Digital real: understand how the currency will work – 07/16/2023 – Market

Users’ financial privacy will be put to the test in the first tests of the Brazilian digital currency — the digital real, under development by the Central Bank. The objective is to replicate in this new environment the same degree of protection required by law for bank customers, that is, to ensure that transactions can only be traced by interested parties.

In this phase, functionalities that will give citizens the ability to control and program the use of their electronic money will also be tested. The idea is that the use of the Brazilian CBDC (Central Bank Digital Currency) is as simple as making a Pix, but brings gains in more complex transactions and currently not accessible to the Brazilian population.

In an interview with SheetFabio Araujo, coordinator of the digital real at BC, defines the new version of the national currency as “a platform to democratize access to financial services in Brazil”.

In the future, the digital real will open up the possibility of making, for example, the purchase of vehicles linked to smart contracts —digital documents programmed using technology to be executed automatically under the agreed conditions.

In practice, this works in such a way that the registration of the car being negotiated is automatically transferred to the buyer as soon as the payment is made by him, and everything happens simultaneously.

Eliminating this gap in the buying and selling process brings more security to a commercial agreement between unknown people. The logic also applies to real estate, products sold on electronic platforms, among other items. In technical terms, this type of negotiation is called DvP (delivery versus payment).

Today, transactions involving smart contracts are not available in a regulated environment and require intermediaries, which makes the model economically unfeasible for trading lower value items. “This type of instrument, which is very expensive and today is only accessible for some transactions, can be done at a marginal cost”, projects Araujo.

The focus of the digital real project is to bring retail services to the entire population. Throughout the discussions on the subject, BC concluded that people do not need to have the real digital “stricto sensu” in their hands to have access to its benefits.

“It has several inconveniences, the risk of disintermediation, macroeconomic problems, which can happen in an environment where there is a Central Bank currency directly in people’s hands”, ponders the coordinator. He points out that today a small portion of paper money circulates in the economy, while most people use the “bank version” of money.

To avoid an abrupt change in the financial system and regulatory asymmetries between the systems, the monetary authority updated the digital currency guidelines and agreed that the digital real will be concentrated for wholesale activities, that is, restricted to payments between the BC and financial institutions.

The population, in turn, will have access to the real tokenized call. In this case, the representation of the Brazilian currency will be the token [representação digital de um ativo real] from a deposit held by financial institutions or payment institutions.

“Banks will create stablecoins [criptomoedas de baixa volatilidade, com lastro em ativos mais seguros] on top of the deposits. And the stablecoins will be guaranteed by the BC, one for one, in a digital currency”, detailed in September 2022 Roberto Campos Neto, president of the monetary authority.

“So, you will have stablecoins from banks A, B and C. All are fusible, all have the same value and all can be converted into the digital currency issued by the BC”, he added.

This month, the BC begins incorporating the 16 participants (individuals or consortia) selected for the infrastructure where the tests will be carried out. The network chosen for this development phase was Hyperledger Besu. It is based on Ethereum, a platform that uses blockchain technology to record transactions with digital assets.

According to Aristides Cavalcante, head of the BC’s Technological Innovation and Cybersecurity office, Hyperledger Besu was chosen because it is a network that has well-known participants, has a diversity of technology providers and has an open governance ecosystem.

“This platform aims to build new models of financial services”, justifies the technician. He also argues that “it is important not to make the financial system dependent on a single technology provider”.

As it is an open source system, there is no requirement to hold a public competition and there are no expenses with licensing.

If the platform is successful during the testing phase, it could be chosen as the definitive technology for the tokenized version of the Brazilian currency. “We really have to know if we can, with this technology, reach the minimum requirements of privacy and programmability”, says Cavalcante.

In the pilot, these aspects will be tested on two fronts over 18 months. The first, expected to last until December, involves the exchange of money between participants using both the digital real itself and the tokenized real.

The second involves the purchase and sale of federal public securities between clients from different institutions and should be concluded in February 2024. “The ultimate goal is to allow two people to exchange federal public securities with each other”, says Araujo.

The BC argues that, when choosing a federal public bond for this new phase of the project, it tried to be as neutral as possible and open space for the participation of the National Treasury, which had already expressed its desire to collaborate with the work.

In a hypothetical scenario, a restaurant customer can borrow money via QR Code for the owner of the venture to open a branch or renovate the place. As soon as the money is transferred, the person automatically receives the bond in his wallet.

“As this technology is used more by the population, anyone will be able to borrow money directly from the other”, says Araujo. “The possibility of creating products is very great.”

In this first stage of the pilot, the process is carried out in a simulated environment, without involving transactions or real amounts. The expectation is that at the end of 2024 or the beginning of 2025 real customers will be able to make their first operations with the digital real.

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UNDERSTAND BRAZILIAN DIGITAL CURRENCY

What is the digital real?
It is a CBDC (Central Bank Digital Currency), i.e. a digital currency issued by the Central Bank. It is a new form of representation of the real and can be converted into other forms of payment available today, as it will have the same value as traditional money.

What will the Brazilian version of the CBDC look like?
The digital real itself will be aimed at wholesale activities, while the population will have access to the tokenized real. In this case, the digital representation of the Brazilian currency will be the token of a deposit held by financial institutions or payment institutions.

What are the differences between the digital real and cryptocurrencies and stablecoins?
The digital real is the electronic expression of the Brazilian currency, while cryptocurrencies and stablecoins are privately issued and, in general, do not have regulation. Cryptocurrencies such as bitcoin and ethereum are highly volatile. Stablecoins, on the other hand, seek to correct this problem by pegging their value, in general, to a sovereign currency.

What is the difference between a retail and wholesale digital currency?
A wholesale digital currency is aimed at high value transactions, involving banks, cooperatives, payment institutions and eventually large companies. A retail digital currency, on the other hand, seeks to meet the needs of individuals and companies of all sizes, and can be used for payments and for everyday financial operations in any range of values.

What the digital real does it bring anything new?
In addition to being able to be used in conjunction with bank accounts, payment accounts, cards and cash, it will allow access to financial services that are being developed based on new technologies, such as smart contracts and programmable money (digital monetary value that can be programmed to be spent only for a certain purpose).

A practical example of use is the possibility for a family to transfer an amount of money to children under 18 years of age with the certainty that the amount can only be spent on cultural activities, such as cinema, not on something not authorized by the parents.

What technology will be used in the digital real?
The network chosen for the testing phase was Hyperledger Besu. It is based on Ethereum, a platform that uses blockchain technology to record transactions with digital assets, is capable of executing smart contracts and is able to operate on a large scale. If successful during the pilot, Hyperledger Besu could be chosen as the ultimate technology for the tokenized version of the Brazilian currency.

What are the next steps for the development of the digital real?
The pilot phase will last 18 months, and is expected to end in February 2024. The expectation is that at the end of next year or at the beginning of 2025 real customers will be able to carry out the first operations (still in the test model) with real digital . The schedule may change.

Is the digital real name final?
No. BC studies the new identity of the Brazilian digital currency, which will be renamed. The idea is that a short and sonorous name is chosen to boost its popularity after launch, as is the case with Pix. The disclosure of the new brand still has no set date, but should occur during the testing phase.