The Brazilian Central Bank is making progress towards introducing a digital currency for Brazil. According to information disclosed on Monday (7th) in a blog post by Andréia Sadi, the Brazilian Central Bank has decided to name the counterpart of PIX, which is the new development referred to within the institution, as “Drex”.
However, this project is currently in the testing phase and lacks an official release timeline. The anticipation is that this fresh currency will be made available to the general public by the end of 2024, as stated by Fabio Araújo, the coordinator of the Central Bank’s digital real initiative.
The Central Bank has been discussing this subject for several years now. In 2020, for instance, they established a working group to explore the creation of a Brazilian digital currency, and the basic outlines of the project were disclosed in May 2021.
In practical terms, the Central Bank digital currency (CBDC) is essentially a new representation of the Brazilian Real, existing entirely in a digital format. In other words, “Drex” is essentially the Real, but in a digital form.
“Drex” is expected to have similar functionalities to the instant payment system, PIX, but with notable differences, such as the potential to buy and sell government bonds.
What is “Drex”?
“Drex” is Brazil’s inaugural official virtual currency, also known as the Digital Real.
In essence, it will function as a novel manifestation of the physical banknotes issued by the Central Bank. It will be supported by the same principles and economic policies that determine the worth and stability of the traditional real, facilitating financial transactions, transfers, and payments, among other functions.
Key points about “Drex”:
- It will be issued by the Central Bank itself, extending from the physical currency, with distribution facilitated by banks and payment institutions.
- Custodianship will be maintained by the Central Bank.
- Conversion between “Drex” and the conventional Real (in physical notes) will be feasible, with the focus primarily on financial transactions.
- Its exchange rate against other currencies will remain consistent.
- Banks will be prohibited from lending these digital resources to third parties, a contrast to the current lending practices with physical currency.
- “Drex” will not accrue interest, meaning the value will not inherently increase over time.
- Security measures, encompassing legal, cyber, and privacy aspects, will be guaranteed for all operations.
According to Fabio Araújo, the coordinator of the Central Bank’s digital real initiative, the intent is that this new currency will facilitate a broader array of financial products and services, tailored more precisely to users’ requirements, and at a reduced cost.
The name “Drex” for the new digital currency holds multiple elements of innovation, as per the Central Bank’s explanation:
- The “D” signifies digital.
- The “R” signifies Real.
- The “E” signifies electronic platform.
- The “X” signifies transactions.
Is there a distinction between “Drex” and the Brazilian Real?
No, “Drex” is essentially a digital rendition of the Brazilian “Real”, the official currency. However, it offers the added potential for usage in various financial operations.
“We’re talking about money [that is] on top of a new technological infrastructure. So from the moment you have this tokenized format, within a blockchain, it allows you to do some different operations from a financial point of view,” says Bruno Diniz, co-founder of innovation consultancy Spiralem.
“So a lot of this is still going to be offered by institutions in terms of financial products that are going to need the digital real to be activated, for example,” adds the expert, citing as an example the use of smart contracts (also known as smart contracts).”
For example, consider a scenario where two individuals are buying a car. In this case, a smart contract could be executed using “Drex” to circumvent debates over who should take the initial step – whether the buyer should deposit money before receiving the car or the seller should transfer vehicle documentation before receiving payment.
“Everything is done simultaneously because it falls within a contract that is automated,” Diniz explains.
The expert emphasizes that holding a balance in digital reais provides an extra layer of security for all types of financial transactions. This not only enhances the efficiency of service providers but also offers advantages for users through the utilization of blockchain technology.
What is the purpose of “Drex”?
The Central Bank envisions the new Brazilian digital currency being employed in existing financial activities like loans, insurance, and investments, while also introducing new possibilities such as smart contracts. Additionally, these operations are anticipated to have lower costs, expanding access to the population.
Furthermore, the Central Bank emphasizes the importance of interoperability with current payment methods available to the public. This means users can make payments in stores through their chosen payment service providers – banks, payment institutions, or other entities authorized by the Central Bank – and even via PIX.
Users will also be able to transfer digital reais to others, convert them into traditional bank deposits, withdraw them as physical currency, and settle bills and taxes.
“That is, you will be able to move your Digital Reais in the same way that you would move your resources currently deposited in banks,” the central bank said in a note.
How does “Drex” differ from PIX?
While PIX is a technology for instantaneous transactions, “Drex” is the currency itself.
What sets “Drex” apart from cryptocurrency?
According to the Central Bank, cryptocurrency lacks the fundamental characteristics required for classification as a currency – namely, functioning as a medium of exchange, store of value, and unit of account. Cryptocurrencies are also not issued by official monetary authorities (central banks), unlike “Drex” and other central bank digital currencies (CBDCs).
Additionally, the Central Bank highlights the high volatility of cryptocurrencies like Bitcoin and Ethereum, which hampers their practical use as payment methods.
In contrast, the Brazilian digital currency, “Drex”, is being developed to establish a secure environment that fosters innovation for entrepreneurs and grants consumers access to technological advantages while avoiding unregulated financial scenarios.
How does one get “Drex” in practice?
The Central Bank indicates that end-users will require a virtual wallet held by an entity authorized by the Central Bank, such as a bank or payment institution, to access the digital currency. Moreover, anyone wishing to possess the digital currency will need to provide traditional Brazilian reais for issuance of the corresponding digital reais.
“This operation will not be done directly by the Central Bank, it will be intermediated by a participant of the financial system (bank, cooperative or fintech) or the payment system (payment institution), or even of some new type of company that will be created under the authorization of the BC to intermediate the access and use of reais in digital format,” said the BC in a note sent to the g1.
Will using the new digital currency incur any costs?
As stated by Fabio Araújo, the coordinator of the Central Bank’s digital real initiative, since it is inherently linked to a financial service, the costs associated with the platform for the new digital currency will be integrated.
Is “Drex” secure?
The Central Bank emphasizes that the new Brazilian virtual currency will uphold the high levels of security and privacy already present in banking and payment operations today.
According to Araújo, the “Drex” platform will be accessed through tokenized bank deposits. Tokens are contracts representing custody of assets, electronically recorded and immutable.
Source: Adapted from G1
