The Central Bank of Brazil (“BCB”) has been closely participating, studying and monitoring international efforts and discussions regarding the implementation of Central Bank Digital Currencies (“CBDC”) across different jurisdictions and regulatory bodies over the last years and is advancing significantly towards its implementation in Brazil since the creation of a multidisciplinary study group, in August 2020, to analyse its risks, advantages, and potential impacts on the Brazilian economy.
In May 2021, BCB has finally disclosed the applicable guidelines for the potential development of the Brazilian CBDC, which will be a major leap for the Brazilian payments and financial markets, since Brazilians still have a strong cash culture – a research performed by BCB in 2018, evidenced that 96% of Brazilians still used cash and 60% used cash more frequently than any other payment method. The estimated costs arising from the use of cash in Brazil are still approximately 90 billion Brazilian Reais.
Therefore, similarly to other relevant initiatives recently launched by BCB, particularly the Brazilian instant payment scheme (Pix) and Open Banking, the development of the Brazilian CBDC is part of the scope of BCB’s agenda to reduce the use of cash, combat irregular activities, improve the execution of cross border payments, as well as promote innovation, financial inclusion, competition in a digitalised economy and efficiency in the Brazilian Payments System through the creation of new business models that use disruptive technologies, such as smart contracts, internet of things (IoT) and programmable money.
These initiatives promoted by BCB within the last year, among others, were mainly accelerated by the impacts that the pandemic is having over the way Brazilians execute financial and payment transactions, particularly the significant rise in the use of digital payment instruments. In this context, the guidelines set forth by BCB are divided into three (3) main categories, as follows:
(i) operating requirements, pursuant to which the Brazilian CBDC (a) shall focus on fostering innovative business models that can enhance the Brazilian economy’s efficiency; (b) is expected to be used in the retail market and by the general population, both in online and offline payment transactions; (c) shall be custodied and distributed to end-users through intermediating institutions that are part of the Brazilian Payments System, similarly to the model currently adopted for the custody and distribution of cash; and (d) shall not result in the collection of any compensation by BCB or by the intermediaries from end-users, thus preserving the value of the funds held in their e-wallets;
(ii) legal safeguards, in the scope of which BCB clarified that (a) the Brazilian legal framework will need to be adjusted to grant BCB the necessary jurisdiction to operate the Brazilian CBDC, thus assuring legal certainty to transactions executed with it; (b) the Brazilian CBDC will need to be developed in line with the Brazilian General Data Protection Law, the Brazilian Bank Secrecy Law and cybersecurity regulations; (c) the Brazilian CBDC will require the implementation of mechanisms for anti-money laundering and combating the financing of terrorism and the proliferation of mass-destruction weapons; and (d) it will also be necessary to ensure that irregular transactions executed with the Brazilian CBDC are traceable to enable compliance with judicial orders, if necessary; and
(iii) technological premises, according to which BCB clarified that (a) it intends to keep the local system open to the adoption of internationally agreed standards, thus enabling interoperability of its systems with the ones held by central banks from other jurisdictions; and (b) the resiliency of the involved systems to cyber-attacks must be compatible with the parameters currently applicable to critical infrastructures of the Brazilian financial market.
BCB has also clarified that the future and gradual existence of the Brazilian CBDC shall not replace cash, but rather cover gaps and overcome frictions that traditional currency struggles with, as well as highlighted that the Brazilian CBDC shall solely be a new way of representing the sovereign Brazilian currency already issued under the country’s monetary policy (i.e., the Brazilian Reais) and, hence, is not to be mistaken with cryptocurrencies – which are not deemed as currency in Brazil and are still considered, by such authority, as an unregulated high-risk asset.
The guidelines above are currently under discussion between BCB and local markets’ players, particularly to determine the pace of their implementation, define the applicable technologies and use cases, and support further developments.
Therefore, the implementation of the Brazilian CBDC is still under debate but has the potential to be a game-changer for the Brazilian payments and financial markets, particularly by promoting more transparency, traceability, and efficiency to the local currency, as well as opening the Brazilian ecosystem to new business models, cross-border transactions and disruptive technologies while preserving financial stability and data protection.
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