07 Digital Real

For modernizing Brazil’s economy with a new digital currency

Already one of Latin America’s economic powerhouses, Brazil is now emerging as a first mover in the digital banking space. At the forefront of those efforts is a reimagining of the country’s payments industry: Banco Central do Brasil plans to roll out a digital version of the country’s official currency, the real. The goal? Maximize interoperability and support cross-border payments while putting a dent in money laundering and the financing of illicit operations. 

The move is similar to that taken by the Central Bank of the Bahamas with its Sand Dollar—albeit on a much bigger scale. And taking the digital currency plunge is still a novel endeavor for any nation, requiring teams to navigate wildly shifting unknowns. So Banco Central do Brasil launched the Lift Challenge, inviting 43 fintech innovators from around the world to build minimum viable products that would aid the bank in rapidly exploring potential applications and assessing risks and benefits for its Digital Real. 

In March, it chose nine of those companies to develop central bank digital currency (CBDC) pilots scheduled to go live in 2023. The lineup includes a range of global players, from Brazilian crypto exchange platform Mercado Bitcoin to Spanish financial giant Santander to German digital payments firm Giesecke+Devrient. The aim is to use the pilots to pick up critical lessons on support issues and actions like digital lending transactions, tokenization of ownership rights, international payments, rural financing and trading platforms. 

“Thinking about retail use, we initially focused on the use cases that would bring the Real Digital closer to the population who will be its final users,” says Fabio Araujo, executive secretariat, Banco Central do Brasil.

For example, the Giesecke+Devrient team developed a pilot to support dual offline transactions that would allow users to make payments to anyone without either party needing access to the internet. The project alleviates the barriers that many vulnerable populations face in accessing traditional forms of digital payment.

“With a CBDC, you can grant them access to financial transactions even without a bank account or a smartphone,” says Tanja Hessdörfer, director of business development CBDC at Giesecke+Devrient in Munich.

Aware that access to digital currency requires internet connectivity—which unfortunately is not accessible to the entire Brazilian population—Hessdörfer’s team was inspired to create a token-based transaction option, which allows money to be represented by a piece of data. Users with smartphones can make payments by transferring the data or token from one wallet to another, while users who don’t have smartphones could store the CBDC data on a smart card, which can be used to make payments offline between cards.

The move to include token-based transactions is yet another way that the Central Bank and its partners are seizing an opportunity to make Digital Real a driver of financial inclusion.

The debut of the digital currency has been delayed until 2024 because of a worker’s strike at the Banco Central do Brasil. But once it does go live, the Central Bank is already planning for this digital approach to connect with future technology by putting blockchain and web 3.0 in place.  

“You have to work in an agile approach, doing iterative projects where you learn and adapt your strategy,” Hessdörfer says. “It is an interesting way to test different technologies to ensure that we build a platform that fulfills the needs and requirements for all segments of society.”

Listen to Giesecke+Devrient's Tanja Hessdörfer discuss why project leadership is critical for central bank digital currency initiatives:

Project management is an integral part, I would say, in managing those CBDC [central bank digital currency] projects. I think they are also very intriguing projects because, first of all, it’s a very new topic and often the clients and yourself, you have established new teams and new roles for that. There are always new team members usually that join such initiatives. People get trained on new knowledge and competencies. So it’s a very interesting project where you usually work with a lot of different departments of a central bank together because you need all the different angles to successfully manage such a CBDC project, and that can range from, of course, IT, security, the currency department. So, usually, it’s a very interdisciplinary team, and strong project management is also required to keep the strengths together and manage it successfully. Of course, it’s also a learning journey. Not a lot of central banks have launched a central bank digital currency yet. Not everything is predictable, so you have to work in an agile approach. You have to do iterative projects or pilots where you step by step learn and then also adapt your strategy and how you manage those challenges.

A lot of people always ask, “What problems does a CBDC solve? We have a lot of digital payment methods already.” Of course, to that question, there are a lot of answers, looking at financial inclusion, data privacy and monetary serenity, interoperability. But I also like to look at it from a different perspective and not asking about what problem does it solve, but what innovation can it bring?