When Isabela Duque, a receptionist in the Brazilian city of Santos, decided to use all her savings to buy her first car, the process was fraught with suspicion. The seller asked for the full amount to be deposited in his bank account before transferring the car to her name, and Duque obliged. They went separately to the notary office to process the paperwork while Duque worried about the possibility the man would vanish with the car as well as her money.
While Duque managed to complete the transaction successfully that day, her situation exemplifies the risks Brazilians often face when making purchases that rely largely on trust, a fairly common way of doing business.
It also illustrates one of the future uses of DREX, a digital currency issued by the Central Bank of Brazil as an extension of the country’s physical currency, the real. Residents would have their current account with physical money and another with digital currency. A digital wallet with DREX could live inside a user’s mobile banking app for example.
“Today, purchases such as buying a car are based on trust because doing it in any other way is way too expensive as it involves hiring lawyers as well as doing a lot of paperwork. In the DREX environment, there are ways to automate the entire process,” said Fabio Araujo, coordinator of the initiative at the Central Bank.
This is one of the aspects of DREX that is currently being tested by banks. By automating processes and eliminating intermediaries from the transaction, tokenisation is expected to reduce the cost of financial products like credit or investment products for the population.
DREX is currently being tested by banks in Brazil for aspects such as scalability, security and privacy and is expected to launch in the second half of 2024 for all residents to use in addition to cash.
Technically described as a Central Bank Digital Currency (CBDC), DREX is the latest development of a broader agenda in place since 2016 and aimed at incentivising the digitalisation of the Brazilian economy.
The plan is led by the Central Bank and aims to make financial services more modern, cheaper and more accessible to the population.
As part of that plan, the bank in 2020 launched an instant payments platform called Pix, which has since become Brazil’s most popular payment method.
That was followed by the rollout of Open Finance, an initiative that enables access and sharing of consumer data across a range of financial products and services.
Similar to Open Finance, DREX is intended as a platform upon which businesses such as banks and fintechs can create a broader range of products within the existing financial system. The idea is to be able to register projects from the physical world – a car, a house – as tokens in the blockchain.
A key characteristic of services provided under DREX is that they will be held as smart contracts using blockchain technology, which records not only when and how transactions are made but also sets the rules for them to occur. The idea is similar to setting up escrow accounts, except that they need professionals like lawyers while this is meant to be initiated by consumers.
In practice, transactions such as a car purchase would be completed only when all the conditions are fulfilled. In Duque’s case, this would entail the payment and the transfer of ownership.
“And if something doesn’t work out at any stage of the transaction, the car remains with the seller and the buyer retains the money,” Araujo explained.
Today two-thirds of global adults use digital transactions, according to data from the World Bank. In developing countries, digital payment use grew from 35 percent in 2014 to 57 percent in 2021, the year for which the latest figures are available.
Digital versions of cash that are fully regulated by central authorities – unlike cryptocurrencies, which are privately run by individuals or companies – are also a way for countries to respond to the demands of an increasingly digitalised world.
According to data from the US think tank Atlantic Council, at least 130 countries around the world have some form of digital currency project under way.
CBDCs in emerging economies include the digital yuan in China, the first launched by a major economy and operational since 2021. The Chinese government has been trying to stimulate uptake of its CBDC via initiatives such as discounts and digital yuan lotteries, but less than a fifth of the population currently uses it. India launched the digital rupee last year, but it is yet to gain momentum.