Brazil is preparing to introduce digital currency by early 2025

Thu, 07 March 2024

Article Tags Economy Forecast Americas Brazil Country Analysis Financial Services

The Banco Central do Brasil (BCB, the central bank) aims to launch its own central bank digital currency (CBDC), the Drex, by the end of 2024. The Drex will complement the circulation of traditional money and promises to reduce operating costs, increase financial inclusion and make wholesale and retail transactions more secure. Although the Drex pilot program is in its final stages, we expect the launch to be delayed until early 2025 as regulatory agencies still need to outline the new legal framework for the digital currency and its infrastructure. Nevertheless, since Brazil is already at the forefront of many digital economy technologies, we think that the Drex will be widely adopted and improve the country’s business environment.

More than 100 central banks—representing 98% of global GDP—have adopted or are considering their own digital currency to supplement their economy’s money supply, according to the Atlantic Council (a US think tank), although only 11 have formally launched it has. so far. The BCB began its journey towards a CBDC in August 2020, with the creation of the first working group to study the feasibility of a digital currency. Brazil has made significant progress since then; its pilot program, which began in March 2023, will produce an assessment by mid-2024.

As Brazil has achieved remarkable success in developing its digital economy, we expect the adoption of the Drex to be widespread. Pix, a digital payment system, quickly gained popularity after its launch in November 2020, and almost three quarters of Brazilians (99% of the adult population) have now registered. The popularity of Pix has been credited with increasing financial inclusion and reducing transaction costs. The BCB expects the Drex to take the digital economy a step further and fill the gaps left by Pix.

Drex will target big ticket operations

While Pix is ​​an instant payment system focused on retail transactions, the Drex is the digital representation of the Brazilian currency, the Real. The use of blockchain technology, as is the case for cryptocurrencies, and distributed ledger technology (DLT) will provide security and transparency, helping to instill confidence in the Drex. However, unlike cryptocurrencies, which are unregulated and decentralized, the Drex will be regulated and its value guaranteed by the BCB, meaning that its value will be stabilized, equal to the Brazilian Real. These features will make the Drex more suitable for conducting the larger transactions required in wholesale and government operations. For example, the Drex can be used to price assets, conduct streamlined cross-asset operations without intermediaries, facilitate international transactions and automate contracts, to the benefit of the country’s business environment.

Digital currencies do not come without risk

CBDCs are relatively new – the first was only introduced by the Bahamas in 2020 – and their long-term impact and risks remain to be seen. However, initial concerns have subsided to a certain extent. Concerns that digital currencies could undermine the role of banks have so far proved unfounded. Many central banks have designed their CBDCs in such a way that the public can only access them through financial institutions, perpetuating the need for financial intermediation and preventing digital currencies from being used instead of bank deposits. Similarly, the existence of CBDCs increases the risk of bank runs, although none have yet occurred. This risk remains low while maintaining the banking sector’s health, but some central banks have attempted to prevent bank assets from flooding into CBDCs by establishing regulatory limits on digital currency holdings. To that end, the BCB has already indicated that public access to Drex will be through financial institutions and that there will be a limit on individual ownership.

Although the BCB planned to launch the Drex to the public before the end of 2024, delays in the development of the regulatory framework for the digital currency and its infrastructure indicate that the entire timeline for the project will slip. The BCB has announced that an open trial period could take place at the end of the year, but our view is that the Drex will be fully launched in early 2025.

The analysis and forecasts featured in this video can be found in EIU’s Country Analysis Service. This integrated solution provides unparalleled global insights covering the political and economic outlook for nearly 200 countries, enabling organizations to identify prospective opportunities and potential risks.

Thu, 07 Mar 2024 Article Tags Economy Forecast America Brazil Country Analysis Financial Services