Uncover Brazil’s innovative CBDC, Drex, and its role in shaping the nation’s digital financial landscape.
Brazil has given the idea of creating its own CBDC (Central Bank Digital Currency) great consideration. Until now, we had been referring to this endeavor as the “digital real,” even though the “real” is actually the currency of Brazil. In contrast, we already know that the CBDC for Brazil will be called Drex.
Brazilian CBDC Drex
According to Agencia Brasil, the initiative’s coordinator and bank economist Fabio Araujo revealed the official name during a YouTube live broadcast of the monetary authority.
Since each letter in the word DREX stands for a different feature of the instrument, this is an acronym.
The letter “D” stands for the word “digital,” and the letter “R” stands for the word “real.” As for the “E,” it stands for the word “electronic,” while the “X” was added to signify modernity and connectedness and to reflect the final letter of the 2020 quick money transfer system that Pix developed.
The statement contends that Drex should be utilized to improve the lives of Brazilians by giving both residents and company owners a secure and regulated environment for the creation of new enterprises and a more democratic means of accessing the advantages of the digitalization of the economy.
Brazil’s CBDC project
Of all, the Drex will only be a digital representation of the real thing, so it won’t be a brand-new currency, just a revised version of the one that already exists.
Since last year, there has been discussion regarding the establishment of a national CBDC in Brazil, and last month, the first computer codes related to it started to circulate. But it won’t likely hit the market until the end of the next year. In September, the initial operational testing ought to start.
It is difficult to comprehend why Brazil chose to pursue this given that such projects in other nations have not been very effective.
It is generally accepted that the primary benefit of utilizing a CBDC in place of traditional fiat currency in a digital format is to enable the central bank to more effectively oversee cash flows.
In actuality, a CBDC adds no meaningful advantages for citizens unless it is included into smart contracts.
In fact, traditional fiat currencies cannot be used by smart contracts unless they are issued by the central bank itself. While smart contracts for private individuals, or computer programs that conduct financial transactions independently but in a manner that is entirely predictable, might theoretically be hosted on the platform of CBDCs.
For instance, as Drex will only be usable through virtual wallets connected to payment institutions, including banks and correspondent banks, it should only be a wholesale currency, not used directly by retail users.
Given this, it is obvious that CBDCs cannot and do not compete with cryptocurrencies in any way.
Additionally, it doesn’t seem realistic that they could compete with stablecoins, which are digital tokens that mimic the value of fiat money.
Stablecoins can be used with decentralized finance protocols and are uncensurable, anonymous, or at least pseudo-anonymous.
CDBCs won’t be completely anonymous and will always be subject to censorship. Indirect use on decentralized finance systems is also not possible. They will therefore be limited to competing with stablecoins on controlled sites like exchanges where fiat currencies are already accepted.
In conclusion, since they are essentially the same thing, but in a different format, CBDCs will compete largely, or possibly entirely, with traditional fiat currencies.
Stablecoins will likely continue to be preferred over CBDCs even on controlled exchanges by individuals who opt to utilize them in place of fiat money.
For all of these reasons, it has been widely believed for a while that CBDCs will be a positive development, particularly in terms of anti-money laundering (AML) and counter-terrorist financing surveillance.
Additionally, CBDCs like the Brazilian one will mostly be utilized by Brazilians and people who live abroad but need to conduct financial transactions into and out of Brazil.