Brazil’s central bank has selected nine private-sector proposals to progress as it explores the opportunities and challenges presented by central bank digital currency (CBDC).
Banco Central do Brasil (BCB) is developing its thinking on CBDC by tapping into LIFT Lab (Financial and Technological Innovations Laboratory) – an ‘innovation ecosystem’ it manages alongside National Federation of Associations of Central Bank Servers (Fenasbac) to encourage fintech-related proposals more broadly.
The ‘LIFT Challenge Real Digital’ (named after the real, Brazil’s national currency) – described as a collaborative environment seeking to identify the ‘fundamental characteristics of an infrastructure’ for a potential digital real – opened in late-November last year with a call for projects.
The BCB has announced that nine projects have been selected from 47 submitted proposals for follow-up in an implementation phase. The selected projects focus on capitalising an opportunities such as programmable payments and solving CBDC challenges including offline payments.
The development comes just under 10 months after Brazil’s central bank published what it described as ‘general guidelines’ for a potential Brazilian CBDC. At the time the BCB, 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’.
CBDC projects being taken forward
The nine projects being taken forward involve some of the biggest names in the corporate world, as well as companies that specialise in digital money.
Participants were required to develop proposals that would bring new functionalities to Brazil’s payments system and ‘add value to Brazilian society’. Brazil is the world’s sixth biggest country by population with about 213 million citizens.
The companies selected are: Aave (headquartered in London); Banco Santander (Spain); Fabraban (Brazil); Giesecke + Devrient (Germany); Itaú Unibanco (Brazil) in association with B3 (Brazil stock exchange) and R3 (USA); Mercado Bitcoin (Latin American crypto platform based in Brazil), Fundação CPQD (Brazil), ClearSale (Brazil) and Bitrust (UK); TecBan and Capitual (Brazil); Vert, Digital Assets and Oliver Wyman (headquartered in the US); Visa (Brazil; headquartered in the US), ConsenSys (US blockchain company) and Microsoft (US).
The companies focused on applications ranging from internet of things (IoT)-related solutions to enabling payments when both payer and payee lack internet access (‘dual offline’). The proposal presented by Giesecke + Devrient, for example, focuses on ‘dual offline’ payments. The Vert-Digital Asset-Oliver Wyman proposal, meanwhile, focuses on rural financing based on a programmable token asset.
Implementation of the nine projects is scheduled to start on 28 March and end on 29 July.
An emphasis on the development of innovative business models based on technological advances such as IoT and programmable money were among the priorities noted in BCB’s guidelines published last year.
Israel examines impact on banks
In CBDC developments beyond Brazil, the Bank of Israel has published an analysis of the potential effects on the country’s banking system of issuing a digital shekel (also known as ‘shaked’: the Hebrew acronym for digital shekel).
Ten months ago the central bank issued a 40-page paper entitled ‘A Bank of Israel Digital Shekel – Potential Benefits, Draft Model and Issues to Examine’ setting out a draft model of a potential digital shekel to form ‘the basis for a discussion and for examination of alternatives’.
In its newly issued 29-page paper, the central bank’s focus reflects one of the highest profile concerns (which is not specific to Israel) about the issuance of CBDCs – that a structural shift could occur from private deposits to the CBDC (known as disintermediation of private banks).
The central bank’s analysis states that, under common assumptions regarding a substitution volume between public deposits and digital shekel, issuing a CBDC ‘would harm profitability but is not expected to lead to a significant erosion in the banking system’s business results, its stability or its ability to provide credit and fulfil its classic functions in a modern economy’.
One policy decision would be to limit the volume of CBDC people are able to hold. ‘Setting such restrictions could shed new light on the examination presented in this paper, as well as on the discussion of banking disintermediation in general,’ the Bank of Israel states, adding that it ‘continues to examine other issues that arise as part of the research and preparation toward a potential issuance of a digital shekel.’
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