Brazil’s central bank sees its central bank digital currency (CBDC) program as enabling banks to embrace distributed ledger technologies (DLTs) and tokenize their balance sheets, according to Renato Gomes, deputy governor at the Banco Central do Brasil. Talking at the OMFIF Digital Money Symposium, he outlined the potential to facilitate instant settlements when buying high-value items such as cars and real estate using the digital real. Other use cases involve dual offline payments and cross-border settlements.
Pix versus tokenized deposits
The central bank does not see a need for a retail digital real due to the success of its Pix retail payment system. Mr. Gomes pointed out that the motivation for Brazil’s CBDC project has been less about improving retail payments but rather creating a wholesale framework for innovation based on DLT.
“We want to set up a common platform with governance led by the central bank so as to bring fintechs, DeFi actors, and traditional financial institutions to innovate with this new technology,” he says.
The digital real project is primarily a wholesale CBDC that will also enable retail access through tokenized deposits. According to the deputy governor, its main objective will be to “commoditize financial services.”
The most innovative CBDC use cases involve tokenization technologies, which allow the central bank to explore the benefits of programmability and composability in financial services. For example, one of the proposals consists of a delivery versus payment (DvP) solution using the digital real to settle high-value transactions involving tangible assets such as cars and real estate as well as tokenized bonds and virtual assets.
A key aspect of this approach has been the minimized need for legal adaptation thanks to the use of tokenized deposits instead of a new form of money. Brazil defines virtual assets by exclusion, so “tokenized deposits inherit the legal properties of demand deposits. And they benefit from the regulation and supervision already in place.”
Another important feature has been the application of existing consumer data protection and banking privacy regulations to the CBDC project. Financial institutions and payment service providers will be in charge of AML/KYC background checks.
Other use cases
However, the central bank is also exploring the use of a CBDC to address other use cases, including offline payments and cross-border settlements.
While Pix might be a massive success as a digital solution, it risks leaving behind those without smartphones or reliable internet access. Tanja Heßdörfer from German service provider Giesecke+Devrient (G+D) said an offline digital real would provide the “last mile financial inclusion” element. Its solution involves a simple form factor, such as a smart card or cheap wristband, that will allow making CBDC payments without a smartphone or internet coverage.
Another pilot is testing foreign exchange transactions with neighboring Colombia. The trial brings together the Brazilian stock exchange B3, and Itaú, Latin America’s largest bank, which has branches in both countries and established a DLT to settle international payments.