Brazil’s central bank has set out the next steps of its journey towards the launch of a digital currency – newly named ‘Drex’ – as its experimentations with the platform that would underpin it advance through 16 projects.
Banco Central do Brasil (BCB) has, like many central banks globally, been increasing its investment into the development of a potential central bank digital currency (CBDC) and related infrastructure.
In its ‘testing phase for operations’ for Drex – previously known as the ‘Real Digital’ (Brazil’s national currency is the real) – the BCB plans to ‘evaluate 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’.
The central bank has already began incorporating participants into the pilot platform (since last month). Microsoft is involved in four different consortia. AWS, Mastercard and Visa are among the other global companies involved. (Global Government Fintech lists the 16 projects at the bottom of this article).
BCB received 36 proposals of interest to participate in what is being referred to as the Drex pilot (formerly known as Real Digital platform pilot) – which is scheduled to run until late-2024 – from a total of ‘more than 100 institutions from various financial segments’.
Many of the companies involved in this new phase of Brazil’s CBDC development were also involved in the ‘LIFT Challenge Real Digital’. This was an initiative focused on CBDC use cases run through LIFT Lab (Financial and Technological Innovations Laboratory) – an ‘innovation ecosystem’ managed by the BCB alongside National Federation of Associations of Central Bank Servers (Fenasbac).
RELATED ARTICLE Brazil selects nine proposals to develop digital currency – our news story almost 18 months ago (14 March 2022) on the BCB announcing that nine projects had been selected for the ‘LIFT Challenge Real Digital’ initiative
‘Programmability through smart contracts’
In the Drex pilot’s first (official) phase, privacy and programmability functionalities will be tested through a specific use case – a ‘título público federal’ (federal public bond) delivery-versus-payment (DvP) ‘protocolo’ (issuance) ‘between clients of different institutions, in addition to the services that make up this transaction.’
‘This use case allows the testing to focus on privacy, since it promotes the exchange of information between the various participants of the platform, and also tests the programmability of the services offered and their interoperability,’ according to the BCB.
The central bank provides further technical information on the overall platform pilot’s aims in a ‘Q&A’ (titled ‘BCB clarifies doubts about Drex’ – published on 15 August) on its website.
‘Distributed-ledger technologies (DLT), like blockchain, allow the automation of financial transactions using smart contracts, which are programs that run securely on DLT networks. In the current testing phase, Drex is being developed on Hyperledger Besu, a DLT incorporating smart contracts. Thus, programmability through smart contracts is a key part of Drex’s platform,’ the BCB states. Smart contracts are self-executing contracts that have terms of agreement between buyer and seller written into lines of code.
Unlike some central banks, the BCB 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 ‘Pix me?’: Brazil marks one year of instant payments system – our article (23 November 2021) on Pix, the instant payment platform created and managed by the BCB
CBDC examples: car sales, real estate and social benefits
The overarching message of the BCB’s Drex Q&A is that the CBDC ‘will bring more speed, convenience and lower cost to various contractual and financial transactions that Brazilians perform today […] it will make life easier for the citizen.’
To illustrate how a Drex transaction is seen as working, it provides the example of a car sale. ‘In the purchase and sale of a car, the seller often fears transferring the ownership of the vehicle without receiving the money first, whereas the buyer often fears paying before ownership is transferred,’ it states. ‘Due to Drex’s programmability, it doesn’t matter who makes the first move. Only when both conditions happen does Drex conclude the contract by simultaneously transferring money and ownership. If one of the parties fails, the car and the amount paid are returned to their respective owners.’
This section of the Q&A adds that Drex could also be used in the purchase of real estate, and that ‘in the future, even social benefits may be paid with Drex.’
The central bank draws parallels with Pix, the instant payment system it launched in 2020, saying that ‘in the same way that Pix has democratised access to payment services, Drex arrives to democratise access to financial services, such as credit, investment and insurance.’
‘Pix is an undisputed success and hard to match,’ the Q&A continues. ‘But the BCB aims to use the lessons learned from Pix to make Drex a top-rated platform that can be part of people’s everyday lives’. The Q&A quotes the BCB’s deputy governor for institutional relations, citizenship and conduct supervision, Maurício Moura, as saying: “Since its launch, Pix was soon incorporated as a common word in everyday life. Today, we all talk about ‘making a Pix’. Soon, we will also say ‘using Drex’.”
RELATED ARTICLE Blockchain bonds: digital issuance breakthroughs build buzz – a write-up of our 23 March 2023 webinar (‘‘Blockchain-based bonds: what potential for the public sector?’) that featured the BCB’s Bruno Batavia among the panel
Evolving possibilities
Bruno Batavia, who works in the BCB’s currency management department, discussed elements of Brazil’s CBDC development during a Global Government Fintech webinar on 23 March titled ‘Blockchain-based bonds: what potential for the public sector?’.
