With one of the most modern financial systems in the world, Brazil currently has one of the most advanced CBDC (Central Bank Digital Currency) projects on the planet.
Today, 134 countries and monetary unions are exploring some type of CBDC. This is equivalent to 98% of global GDP. To give you an idea of the advancement of digital currencies in the world, in May 2020, only 35 nations were exploring this type of asset. Today, 66 countries are already exploring advanced phases, such as development, piloting, or launching.
China leads world’s largest CBDC pilot
All of the G20 nations are also exploring a fiat digital currency. Of the 20 largest economies in the world, 13 are in advanced stages of pilot projects. These include Japan, India, Australia, Russia, Turkey and Brazil, with one of the most advanced pilots in the world. The Bahamas, Jamaica and Nigeria already have their own CBDCs, but they are all for retail only. The Brazilian project is much more complex.
The world’s largest CBDC pilot is in China. In June 2024 alone, total transaction volume reached 7 trillion e-CNY ($986 billion) across 17 provinces. For example, this figure is almost four times the 1.8 trillion yuan ($253 billion) recorded by the People’s Bank of China in June 2023. The data comes from the Atlantic Council, which monitors developments around the world.
Is the Brazilian CBDC one of the best in the world?
BeInCrypto Brazil spoke with experts involved in the Brazilian Central Bank’s Pilot Project.
George Marcel Smetana, Regulatory Strategy Innovation Specialist at Banco Bradesco, told us that it is “difficult to say which CBDC project is the best, given the different motivations involved in the initiatives underway around the world.”
In the case of Brazil, Drex was born with a clear vision of positioning itself as a settlement platform involving digital assets, taking advantage of the benefits of the programmability and composability of technology to encourage the creation of new business models, explains Smetana.
At the same time, ClearSale's strategy and innovation superintendent, Marcelo Queiroz, stated that it is still too early to say that it is the best in the world. “That's because it is under development and not in operation,” he argues.
Challenges to be overcome by Drex
The potential for efficiency gains in the financial sector is enormous, but there are challenges to be overcome before Drex reaches people and companies in a secure and scalable way, such as ensuring compliance with privacy requirements and addressing issues of governance, usability and prevention of illegal acts, to name a few examples, says the Bradesco executive.
Joao Aragão Pereira, Financial Services Technology Specialist at Microsoft in Latin America, explains that “Drex was designed to modernize and optimize the Brazilian financial system, offering a series of significant advantages, mainly in mitigating counterparty risks and fluid settlement.”
Drex – Wholesale and Retail CBDC
Unlike CBDCs that are already in operation, Drex is being tested for Wholesale and Retail at the same time and with many “tokenizable” assets under test, and in most Central Banks, one or the other is tested. This makes Drex a polymathic platform, explains Aragão.
The Microsoft expert explains that Drex applies the Unified Ledger concept, which records all transactions in a single ledger, ensuring greater transparency, security and efficiency. This system unifies different financial platforms, accelerating transactions and reducing costs in Wholesale, Retail and Multi-asset environments, including RWAs or other assets.
Another innovative concept is Finternet, which allows the interconnection of several financial platforms, via interledger protocol with full interoperability between ledgers and an ISO20022-based environment, such as Pix and Open Finance, facilitating interoperability between different systems and institutions, explains João.
This will be a crucial feature for implementing solutions like Drex, which rely on a robust, interconnected network to function effectively, he adds.
In Brazil, the challenge of payments in this modality in retail has already been solved with Pix, a solution fully recognized for its effectiveness. Drex, in turn, is being developed as a wholesale CBDC, with the aim of modernizing the country's digital economy through an innovative infrastructure, adds the ClearSale expert.
Queiroz highlights the importance of understanding that central banks can define digital currencies in two main modalities: retail, aimed at digital payments between consumers, such as Pix, and wholesale, focused on digitalizing financial and economic processes on a broader level, such as Drex.
Brazil’s CBDC could be based on Unified Ledger and Finternet
In this case, Brazil with Drex has the potential to be the first country to have a CBDC based on Unified Ledger and Finternet, in addition to applying the concepts of RLN and RSN in the same framework for national and international transactions, says João Aragão.
Drex's use cases are varied and cover several areas of the financial sector. One example is trade finance, where Drex can be used to automate foreign trade financing processes, reducing the need for intermediaries and accelerating transaction settlement times. We have already started with the Hong Kong Monetary Authority (HKMA), with the case of tokenized agricultural commodities, details the Microsoft executive.
Aragão highlights that Drex can integrate with AMM (Automated Market Maker), allowing the creation of automated markets for trading digital assets in liquidity pools, increasing liquidity and reducing volatility.
It is worth noting that Microsoft is the only company to be in at least six Drex consortia and since the beginning with the Lift Challenge, in 2021.
Drex to facilitate swaps with tokenized physical assets
Real estate and car tokenization is another important use case. Drex can facilitate swaps with tokenized physical assets such as real estate and vehicles, allowing these assets to be traded more efficiently and securely. This opens up new investment opportunities and facilitates the transfer of ownership, as well as introducing another industry, insurance, where contracts can be governed by smart contracts.
Finally, Drex is a multi-asset platform, meaning it can be used to represent and trade different types of assets, from fiat currencies to digital assets and commodities. This provides unprecedented flexibility and expands the possibilities for using Drex in the financial market, says João.
