Drex: understand what it is and how the digital real will work

The virtual version of the real took, this Monday (7), another step towards implementation. The Central Bank (BC) announced that the Brazilian digital currency will be called Drex.

With the platform being tested since March and the first simulated operations scheduled for September, the digital real intends to expand business possibilities and encourage financial inclusion. All in a safe environment with minimal chances of fraud.

The idea, according to the BC, is for Drex to be used wholesale for financial services, functioning as a Pix – an instant transfer system in operation since 2020 – for large amounts and for different purposes. The consumer will have to convert reais into Drex to send money and do the opposite to receive money.

Check out how the country’s new official digital currency will work:

What is Drex?

Also called digital real, Drex will work as an electronic version of paper money, which uses blockchain technology, the same as cryptocurrencies. Classified in the Central Bank Digital Currency (CBDC) category, the tool will have the value guaranteed by the monetary authority. Each R$ 1 will be equivalent to 1 Drex.

Considered hacker-proof, blockchain is defined as a kind of database or ledger with data entered and transmitted safely, quickly and transparently. Without a central control body, this technology works like a kind of chain of encrypted blocks, with each link closed after a certain time. No information can be removed or changed because all blocks are connected to each other by encrypted passwords.

How is it different from other cryptocurrencies?

Cryptocurrencies obey the law of demand and supply, with the value fluctuating daily, like a share in a company. Without the guarantee of central banks and governments, the price of cryptocurrencies fluctuates a lot, which can cause significant losses in value from one day to the next.

Pegged to official currencies, the CBDC fluctuates according to the daily exchange rate, determined by the fundamentals and economic policies of each country. The exchange rate, however, only represents a difference for operations between different countries. For internal transactions, Drex will be worth the same as paper money.

Another difference compared to cryptocurrencies is in the production system. While virtual currencies like Bitcoin, Ethereum and others can be “mined” in a computer that solves algorithms and consumes a lot of energy, Drex will be produced by the Central Bank, with parity in relation to the real.

What’s the difference between Drex and Pix?

Although it can be considered Pix’s cousin, for allowing instant payments between different financial institutions, Drex will work differently. At Pix, the transfer takes place in reais and obeys security limits imposed by BC and financial institutions. At Drex, the transfer will use blockchain technology, the same as cryptocurrencies. This will allow transactions with larger amounts.

What services can be performed with Drex?

Financial services in general, such as transfers, payments and even the purchase of public securities. The consortiums authorized by the Central Bank will be able to develop more possibilities, such as instant payment of installments for the home, vehicles and even social benefits, as announced by the consortium formed by Caixa Econômica Federal, Microsoft do Brasil and the credit card brand. Link.

Drex will allow the use of smart contracts. In the case of the sale of a vehicle, there would be no discussion as to whether it would be up to the buyer to deposit before picking up the good or whether the seller would have to transfer the documents before receiving the money. The entire process will be done instantly, through an automated contract, reducing the cost of bureaucracy, intermediaries and accelerating operations.

How will Drex be accessed?

Expected to reach the consumer in late 2024 or early 2025, Drex will only function as a wholesale currency, exchanged between financial institutions. The client will carry out operations with the digital currency, but will not have direct access to it, operating through virtual wallets.

The process will take place as follows. First, the customer (individual or company) must deposit the desired amount in reais in a virtual wallet, which will convert the physical currency into Drex, at the rate of R$ 1 for 1 Drex. These portfolios will be operated by banks, fintechs, cooperatives, brokerages and other financial institutions, under the supervision of the BC. New types of companies with a virtual portfolio may be created, depending on the evolution of technology.

After tokenization (conversion of a real asset into a digital asset), the customer will be able to transfer the digital currency through blockchain technology. It will be up to the receiver to convert the Drex into reais and make the withdrawal.

Tokenization can be defined as the digital representation of a good or a financial product, which facilitates negotiations in virtual environments. Through a series of codes with requirements, rules and identification processes, assets (or fractions thereof) can be bought and sold in virtual environments.

Tests
In March, BC chose the Hyperledger Besu platform to carry out tests with assets of different types and natures. This platform has low licensing costs and technology royalties because it operates with open source code.

In June, BC chose 16 consortia to participate in the pilot project. They will build the systems to be coupled with Hyperledger Besu and develop financial products and technology solutions. The complete list of entities selected by the Executive Management Committee is available on the BC website.

Scheduled to start in September, the tests with the consortia will take place with simulated operations and will test the security and agility between the digital real and the tokenized deposits of financial institutions. Testing will be carried out in stages until at least February of next year, when simulated operations with National Treasury securities take place.

Active
The assets to be tested in the pilot project will be the following:

• bank reserve account deposits;
• settlement account deposits;
• National Treasury single account deposits;
• demand bank deposits;
• payment accounts of payment institutions;
• federal government bonds.

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