He told the online audience that the central bank was exploring the tokenisation of government bonds alongside the National Treasury (in Brazil the central bank is responsible for government bonds’ ‘back-end’ infrastructure and is also the dealer). ‘We [BCB] thought it would be interesting to partner with the Treasury and explore how we could move further from what we have nowadays in terms of infrastructure,’ he explained. He described a DvP settlement method ‘delivering federal government bonds against deposit tokens from financial institutions or payment institutions’, saying that the central bank was ‘adopting an infrastructure based on DLT [that] can handle multiple assets, not only government bonds’.
He mentioned that the BCB was looking at areas including programmability and that it also planned to explore the establishment of a ‘marketplace for peer-to-peer trades’.
The BCB published ‘general guidelines’ for a potential Brazilian CBDC in May 2021. At the time the central bank, which set up a CBDC working group in August 2020, said it wanted to ‘deepen discussion on the subject, including opening up dialogue with the private sector’.
In respect of the 16 projects, Brazil-headquartered financial services company Banco Bradesco is leading a consortium that includes London-based blockchain company SETL (which was acquired by Turkey-based firm Colendi more than a year ago) and Brazilian interbank clearing house Núclea. “We are immensely honoured to collaborate with the Brazilian Central Bank, Núclea and Banco Bradesco in this transformative project,” said SETL’s chief executive Anthony Culligan in a press release in which he described Brazil as a “rapidly developing economy” and “standing on the brink of financial innovation”.
Think you know CBDCs? An A(CID) to Z(KP) test – a feature article (26 June 2023) focused on some of the many technology considerations involved with CBDCs (the article is based on the Bank of England’s ‘Digital pound: technology working paper’, which digs deep into areas including smart contracts and programmability)
Drex: the name explained
‘Drex’ becomes the latest addition to the global CBDC lexicon. CBDCs already live include the Bahamas’ ‘Sand Dollar’, launched in 2020; the Eastern Caribbean Central Bank (ECCB)’s ‘DCash’, launched the following year; and Nigeria’s ‘eNaira’, also launched in 2021.
The BCB announcement of its CBDC’s name describes the logo as ‘a combination of letters that forms a word with a strong and modern sound: “d” and “r” allude to the Real Digital; “e” stands for electronic; and “x” conveys the idea of modernity and connection, as well as the distributed-ledger technology that underpins Drex.’
The central bank goes on to state that Drex’s ‘visual concept fits into the context of the modernisation agenda carried out by the BCB (Agenda BC#) and uses graphic and typographical elements that refer to the digital universe.’ It adds that ‘alluding to a transaction, the two arrows in the letter “d” represent the evolution of the real from a physical to a digital environment; reinforce the idea of agility; and that the use of colours changing from blue to light green intends to convey the idea of a “completed transaction”.’
The BCB’s Drex Q&A states that the ‘process of developing the Drex name started in 2022 when the main aspects of the Brazilian CBDC model had already become clearer’.
‘The purpose was to standardise communication regarding the Brazilian CBDC by centralising all communications on a single name. This standardisation should avoid using technical terms – such as ‘Digital Brazilian Real’, ‘tokenized Brazilian Real’, smart settlements or smart contracts – commonly used among Drex’s project participants but challenging to understand for most of the population,’ the Q&A states.
Drex pilot: the 16 projects
- Banco Bradesco, Núclea & SETL
- Nubank
- Banco Inter, Microsoft & 7Comm
- Santander, Santander Asset Management, F1RST & Toro CTVM
- Itaú Unibanco
- Basa, TecBan, Pinbank, Dinamo, Cresol, Banco Arbi, Ntokens, Clear Sale, Foxbit, CPQD, AWS & Parfin
- Box, Elo & Microsoft
- SFCoop: Ailos, Cresol, Sicoob, Sicredi & Unicred
- XP, Visa
- BV Bank
- BTG Bank
- Banco ABC, Hamsa, LoopiPay & Microsoft
- Bank B3, B3 & B3 Digital
- ABBC Consortium: Banco Brasileiro de Crédito, Banco Ribeirão Preto, Banco Original, Banco ABC Brasil, Banco BS2 & Banco Seguro, ABBC, BBChain, Microsoft & BIP
- MBPay, Cerc, Sinqia, Mastercard & Banco Genial
- Bank of Brazil
Source: https://www.bcb.gov.br/estabilidadefinanceira/piloto-drex
FURTHER READING
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