex among the general population ‘depends on further advances’.

‘Drex will only be tested with the population when privacy requirements have been adequately addressed,’ the note states, adding that ‘at the moment, it is not yet possible to determine when this obstacle will be overcome’.

RELATED ARTICLE Brazil names CBDC ‘Drex’ as central bank expands tests of DLT-based platform – a news article (21 August 2023) as the BCB kicked off the first (official) phase of testing

Pilot participation to expand

Drex has been developed on Ethereum’s Hyperledger Besu, which is a DLT incorporating smart contracts. Smart contracts are blockchain-based digital contracts that are automatically executed when pre-determined terms and conditions are met.

The DLT infrastructure created for the pilot ‘has proved to be viable for transacting with the assets tested so far’, the BCB update states. But it adds that ‘in order to move forward in the development of the project, it is necessary to test the implementation of smart contracts created and managed by third parties participating in the platform.’

‘Thus, in the second phase of the pilot, one of the actions to be tested by the ecosystem will be the feasibility of smart contracts to be developed by the project participants,’ the note states. ‘In the previous [first] phase, the development of contracts was restricted to the central bank. As a result, this new stage of testing will also allow the maturation of the governance of the provision of third-party services.’

During the second phase, the BCB ‘will continue to prospect privacy solutions as part of the scope of the pilot’.

Unlike some central banks, Brazil’s central bank does not delineate between retail CBDC (a CBDC for the general population) and a wholesale CBDC (for interbank use) in much of its CBDC-related communications. But on a Drex-focused page on its website, the central bank explains that the BCB ‘aims at promoting the efficiency of financial markets and financial inclusion through the implementation of Drex, whose retail version will be provided by a regulated financial intermediary […] thus, the retail Drex will enable the population to access various types of financial transactions with digital assets and smart contracts to be settled in the wholesale Drex issued by the BCB within the Drex platform.’

RELATED ARTICLE Brazilian authorities look to bolster digital ID security with blockchain – a news article (10 October 2023) on state authorities starting to issue digital identification (ID) based on blockchain technology in a move aiming to boost the security and reliability of data-sharing between public bodies

Risk ‘clear’ since the start

The 6 June note quotes Araujo as stating that ‘privacy and security’ are “the factors that, in isolation, have the greatest impact on the [Drex launch] timeline”.  

“The risk associated with them was already clear at the beginning of the project and is part of the evolution of a research-and-development environment that seeks a solution that is still globally unprecedented,” Araujo is quoted as saying.

The central bank announced last year 16 different projects that would be involved in the pilot. Microsoft is involved in four consortia.

‘To broaden the discussion on use-cases in the pilot, the central bank, throughout the third quarter of 2024, will call on society to submit new proposals for participation in the Drex pilot,’ the update states.

‘Applicants will be required to submit new use cases for their own implementation of smart contracts on the Drex pilot network,’ it continues. ‘Those selected are expected to develop their smart contracts by the end of the first half of 2025.’

RELATED ARTICLE Brazil’s LIFT Lab operations ‘suspended indefinitely’ – a news article (1 September 2023) on ‘operational and human resource limitations’ hitting an accelerator-style initiative backed by Brazil’s central bank

More testing required

Araujo and colleagues took part in an online briefing on 22 May during which they discussed the project (YouTube: ‘Fórum Drex’ – 1hr23min: Portuguese language). 

The BCB published an announcement (‘Piloto do Drex entrará em segunda fase de testes’ – ‘Drex pilot will enter second phase of testing’ – Portuguese only) the same day, stating that it had revised the Drex pilot’s guidelines (rules) ‘in order to allow the advancement of its infrastructure in a second phase of testing’.

The goal, it stated, is ‘to incorporate new features and carry out new tests, promoting the evolution and maturation of the platform.’ The central bank explained that it will need to ensure the active participation of other regulators in the Drex platform, ‘especially’ the Brazil’s Securities and Exchange Commission (CVM).

Other companies that have been working with the BCB – which published ‘general guidelines’ for a potential Brazilian CBDC in May 2021 and set up a CBDC working group in August 2020 – include Giesecke + Devrient, which has been testing offline payments with Drex. The Germany-headquartered firm announced details of its work in March.

Privacy and offline payments are two of the most challenging areas for CBDC designers working on different projects across the globe.