Central Bank of Brazil admits difficulties in developing digital currency

The Central Bank of Brazil admitted this Wednesday difficulties in the project of a digital currency , having concluded the first phase of tests that revealed technological challenges and limitations, namely in the authorities' ability to control the use of the currencies.

"The pilot [project] has proven to be challenging from a technological point of view , and has required more intensive monitoring in the second phase than anticipated," the Brazilian issuing body said in a report. The project, called Drex, is a central bank digital currency (CBDC) and its first testing phase began in July 2023, with the collaboration of private banks.

The Central Bank said that "a major adaptation effort will be necessary for the Drex platform to serve as an infrastructure for innovative services for society" and that the tests revealed limitations in the authorities' ability to control the use of the currencies, which would make it difficult to monitor transfers of funds associated with illicit activities.

Limitations were also found in the capabilities of programming tokens and creating new financial services through smart contracts. “Despite significant progress towards anonymity, proven solutions have limitations that currently hinder their adoption in the context of enterprise needs,” the report reads.

Along with the report, the Brazilian issuing body released a statement in which it confirmed the launch of a second phase of testing of the project, although it stressed that "continued development and close collaboration between regulators, developers, academia and market participants will be necessary to overcome the current obstacles ".

The main objective of the second phase of the Brazilian digital currency project will be to advance privacy issues, while analyzing suggestions from participating private institutions to evaluate use cases.

Around 100 countries are moving forward with studies to implement CBDCs, digital currencies that can serve as a means of payment, with the promise of improving central bank controls and allowing the scheduling of cash transactions. The big exception is the United States, which abandoned the study after US President Donald Trump categorically rejected this possibility.

The European Central Bank (ECB) is developing a project to create a digital euro, an electronic equivalent of cash, but will only make a final decision on its launch once MEPs have approved the legislation on the matter. A legislative package was released by the European Commission in June 2023 to move forward with this new availability while also safeguarding the use of the euro as cash.

As part of this package, the institution then proposed a digital euro that, like cash, would be available as cards or apps, functioning as a digital wallet through which citizens and businesses could pay anytime and anywhere in the euro area. It would also be expected that banks and other payment service providers across the EU would distribute the digital euro, free of charge in the basic version, and that merchants across the euro area would accept payments with the digital euro, except for very small ones, given the cost of the infrastructure.