March 18, 2024

  • The Banco Central do Brasil (BCB, the central bank) is aiming to launch its own central bank digital currency (CBDC), the Drex, by end‑2024. The Drex will complement the circulation of traditional money and promises to reduce operational costs, increase financial inclusion and make wholesale and retail transactions more secure.
  • Although the Drex pilot programme is in its final stages, we expect the launch to be delayed until early 2025, given that regulatory agencies still need to outline the new legal framework for the digital currency and its infrastructure.
  • Nevertheless, as Brazil is already at the forefront of many digital economy technologies, we think that the Drex will be adopted widely and will improve the country’s business environment.

More than 100 central banks—representing 98% of global GDP—have adopted or are considering adopting their own digital currency to complement their economy’s money supply, according to the Atlantic Council (a US think-tank), although only 11 have introduced formally them so far. The BCB began its journey towards a CBDC in August 2020, with the creation of the first working group to study the feasibility of a digital currency. Brazil has made considerable advancements since then; its pilot programme, which started in March 2023, is due to produce an assessment by mid‑2024.

As Brazil has had notable success in developing its digital economy, we expect adoption of the Drex to be widespread. Pix, a digital payments system, gained popularity quickly after its introduction in November 2020, and nearly three‑quarters of Brazilians (99% of the adult population) have now registered. The popularity of Pix has been credited with increasing financial inclusion and reducing transaction costs. The BCB expects the Drex to take the digital economy one step further, filling in the gaps left by Pix.

Drex will target big-ticket operations

Whereas Pix is an instant payments system focused on retail transactions, the Drex is the digital representation of the Brazilian currency, the Real. The use of blockchain technology, as is the case for cryptocurrencies, and distributed ledger technology (DLT) will provide security and transparency, helping to engender confidence in the Drex. However, unlike cryptocurrencies, which are unregulated and decentralised, the Drex will be regulated and its value guaranteed by the BCB, meaning that its value will be stabilised, equal to the Brazilian Real. These features will make the Drex more suitable for carrying out the larger transactions that are required in wholesale and government operations. For example, the Drex could be used to price assets, conduct streamlined cross‑asset operations without intermediaries, facilitate international transactions and automate contracts, to the benefit of the country’s business environment.

Digital currencies do not come without risk

CBDCs are relatively new—the first was only introduced in 2020, by the Bahamas—and their long-term impact and risks remain to be seen. However, initial concerns have ebbed to some degree. Worries that digital currencies could undermine the role of banks have so far proven unfounded. Many central banks have designed their CBDCs in such a way that the public can only access them through financial institutions, sustaining the need for financial intermediation and preventing digital currencies from being used in preference to bank deposits. Along similar lines, the existence of CBDCs raises the risk of bank runs, although none have taken place yet. This risk remains low while the banking sector health is maintained, but some central banks have sought to prevent banking assets from flooding towards CBDCs by establishing regulatory limits on digital currency holdings. To that end, the BCB has already indicated that public access to Drex will be through financial institutions and that there will be a limit on individual holdings.

Although the BCB was planning to launch the Drex to the public before end‑2024, delays in the development of the regulatory framework for the digital currency and its infrastructure suggest that the entire timeline for the project will slip. The BCB has announced that an open trial period could take place at the end of the year, but our view is that the Drex will launch fully in early 2025.

Source: Economist Intelligence Unit (EIU)
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