Brazil's Central Bank has shelved, at least for now, plans to launch a central bank digital currency (CBDC) under the DREX project. Instead, it is now prioritizing smart-contract infrastructure aimed at bringing the country's private credit market onchain.
The strategic shift was driven by challenges related to privacy and confidentiality of transactions identified during tests over the past two years. Scalability constraints also proved to be a major hurdle, while the initiative's high cost ultimately weighed on the decision.
The DREX project is Brazil's initiative to modernize its financial infrastructure using blockchain technology. Launched as a pilot in March 2023, it is expected to enter a new phase in the coming months. "Phase 3 of the DREX project will begin this year with a focus on the use of assets as collateral for credit operations," a spokesperson for the central bank told Sandmark.
The decision followed a series of discussions with financial institutions, technology companies and digital infrastructure providers involved in developing the platform. The central bank also carried out extensive testing of smart contracts and other platform features, while evaluating a range of use cases. Together, those efforts led the project to focus on modernizing the credit market, one of the financial system's main priorities.
Focus on the credit market
The goal is to make credit more accessible, addressing the complex processes that can make lending more difficult and costly.
In addition to requiring collaterals such as real estate, accessing credit in Brazil involves multiple institutions exchanging information about pledged assets, making the process slower and more complex.
Brazil's benchmark interest rate, currently at 14.25% a year, has also made borrowing more expensive while pushing up default rates. As a result, banks tend to take a more cautious approach when assessing loan applications. In this environment, credit can remain out of reach even when borrowers are able to demonstrate their repayment capacity. The impact on the economy is significant.
A survey conducted by Sebrae, Brazil's small business support agency, earlier this year found that 46% of small businesses that recently applied for loans had their applications rejected. Among individuals, 26% remain outside the credit market altogether, according to the central bank data, making credit access one of the country's biggest challenges.
The central bank's idea is to develop infrastructure that allows financial institutions to tokenize assets and execute transactions through smart contracts. As a result, processes that currently require multiple steps could potentially be automated, reducing costs, operational risks and the time needed to complete transactions.
The expectation is that faster, more efficient transactions will help expand access to credit and support broader economic growth. "DREX can foster competition among lenders, which, depending on the collateral offered, may openly compete for credit contracts by offering lower borrowing costs," the spokesperson told Sandmark.
A possible outcome would be lower borrowing costs for companies and individuals. In Brazil, current interest rates charged to businesses on credit operations average around 20% a year, according to the central bank. Individuals pay an average of 39.4% in interest on loans, with both levels considered high.That compares with a 3.62% average cost of new corporate borrowing in the euro area in April and a 7.59% rate on new consumer loans, according to the European Central Bank. In the US, personal loans from commercial banks carried an average annualized rate of 11.86% in May, Federal Reserve data show.
Digital financial transactions have already been expanding rapidly in Brazil. For the credit market, smart-contract infrastructure could provide the missing catalyst needed to unlock lending.
Automating credit
According to the central bank, one of the main goals is to build infrastructure capable of connecting different participants across the financial system, including banks and credit cooperatives, while enabling automated transactions based on predefined rules.
Assets such as government bonds, agricultural commodities and real estate would be central to the model, allowing them to be transferred, pledged or settled automatically through smart contracts as tokens.
One of the clearest potential benefits is a faster credit assessment process. Once the assets offered as collateral meet pre-established conditions, steps such as verifying eligibility criteria could be automated. The infrastructure may also facilitate the conversion of receivables - amounts companies are entitled to receive from sales made on credit - into financing, a process that currently involves manual checks and can take days to complete.
Another important area involves trade finance, where banks often provide credit facilities that allow exporters to receive payment before their foreign buyers settle their invoices. This is because payment for exported goods is typically made some time after the sale, which can put pressure on companies' cash flow. Asset tokenization is expected to speed up the verification and use of collateral in these transactions.
Changing market dynamics
The same infrastructure, provided by Brazil's monetary authority, will be available to different financial institutions, allowing them to share infrastructure, reduce costs and streamline operations. "As a result, new financial service providers and new business models will emerge at lower costs," the central bank said.
Over time, banks and fintechs are expected to be able to develop new financial solutions by combining different services into a single automated transaction. The broader range of services enabled by this infrastructure is also expected to increase competition in the sector and encourage new players to enter the market.
Although no concrete applications have yet emerged, the market sees potential, for example, in the creation of lending models capable of automatically accepting different types of tokenized assets as collateral. Another possibility is linking investments - including tokenized assets - to loans through smart contracts.
Smart contracts, however, are expected to have applications that go far beyond the financial sector. In the case of a real estate transaction, for example, a smart contract will allow payment settlement and the transfer of ownership to occur simultaneously, reducing the time required to complete the transaction and the costs associated with the process. According to the monetary authority, the transaction will be carried out on the Drex Platform, accessed by buyers and sellers through their financial institutions.
In the future, the technology could allow consumers to set up a series of rules and processes for a smart refrigerator to purchase groceries when supplies are running low. Variables such as price, brand and quantity could be chosen by the user. The smart contract could verify these parameters and automatically authorize payment using a digital wallet after sending the order to the supermarket.
The possibility that these transactions could eventually be settled using a central bank-issued digital currency has not been ruled out. The monetary authority says it has postponed development of the asset but has not abandoned the idea. "The tokenization of assets on the platform, using a settlement currency provided by the central bank, remains the project's ultimate goal," it said. However, the initiative remains without a timeline or further details on its implementation. The development of smart contracts, by contrast, remains firmly on track.
Reporting by Carla Siqueira.
