The Central Bank of Brazil recently announced that the digital currency it plans to launch by late 2024 will be called Drex. The Central Bank Digital Currency, or CBDC, will be an important innovation to modernize the national financial system and provide more control over financial transactions. The solution behind the digital currency, based on blockchain and smart contracts, is expected to generate efficiency gains, simplifying its use by way of tokenization and a decentralized financial system. Tokenization is the process of replacing sensitive data with unique identification symbols that retain all the essential information about the data without compromising its security.
Drex raises questions about its impact on financial markets and the role of banks. It has the potential to create business opportunities for existing players and new ones but will also require those institutions to review their value propositions, operations, processes, and technologies.
Banks are expected to introduce Drex to the general public. Hence, they have an important role in educating and democratizing the use of the digital currency, creating products, services, and designing use cases.
The possibility of asset tokenization thanks to Drex will make transactions more efficient and could be applied in a wide variety of banking services, also backed up by innovative business models:
- Make transactions between parties safer and reliable, reducing risks.
- Allow asset tokenization and fractioning (real estate, investments, vehicles, etc.).
- Improve credit risk analysis based on tokenized assets as collateral.
- Facilitate fundraising, access of companies to capital and cross-border operations.
- Optimize credit recovery and other banking processes.
Drex is expected to provide people access to a wide variety of financial services delivered securely and more efficiently.
It’s important to noticed that over the last three years more than ten countries have launched or are testing CBDCs: India (e-Rupee pilot launched on March 23); China (digital yuan, in 2020); Singapore (2022); Nigeria (eNaira, in October 2021), and a few Caribbean countries, among others. Massive adoption of CBDCs in those countries depends, among other factors, on each market particularity (unbanked population percentage for example), regulatory maturity, and competition dynamics.
Financial Institutions have a unique opportunity to anticipate, capture, and be prepared for opportunities with Drex. Despite uncertainties on specific regulatory discussions underway in Central Banks work sessions, there are key topics to keep in mind:
- Banks will play an important role as safeguards of tokenized assets such as real-estate properties, vehicles, treasury bonds, etc. Their ability to leverage it is evolving and can potentially benefit their business operations, including investments, mortgage, personal loans, credit cards, etc.
- Incumbents and digital banks will have the opportunity to create disruptive business models and innovative solutions to get customers’ attention. In other words, Drex will be an incentive for innovation.
- Players’ ability to adapt quickly and launch products and services is a competitive advantage. Not all banks are currently aware or prepared to capture the opportunities presented by Drex. As they bring their technology, workforce, and resources up to speed, they should factor in Drex in their strategic and budgeting agenda.
- In addition to Drex, the Brazilian financial industry has been also impacted by relevant transformations such as Open Finance, PIX and Gen AI. Therefore, the discussion is not only about prioritization but how to create the foundations to capture the long-term opportunities of the digital economy.
- Privacy is key and the Brazilian General Data Protection Law, or LGPD by its acronym in Portuguese, continues to be a key pillar in respect of all trends in course.
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