Innovation and Financial Inclusion in Brazil
The financial system is going through a time of technological change that has never happened before. In the digital world of today, people are looking for ways to make digital versions of anything that might be useful. In order to do this, encrypted assets have been put on a ledger so that they can be checked, moved, and split. Asset tokenization is a process that lets us get digital value from different kinds of assets, like photos, art, real estate, ideas, and money. Even virtual reality (VR) is now being turned into tokens.
This process of change suggests that BCB is moving toward a more tokenized economy, where the main change is in how tokenized assets are traded. This process tends to make the difference between what is account-based and what is token-based on the balance sheets of banks bigger. In the end, these changes could lead to the creation of global, regulated, token-based networks that can handle multiple types of assets.
The Central Bank of Brazil (BCB) has tried to push its agenda of financial innovations in this environment of change. Over the past few years, the BCB has put into action a number of the innovative projects on its agenda for structural changes to the financial system, called Agenda BC#. These projects include the instant payments system (Pix) and Open Finance. The BCB is also working on other projects, such as updating the laws on foreign exchange (FX) and the digital real estate market (central bank digital currency, or CBDC). All of these projects are different parts of a larger plan to build the financial system of the future. The goal of this plan is to make the Brazilian National Financial System (SFN) more efficient and modern and to use technology to make financial services more accessible to more people.
Pix, the BCB's instant payment system that came out in 2020, has far surpassed expectations so far, and the number of people using it keeps going up every month. Since 2020, Pix has gotten a lot of new features. For example, you can now make payments on the due date or at a set time. You can also get cash from a store, which makes the service much more widespread. Also, new ways to make things easier to use and safer are already in place. Even with all of these new features, there will still be new things to come. In the future, customers will be able to use Pix to get credit for some financial services that are currently only available through banks. Pix will also be able to do things that can be programmed. Customers will save a lot of time and money thanks to these changes. BCB is also planning that in Latin American countries, connections will be made between Pix and other instant payment systems. This will allow Pix to be used for international payments.
The Brazilian open finance environment is defined as the sharing of data, products, and services between regulated entities, such as financial institutions, payment institutions, and other entities licenced by the BCB, at the customer's choice. The goal of this project is to make Brazil's credit and payment markets work better by creating a more open and competitive financial system.
The BCB open-finance model is used as a standard around the world. It is the biggest model in terms of scope and the number of institutions involved. This project has been done in several steps. At the moment, BCB has more than 800 institutions participating, more than 7.5 million customer consents to share data, an average of more than 260 million API calls in the last few weeks, and more than 4 billion API calls in total.
In turn, the modernization of foreign exchange laws will make it easier to do business in Brazil. This is because the National Congress of Brazil passed a new law in late 2021. The new regulatory framework that the BCB will put in place will make it easier for Brazilian companies to enter international markets and make the Brazilian economy more appealing to foreign investors.
In the coming months and years, this process of innovation will lead to a financial system where competition will be based not only on the product but also on the way it is sold. All four projects—Pix, Open Finance, the internationalisation of BCB currency, and the Digital Real—will be brought together by this process. BCB believes that these four building blocks will lead to financial aggregators, which will let customers use the same applications to get information and services from different banks. In the end, BCB will move toward a new system that can work with other systems. All of BCB's projects will be connected by a single track.
BCB digital currency will be based on how well this integration works. BCB thinks that the benefits of a CBDC go far beyond improving wholesale and cross-border payments or allowing instant payments, which are two of the main reasons why central banks are interested in CBDCs. BCB believes that a CBDC is a key factor in bringing new business models and new ideas to the financial system. The challenge for the digital real is to make it possible to use it for more than just payments, using the new financial ecosystem that is about to emerge.
With tokenized deposits, the Brazilian CBDC will let people change their money. The idea is that deposits will be turned into tokens (stablecoins) that can be exchanged on demand for a CBDC from the BCB. Because the stablecoins will be issued by banks, there won't be any financial disintermediation or problems with their balance sheets. Since digital money won't pay interest, it won't mess with the way monetary policy is communicated or the way the economy works as a whole. This avoids some of the worries that other places with CBDs have. At the same time, tokenized deposits will be governed by the same rules as regular deposits. This will keep the financial system safe.
Also, the digital real is expected to make the trading chain of tokenized assets more efficient. This will help speed up the move to a world based on tokens since the same technology that banks and payment institutions use to tokenize deposits can be used to tokenize a wide range of other assets. Using new technologies to improve the internal controls and settlement processes of banks is another good result.
Through a BCB initiative called LIFT Challenge Real Digital, BCB is currently evaluating the execution of projects on the CBDC use cases proposed by banks, payment institutions, and other market participants. These projects include solutions for delivery versus payment (DvP), payment versus payment (PvP), the Internet of Things (IoT), and decentralised finance (DeFi), among others. The BCB plan is to start a pilot project in 2023. If everything goes as planned, the Brazilian CBDC industry could be up and running by the end of 2024.
In this changing ecosystem, both the chances and the problems are likely to be big. The biggest problem on a global scale is getting central banks to work together. When deciding on the technologies that will be used in their CBDCs, central banks need to work together more. If there is no coordination to make it possible for CBDCs to be used for cross-border payments, cryptocurrencies will always be more efficient. International tests show that using smart contracts is a key part of making it possible for CBDC solutions in different countries to work together.
The other important thing on BCB's agenda is making money from data. Users of the financial system find it hard to make money off of their data today. They should be able to do that because it's their information. BCB is working on ways for them to make money in the future with the information they give us. In this way, the financial aggregator could also be used as a data wallet, where the user could store data and choose the best way to make money from it. In order to do this, BCB needs to keep track of which data can be moved in a safe and organised way.
BCB doesn't think it makes sense that people will need to use different apps to get information and services from different financial institutions in the future. The idea behind BCB is to have a process that works together so that people can choose a single application that brings together information and services from different players. This app can be used as a digital wallet, but it can also be used to make payments, investments, transfers, and purchases of assets. It can also be used to manage cash and get many other financial services from different institutions. This aggregator would let people buy and sell things both online and in person. This process is already underway, but BCB will work in the coming years to speed it up even more.