Brazil to develop digital currency plans

Brazil’s central bank has released guidelines for a digital real, promising further change to the country’s payments landscape after its approval of WhatsApp Pay and the introduction of a local digitised payments system.

The Central Bank of Brazil (BCB) announced the guidelines on 24 May, almost a year after it created a study group on the benefits of a digital Brazilian real in mid-August 2020.

A digital real would be the latest digital innovation in Brazil’s payments landscape after the country introduced Pix, a digitised payment system which began operating in November 2020, and after the BCB approved a WhatsApp-based payments platform in Brazil earlier this month.

The bank said that a digital currency was needed in order to keep up with Brazil’s digital evolution as well with broader international economic involvement, and that the new digital real would stimulate new business models by making the retail payments system more efficient.

A central bank digital currency (CBDC) would foster the creation of “new technologies, such as smart contracts, IoT (Internet of Things) and programmable money, in new business models, which increase the efficiency of our payment system," explained Fabio Araujo of the BCB’s Executive Secretariat.

The guidelines centre around the CBDC’s potential operation, its legal guarantees and technology.

The digital real would integrate with Brazil’s current digital ecosystems, the guidelines say, and make up part of people’s daily retail transactions. Online operations would work with current online payment systems, and offline payments, which the bank admits still face “difficulties”, would be akin to making a physical cash payment in a virtual wallet.

The BCB plans to issue the digital real as an extension to the physical currency, being transferred to end users via payment system participants.

“This model maintains the existing relationships between clients and payment system institutions and gives the latter another instrument for the inclusion of new customers in the system”, the guidelines said.

The bank warned that Brazil would need to make adjustments to the legal framework of its finance system to ensure legal certainty of operations, although Araujo said that the extent or nature of those adjustments remained unknown.

Bank secrecy and Brazil’s General Data Protection Law (LGPD) would also apply more heavily to the CBDC, the bank said, because the digital real will be implemented in virtual spaces governed by LGPD requirements.

The guidelines say it is of “fundamental importance” that the CBDC be trackable, so that it can comply with anti-money laundering and counter-terrorist financing regulations.

The technology needed for the CBDC would also have to be flexible enough to facilitate cross-border payments and integration with central banks in other countries in the future, they concluded.

The BCB distanced its proposed CBDC from other forms of cryptocurrency. As Araujo said, the CBDC "is part of the monetary policy of the issuing country and has the guarantee given by this policy", unlike cryptocurrency, which has no value reserve.

The bank also acknowledged a need to “deepen the discussion” around CBDCs by consulting the private sector on the technologies to use.

Alexei Bonamin, partner at Brazilian firm TozziniFreire, tells GBRR that the BCB has issued alerts against the risk of cryptocurrency transactions in the past, but that the bank’s wider agenda includes initiatives to promote tech-based innovation around fintechs, payment schemes and open banking, which Bonamin says are in line with developments on the topic worldwide.

Brazil’s CBDC plans fall in line with Agenda BC#, the BCB’s roadmap to what it calls “financial democratisation”, and which aims to use technological innovation to tackle structural issues in the national finance system.

A digital currency would reduce the cost of Brazil’s money cycle and foster greater financial citizenship, the BCB said when it announced the study group last year. 90 billion reais per year disappear on managing bank notes and coins in circulation, much of which would disappear with the use of a CBDC, according to the bank.

The same day as the BCB’s announcement, US Federal Reserve governor Lael Brainard cited a recent “pronounced migration” towards digital payments accelerated in the US by the pandemic, in remarks to a virtual conference hosted by crypto-focused publication Coindesk.

“We must explore—and try to anticipate—the extent to which households' and businesses' needs and preferences may migrate further to digital payments over time,” Brainard said.

Brainard noted that a US CBDC could increase the speed of payments and lower transaction costs by creating more competition in payment types, but added it could also contribute to fragmentation of the current payments system.

She said that cross-border payments would also be made easier, with CBDCs reducing the number of intermediaries needed, though warned that this could only be achieved with international collaboration on standard-setting.

The Fed will be publishing a discussion paper over the summer on its approach to digital payments, she said, and the Boston Fed will partner with Massachusetts Institute of Technology’s (MIT) digital currency initiative to test out different platforms for a CBDC, releasing a white paper in the next quarter.

The South African Reserve Bank (SARB) has also joined the mix, announcing that it will investigate the feasibility of its own CBDC for general-purpose retail use.

This comes after the SARB’s Project Khokha, a trial wholesale interbank payment system based on blockchain technology, which SARB touted as a success. Its investigation of the retail CBDC is projected to finish in 2022.

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