Articles
TL;DR
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The Brazilian Central Bank (BCB) has a promising and holistic agenda for financial innovation, including instant payments, integrated financial data systems, and the integration of blockchain technology and digital assets into the financial system.
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This roadmap aims to solve the problem of financial intermediation and foster the transition to a tokenized world, where assets and liabilities will be monetized and certified in digital form using blockchain technology.
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The agenda put forward by the BCB currently proposes a design for the Digital Real. This is distinct from other major countries because it leverages stablecoins to build, from the ground up, a revamped national currency which will be developed and integrated to the vibrant decentralized finance (DeFi) ecosystem that has emerged in recent years.
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The BCB’s seriousness about crypto is a major reassuring argument for the institutional adoption of these technologies.
The President of the Brazilian Central Bank (BCB), Mr. Roberto Campos Neto, has been regularly sharing the bank’s views on technological innovation and its current plan for the Brazilian financial system. Campos Neto recently discussed in detail1 the current developments of the BCB on the digitalization of the Brazilian economy and how the central bank is working on a suite of interlinked technologies that aim to foster the transition to a world of tokenized assets.
The BCB has a very comprehensive agenda of financial innovation
According to Campos Neto, the core problem that the BCB is trying to solve is how to improve financial intermediation, and that any solution should consider the current trend of people looking for a digital representation of something that has value. This connects directly to a technology that distributes and transfers value using a public ledger, which he believes is here to stay. And while the benefits of this technology are not fully understood yet, it’s clear to Campos Neto that there is significant potential in having divisibility and atomized settlement (i.e., the ability of doing multiple sequential settlement transactions) at very low costs, which he believes “completely changes the world of finance.”
Campos Neto’s view is that we’ll live in a tokenized world, meaning a global economy which is cross-border and 24/7/365, and where assets and liabilities are monetized and certified in digital form using blockchain technology. He believes we are heading into a world where currencies, stocks, bonds, real estate, intellectual property, and basically anything that has value will be represented digitally and cryptographically secured on a distributed ledger. This technology has the potential to bring more efficiency, reduce costs, remove barriers, enhance liquidity, and integrate the whole economy, with a set of standards that make assets more interoperable and their flow more transparent across the board.
What has the BCB achieved already?
So far, the BCB has put forward its roadmap of innovation through (i) Pix, a means of payment which is instantaneous, cheap, 24/7, and (ii) Open Finance, a shared database of information that expedites the communication and product provision among different financial institutions authorized by the central bank. Pix, which was introduced in Brazil in November 2020, has already surpassed trillions of reals in monthly volume, with more than 500 million registered keys2 split between individuals and businesses. Open Finance has 7.5 million users since inception. Campos Neto has reinforced that both Pix and Open Finance are just scratching the surface in terms of development.
The BCB wants to be as close as possible to crypto and blockchain
Campos Neto argues that the infrastructure proposed by the BCB entails programmability through smart contracts, which allows not only cross-border payments and integrated custody, but enables the direct integration with decentralized finance (DeFi) protocols. According to him, DeFi should be brought closer to the monetary authority, rather than the BCB creating regulatory barriers. In his view, central banks in developed countries have embraced a mindset of “if I can’t regulate it, I’d rather expel it.” In opposition, the BCB’s is taking an approach that assumes “if I can’t regulate it, I’d rather have it as close to me as possible.”
With regards to regulation, Campos Neto reassured the BCB’s commitment — together with the Securities and Exchange Commission of Brazil (CVM) — to establish a robust regulatory framework that focuses on the general public’s interacting with digital assets, but which also fosters the technological innovation and full potential of this emerging asset class. He said, “the central bank has never worked so closely to CVM as it’s doing at the moment,” exactly because they “think that there’s not much time to waste on the topic of crypto assets.”
The Digital Real will be based on stablecoins
To track the evolution to a tokenized world, the BCB is proposing an architecture for the Digital Real—the Brazilian Central Bank Digital Currency (CBDC)—which, in contrast to the designs considered by other central banks, is structured as follows: banks will issue stablecoins on top of clients’ deposits, and these stablecoins will be BCB-insured, one-to-one, to the CBDC. This will lead to the existence of stablecoins of several banks, all fungible with each other, with the same value and convertible to the CBDC issued by the central bank. He believes this is an open-minded solution to the overall design of the CBDC that also addresses regulation: there already exists a regulatory framework in Brazil for bank deposits, which could be used with some adaptations to tackle the regulation of digital bank deposits.
In his view, a Brazilian CBDC pilot is one of his current priorities and should be ready next year. The infrastructure to make this happen is still under discussion. However, Campos Neto mentions that the Digital Real may be powered either by a BCB-controlled system, which gives less versatility for future developments, or constructed atop more open protocols—such as Ethereum — with a programmability and utility set already tested in the digital asset space.
Why should global investors care about the Brazilian agenda?
The roadmap discussed by Campos Neto demonstrates clear signs of the BCB’s commitment to bring real innovation to an already versatile Brazilian financial infrastructure. In a developing country that has consistently faced high levels of inflation — and even hyperinflation in the late 80s and early 90s — the Brazilian financial system is used to adopting innovation at a fast pace. Brazil still faces the challenges of a continental territory, with populations located in very remote areas, so it's refreshing to see new initiatives coming from the BCB aimed at providing much more accessibility to financial services for every Brazilian citizen.
The development of the Brazilian CBDC has been particularly interesting. The Digital Real will be structured from the ground up using one of crypto’s strongest applications: stablecoins. This is a sign that stablecoins will likely be a key tool to allow the future Brazilian digital currency to easily interoperate with the whole DeFi ecosystem, which for us demonstrates the desire of the Brazilian monetary authority to bring best-in-class applications in the crypto ecosystem closer to the new on-ramps of financial innovation designed by the BCB.
We believe the BCB roadmap is a major example on how to employ digital assets and blockchain technology within a new digital economy that is more open, accessible, secure and integrated. For us, the BCB’s seriousness about crypto and blockchain technology is a major reassuring argument for the institutional adoption thesis. It is happening! And what makes these developments even more appealing is that the Brazilian innovation experiment is steadily becoming a case study for other countries in Latin America and elsewhere. Only time will tell, but the Brazilian model looks very promising and may be an indication of where the world is heading in the coming years.
[1] The full talk is available (in Portuguese only) on YouTube, DW Day#2, between 1:22:00 and 2:04:40.
[2] Data from the BCB, Pix Statistics, accessed October 4, 2022.
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