By Jude Ayua  

 

Brazil’s central bank, Banco Central do Brasil (BCB) is incorporating elements of decentralized finance (DeFi) into its central bank digital currency (CBDC), Drex. The BCB disclosed it is developing a “synthetic” CBDC that integrates the “trilemma” of decentralization, privacy, and programmability. 

Testing CBDC compatibility with DeFi

During a presentation at Markus’ Academy on 3 October 2024, Governor of BCB, Roberto Campos Neto, highlighted Brazil’s need for a multidimensional CBDC that will tackle issues around DeFi elements: “We wanted to have three dimensions of benefits that you cannot get on just a normal CBDC. We wanted to insert the tokenization concept into the balance sheet of the banks,” Neto stated.

The BCC has already experimented with decentralization elements in the first phase of its CBDC pilot.

The second phase, which is projected to reach 2025, focuses on digital asset transactions, including liquidity pools for government bonds and international trade finance.

Public-private sector partnership

To complement government efforts, private crypto firms are expanding digital asset payment options in the Brazilian market. On 3 October, Ripple and Mercado Bitcoin announced a partnership for a crypto-enabled cross-border payments platform in Brazil. Ripple noted that this development will enable local businesses in Brazil to make “faster, cheaper, more efficient cross-border payments” worldwide. 

Business Wire has observed Brazil’s regulatory efforts as being instrumental to private sector participation in the industry:  “Brazil’s leadership in the cryptocurrency market, progressive approach to policy and growing institutional and developer adoption made it a natural next market to launch Ripple Payments, for the benefit of businesses in Brazil.”

 

Read also: 134 Countries Exploring CBDCs: 8 Major Findings You Should Know 

Drex, tokenization, and Open Finance platform 

Along with its CBDC development, Brazil is speeding up its nationwide tokenization efforts using an Open Finance platform. The BCB sees Open Finance as a marketplace that will offer users multiple options for digital banking and payments, including CBDCs.

In a presentation by Governor Neto on the future of financial intermediation and the BCB’s innovation agenda, he discussed digital transformation, tokenization of the economy, platforms for tokenized digital assets, retail payments, and Drex initiative.

Neto emphasized the shift towards a digital representation of value, the tokenization of assets, and the potential for a tokenized economy with regulated, global, multi-asset networks. ​Tokenization is beneficial to the economy because it will improve efficiency, speed, transparency, and reduce costs in asset trading. ​Neto hinted that Open Finance will serve as the platform for tokenized digital assets, which will enhance efficiency, safety, and financial inclusion.

​For retail payments, Pix will be a programmable payment system which will promote financial inclusion and reduce costs.

Finally on the Drex project, Neto stated that, like all CBDCs, it is a response to digital payment needs, enhancing retail payments and financial services. ​It is prioritizing privacy, cybersecurity, and governance in a decentralized ecosystem. In the Drex pilot stage, the BCB is developing a platform for tokenized deposits and financial services.

There are also ongoing plans to expand participation and test new assets.

Use cases include transactions with real-world assets, credit notes, debentures, and more.  

 

Read also: IMF proposes framework for CBDC adoption    

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About the Author: Jude Ayua is a policy analyst at CAB. A lawyer, Jude is an associate at Infusion Lawyers where he is a member of the Blockchain & Virtual Assets Group. He is also a member of the Policy & Regulations Committee of the Stakeholders in Blockchain Technology Association of Nigeria (SiBAN). Jude reports and writes on crypto policy and regulations. jude@infusionlawyers.com