A Brazilian CBDC is now official, as Central Bank announces 2022 launch

President of Brazil’s Central Bank Roberto Campos Neto confirmed this April that the long-awaited Brazilian Central Bank Digital Currency (CBDC) should arrive during the second semester of 2022.

What will the Brazilian CBDC look like? It will be the first CBDC to come with a limited supply, much like Bitcoin’s 21 million BTC cap. Through this framework, the Central Bank wants to avoid a potential rupture in the bank's balance sheet and keep a tighter leash on cybersecurity to prevent the potential hacks and exploits.

Who is behind the Brazilian CBDC? Besides Brazil’s central bank, the government is also partnering in projects with the following organizations: Microsoft, Visa, AAVE, FEBRABAN, Giesecke+Devrient, Itaú Bank, Santander Bank, Mercado Bitcoin, TECBAN and Oliver Wyman.

Biggest challenges for a CBDC in Brazil: On one hand, it will be difficult to get the population to adopt a CBDC as Brazil already has pretty advanced systems of digital payments like its P2P “PIX” system created in the country. On the other hand, Brazil’s population is still largely illiterate when it comes to financial services in general. While financial technology flourishes in the richer areas of the country, a huge chunk of the population still lacks access to smartphones and any form of digitality.

President of Brazil’s Central Bank Roberto Campos Neto confirmed this April that the long-awaited Brazilian Central Bank Digital Currency (CBDC) should arrive during the second semester of 2022, with the possibility of a slight delay if needed. The announcement was covered during a presentation on April 11th, discussing the country’s current economic scenario and the central bank’s agenda for the near future.

Campos Neto disclosed during the presentation that several central banks in the world are developing their own CBDCs, with a strong focus on China, Japan and the European Union - which is in the research process for the past year or so. During the presentation, the president displayed several PowerPoint slides detailing the recent and upcoming development process for the Real Digital - meaning digital “real” (Brazil’s currency). Tests began on March 28th and are expected to end on July 29th. From that moment on, the CBDC will be supposedly ready for its pilot version, which will be tested in scale in a few cities before amplifying the testing zones - similar to what occurred in China for the digital yuan.

What will the Brazilian CBDC be like?

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Although there are not many details disclosed on the actual characteristics of the Brazilian CBDC, the Central Bank president did mention one major factor that has not been announced by other nations and their CBDCs. According to Campos Neto, the Brazilian CBDC will have a limited supply - something that no other stablecoin, which is pegged to fiat currency values- ever had. Therefore, the Brazilian CBDC would have a capped supply similarly to Bitcoin, which has a maximum supply of 21 million BTC.

The reasoning behind this novel framework is simple; by keeping a maximum supply of the CBDC, the Central Bank is avoiding a potential rupture in the bank's balance sheet. By having a maximum supply, the central bank also keeps a tighter leash on cybersecurity, as it prevents the currency from facing potential hacks and exploits on the number of tokens available. A good example of such exploits can be seen in the recent Titan hack back in June of 2021, when taking advantage of the stablecoin’s unlimited supply associated with the IRON token caused the coin to lose its peg and create trillions of new coins in a matter of minutes - consequently, Titan’s value went to zero almost immediately.

However, even with the Brazilian CBDC under a limited supply, it will still be pegged to the country’s currency “Real”, and will be directly exchangeable for cash, coins and any form of digital transaction that involves the currency.

Who is behind the Brazilian CBDC?

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To advance the development of the Brazilian CBDC, the country’s government launched a new lab in November of last year specifically for the project. Entitled in translation as the Laboratory of Financial and Technological Innovation, it called its CBDC project the “Real Digital Challenge.” With Brazil as one of the biggest economies in the world, it’s no surprise that the government allied with several different companies and already-popular crypto projects to develop its central bank digital currency.

Until the end of its testing phase, the CBDC lab is expected to implement nine separate projects associated with different organizations.According to official internal reports, they are detailed as follows:

• AAVE - One of the top crypto projects in the world partnered with Brazil’s Central Bank to offer DeFi lending, staking and borrowing frameworks that can be accessed with ease by Brazilian citizens through the CBDC.
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• FEBRABAN - The Brazilian Federation of Banks will work on DvP technology (delivery versus payment), but aimed at trading assets such as stocks and bonds. DvP is a digital process that requires the payment of a security to be conducted before or at the same time as the product is received.
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• Giesecke+Devrient - A banknotes and securities company from Germany, G+D will provide the technology for dual offline payments - a feature that allows digital transactions to be conducted even when both the payer and the payee are offline.
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• Itaú Bank - One of the biggest banks in Latin America, Itaú will provide the CBDC infrastructure for international payments through peer-to-peer technology - also called P2P, which allows two parties to exchange data without the need for a central entity.
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• Mercado Bitcoin - Brazil’s biggest crypto exchange will also aid in DvP conversion, but completely focused on digital assets.
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• Microsoft and Visa partnership - The most ambitious product on the list, with the biggest companies, Microsoft and Visa partnered with Brazil’s central bank to create DeFi solutions that will allow small to medium-sized businesses to apply for and receive loans. Institutional adoption doesn’t get more crypto-friendly than this!
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• TECBAN - Will implement the connection between the CBDC and Internet of Things (IoT) applications. IoT signifies daily hardware appliances that are connected to the internet - a fridge with Wi-Fi, for instance.
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• Oliver Wyman - An American management consulting firm, OW will research and implement tokenized assets that can promote and sustain rural businesses.
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• Santander Bank - Also amongst the biggest banks in Latin America, Santander will yet also aid in DvP conversion (delivery versus payment) to digitally format vehicle and real estate ownership through the CBDC.

Biggest challenges for a CBDC in Brazil

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The biggest challenges for a CBDC to be implemented in Brazil are almost polar opposites, but perfectly capture the reality of inequality in the country.

On one hand, it will be difficult to get the population to adopt a CBDC as Brazil already has pretty advanced systems of digital payments. Being the creator of the “PIX” framework of instantaneous P2P payments, there’s a very good chance that the digitally-educated population just won’t see the need for utilizing a CBDC.

On the other hand, Brazil’s population is still largely illiterate when it comes to financial services in general. While financial technology flourishes in the richer areas of the country, a huge chunk of the population still lacks access to smartphones and any form of digitality. Hopefully, the Brazilian CBDC will also come up with initiatives to promote financial inclusion in the technologically-deficient areas, through projects involving the country’s Central Bank and the many partnering companies.



Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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