Drex CBDC Advantages
Other advantages highlighted by João Paulo Aragão Pereira, Financial Services Technology Specialist at Microsoft Latin America were:
Privacy, Security and Reliability: Drex is issued and regulated by the monetary authority, which guarantees its stability and reliability. Unlike cryptocurrencies, which are decentralized and can be volatile, Drex is backed by the “faith and credit” of the Brazilian government.
In addition to privacy tests, Microsoft is building, together with partners, a solution that covers the proposed trilemma: composability, security and decentralization.
Smart Contract Integration: Drex allows integration with smart contracts, which are self-executing contracts with hard-coded terms.
This increases the efficiency and accuracy of transactions, in addition to allowing the creation of modular services and products that can be combined flexibly, explains Aragão.
Liquidity and Settlement Finality: Drex assets can be easily converted into other forms of money or assets, facilitating a seamless flow and instant settlement of transactions without delays or reversal risks.
Accessibility: Drex facilitates, above all, direct payments from the government to individuals, such as tax refunds or stimulus funds, directly into digital wallets that do not require bank accounts.
Drex – benefits and innovations
Increasing transaction efficiency is among the topics listed by João Aragão. By eliminating intermediaries and reducing fees, transactions become cheaper and faster. Payments and transfers can be made almost instantly, 24 hours a day, 7 days a week. This mainly improves cash flow management for companies and individuals, and this topic can optimize the Brazilian Capital Market and influence the world.
Another significant impact is the mitigation of counterparty risk. By using smart contracts and blockchain technology, Drex ensures that transactions are secure and transparent, in addition to being atomic. This reduces the risk of default and fraud, increasing the confidence of investors and market participants, explains Aragão.
Drex should increase financial inclusion
Drex also promotes financial inclusion, facilitating access to the financial system for people without bank accounts. This is one of the main arguments frequently used by the Central Bank itself.
With digital wallets, these people can carry out transactions and receive payments, contributing to the inclusion of a significant portion of the population that was previously marginalized from the formal economy, in addition to offline payments, which several countries are testing, concluded Microsoft expert João Aragão.
Brazilian CBDC paves the way for new tokenized economy
Drex may not be the best CBDC project in the world, but it is certainly unique, says Mercado Bitcoin (MB) Vice President of New Business, Fabrício Tota.
The main innovation is to create an infrastructure layer for tokenized assets, opening the traditional financial system to the possibilities of tokenization, explains Tota. For the executive, the Central Bank's call to the market, involving 16 consortia in the first phase for the pilot of trading public securities, and now expanding to new consortia and use cases, expands, above all, the potential of Drex.
This opening will allow the creation of innovative solutions ranging from tokenized credit to the tokenization of various financial instruments, consolidating Brazil as a reference in the tokenized capital market, concludes the VP of New Business at MB.
According to Marcelo, the Central Bank stands out in Drex due to the open innovation model it has adopted. From the Lift Challenge to the pilot phases, it is being built in collaboration with financial institutions, regulators and experts, such as ClearSale. This collaborative approach has, in fact, enabled advances in privacy, security, governance and operationalization, which are essential for a functional CBDC, he believes.
Therefore, although Drex is still in the development phase, its innovative and collaborative methodology puts the country in the spotlight on the global stage. The Brazilian CBDC is on the path to becoming one of the most complete and modern infrastructures, rigorously meeting the necessary requirements for a successful wholesale CBDC, believes the superintendent of strategy and innovation at ClearSale.
Yes, Brazil's CBDC is one of the best in the world
Marcos Viriato, CEO and co-founder of Parfin, agrees that Brazil’s CBDC project is one of the best in the world. He mentioned some of its features at BeInCrypto Brazil’s request.
First, it is important to understand that CBDCs around the world seek to have a project to improve payment infrastructure. This is not the case in Brazil, Viriato points out. Brazil wants to innovate in financial services, bringing DeFi, promoting the tokenization of the economy. So this already brings a very big difference, adds the engineer.
Furthermore, the Brazilian CBDC targets both the wholesale and retail sectors. Thus, it allows banks to tokenize the deposit – which is the retail CBDC, the tokenized real. And the DREX, which is the wholesale real, the tokenized deposit. So some central banks around the world only do wholesale or only retail, explains Viriato in detail.
Another point is that Bacen wants to decentralize the network. So it brought banks and market infrastructure to run network nodes, which is super evolved. So he (BC) wants an effectively decentralized network, argues the CEO of Parfin.
Privacy continues to be tested in Phase 2 of the Drex Pilot
Privacy, which is one of the priority issues for the pilot's advancement, remains the BC's focus. And Parfin has one of the solutions tested in the consortium, Rayls.
With that, we bring some complications, which is, especially, the issue of privacy that is being addressed now, and we are one of the solutions that are being tested. If everyone is running Node, everyone can see everything. In a regulated financial market, this is not possible. So we still have the issue of privacy being addressed, continues one of the founders of Parfin.
I think all the cases in the second phase show one of the advantages. It is not being used only for payments. If you look at the 13 cases, there are several where they are exploring the use of lending pools to be able to, for example, make collateralized loans. Or even the use of cross-border payments and DVP to ensure greater efficiency, especially in the settlement of financial market transactions, adds Marcos.
The use of interoperability and oracles to provide information to blockchain, for example. There are several innovative solutions in the cases of the second phase, which we do not see in other central banks around the world, he explains.
I think that everyone involved is, above all, very aligned with the objectives and results to be achieved. So the financial system's commitment to making the business happen is very high, concludes Viriato.
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