Real digital moves forward with a plan to provide more security in the use of money – 02/19/2023 – Market

Transferring a sum of money to children under 18 years of age with the certainty that the amount can only be spent on leisure activities, such as cinema, not on anything not authorized by the parents. This is a practical example of how the Brazilian digital currency —the digital real— under development by the Central Bank can be used.

In general, the CBDC (Central Bank Digital Currency) will expand the citizen’s ability to control and program the use of money, which can only be effectively liquidated if the agreed conditions are respected. The digital real arrives at the pilot phase —scheduled to start at the end of the first semester— under the promise of increasing guarantees in electronic transactions.

“Programmability is not just about time, but about function. It can be on a specific date, for a specific person, as long as something has happened before, at a combined rate”, details Rodrigoh Henriques, director of innovation at Fenasbac (Federação Nacional of Associations of Central Bank Employees) and coordinator of Lift Challenge, a laboratory that has studied the development of the digital real in recent months.

“As much as we are talking about the digital real, we are talking about several digital reals at the same time, and a single integrated solution for this is not easy to do”, he says.

Another use case for the new currency is the purchase of vehicles or real estate linked to smart contracts — digital documents programmed using technology to be executed after the established conditions are met.

“I transfer the digital money to the contract, not to the owner of the car, for example. This will make a very big difference in people’s lives. By removing the intermediary, you lower the risk of the transaction and make the service cheaper” , says Henry.

Although the advantage of digital real use is observed mainly in more complex operations, Fabio Araújo, coordinator of the BC’s digital real initiative, says that the institution’s focus has always been on retail services. This means that CBDC can be used for everyday financial operations in any range of values.

“We want the functionality of the digital currency to reach people’s hands”, said Araújo in November, at an event aimed at specialists in the sector at the autarchy’s headquarters.

Different use cases of the digital real were worked on by nine projects selected for the Lift Challenge, which came to an end last week. The solutions under study involved, among other topics, decentralized finance, offline payments and international transactions using blockchain.

The laboratory brought clearer answers about the design of the Brazilian digital currency and the infrastructure necessary for its operability. The obstacles that the digital real will have to overcome in order to become a reality were also mapped.

“In some cases, the gain is understanding that it is not the time to explore some functionalities”, says Henriques. Transactions in which neither payer nor payee are connected to the internet fall into this group.

“We are clear that this dual offline functionality is important in the digital real, but it is not a priority in the Brazilian CBDC solution now because it would require a level of testing and complementarity with other technologies”, he says.

The laboratory also highlighted the regulatory changes necessary for the creation of the digital real. One of them is the responsibility of the BC, which, according to the legislation that governs the institution, specifies only the issuance of paper money and metallic currency.

Such discussions will be conducted by an interdepartmental BC working group focused on the “tokenized” economy. In order to “turn the key” to society, it will be necessary to include other players in the financial system and outside it in the discussions, such as the CVM (Securities Commission) and the Detran (Transit Department). The technicians will be in charge of talking to regulators and institutions about regulatory standards, cybersecurity, market infrastructure and other topics.

Unlike cryptocurrencies such as bitcoin, CBDCs are an extension of paper money, backed by the state. One of the points already defined by the BC is that financial institutions will be allowed to issue tokens (digital representation of an asset) of their deposits.

“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. 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”, said Roberto Campos Neto, president of the monetary authority, in September 2022.

BC’s idea is to design a system in which it is possible to add other services from a starting point, such as “Lego pieces”. For the digital real to come into operation, it will be necessary to create a new layer in the payment system infrastructure. It is precisely this system that will be put to the test in the pilot test phase.

Financial institutions regulated by the BC will have access to the network, where they will carry out operations involving the exchange of digital reais and simulation of issues of tokenized reais. It will also be up to the participants to take the system to the limit and promote attacks.

Tests include break-in attempts, identity theft, transaction fraud, and duplicate operations. “You will work a lot on the idea of ​​war games [jogos de guerra, um desafio de cibersegurança] in a network like this to ensure first-level security and confidence that you can have in it”, says Fenasbac’s director of innovation.

The pilot phase will last 18 months, and the expectation is to have the first digital reais issued by the end of 2024. Araújo, however, admits that the schedule can be extended.

“After these 18 months, we expect to have a better visibility of what the digital real is, what are the use cases, what is the security. If everything is oiled up, it probably won’t be, we launch the digital real in the end of 2024, beginning of 2025, this schedule is very challenging”, said the coordinator of the BC’s digital real initiative at the event. “If everything works out, this will happen. If not, we move on to the next phase of refining the pilots to solve the problems.”

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UNDERSTAND BRAZILIAN DIGITAL CURRENCY

What is the digital real?
It is a CBDC (Central Bank Digital Currency), that is, a digital currency issued by the Central Bank. It is an extension of paper money, secured and managed by the State.

What are the differences between the digital real and cryptocurrencies and stablecoins?
The digital real is the electronic expression of the Brazilian sovereign 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.

Can the digital real be converted into banknotes?
It can be converted into any other form of payment currently available in Brazil, such as a conventional bank deposit or physical currency, in addition to being used for day-to-day payments.

What are the next steps for the development of the digital real?
The pilot phase will last 18 months, starting at the end of the first half of this year. The date should be announced on April 25th. The expectation is to have the first digital reais issued at the end of 2024. The schedule may change.