Brazil Central Bank Starts Testing Use Cases Of Digital Real

December 3, 2021
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The Central Bank of Brazil has announced a new partnership aimed at testing potential use cases of a central bank digital currency.

The Central Bank of Brazil has announced a new partnership aimed at testing potential use cases of a central bank digital currency (CBDC).

Roberto Campos Neto, the president of the Brazilian Central Bank (BCB), announced the new initiative in his closing remarks of a series of webinars in the South American country held on policy questions related to a digital real.

The "Lift Challenge - Digital Real" aims to evaluate the use cases and technological feasibility of a Brazilian CBDC.

"We hope that the digital Real can become part of people's everyday lives, which will be used in conjunction with bank accounts, payment accounts, cards and cash, and which helps to diversify the portfolio of means of payments available to citizens," Campos Neto said in his speech.

The testing will be carried out in collaboration with market participants and the central bank civil servants trade union, Fenasbac.

The initiatives to modernise payment methods are part of a larger process of digital transformation that tje country has been going through, the BCB president said, adding that “the development of the digital real fits into the modernisation efforts of the central bank and represents a natural evolution of this agenda”.

With the digital real, Brazil sees the potential to incorporate new technologies, such as programmable money and smart contracts into their payment and settlement system, and to offer a native form of settlement between applications in the Internet of Things, the president added.

“The issuance of digital assets is a reality, and it is up to regulators to provide a safe environment for it.”

CBDC webinar series

Since July, the BCB has held seven webinars on various policy questions surrounding CBDCs, with the latest roundtable focusing on interoperability.

Although the central bank has not yet taken a decision on what would be the actual use cases of a potential digital real, interoperability is considered a key part of reducing costs and increasing the efficiency of payments systems.

Although current digital payments systems allow for the programmability of money and applications, there is significant room to improve efficiency and reduce costs.

“The key difference that we see [between today’s solutions and a potential CBDC] is that oftentimes those [programmability] rules are encoded at each individual organization and replicated. You have a lot of reconciliation that is required in order to ascertain whether the rules on either side should be maintained the same as we first defined them and agreed to them,” Ricardo Correia, global head of digital currencies at R3, told the audience.

“Reconciliation cost is a massive opportunity that we can reduce by encoding the actual rules in the network and on the asset itself.”

The other opportunity is the notion of composability, Correia said, where a central bank could provide a set of rules on a digital asset, and additional participants, such as commercial banks or payments service providers, can compose additional services and rules on top of that.

These opportunities would lead to the reduction of reconciliation and, hence, cost efficiencies.

In addition, if we consider interoperability between national CBDC platforms, the feature has the potential to improve cross-border payments.

Central banks have various options in how they could achieve interoperability, from the use of established messaging standards, data and other technical standards, to building technical interfaces to communicate with other systems.

The Bank for International Settlements (BIS) has proposed three different models on how central banks can enable the interoperability of their payments systems. These concepts include compatible CBDC systems, interlinked CBDC systems, and a single system for multi-CBDC.

For instance, Project Dunbar, which examines the feasibility of one network with multiple subnetworks within, represents the third model.

“When you have one network you have shared services that make it easier to interoperate. While there is a sovereign control of each subnetwork, they have the same digital ID schemes, same rulebooks, same governance models that facilitate interoperability,” Correia explained.

However, he noted that interoperability becomes more complex when it comes to cross-ledger solutions, such as the mBridge project.

“Interoperable bridges tackle interoperability on the data level, which is a slightly higher level than the protocols. Once we can tackle interoperability at the protocol level, that is when we truly unlock the ability to have assets moving freely and seamlessly across various boundaries and networks,” he said.

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