🌎 Deep dive on Drex, the Brazilian CBDC

We explain it to you here

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Frontera EC, Abraham Rivv & Abraham Cobos
December 13, 2024

👋 Hi welcome to Frontera, the newsletter dedicated to showcasing the reality of crypto in Latam. Join industry leaders from Binance, Crypto.com, dYdX and others to understand how Latin America has become one of the most dynamic and promising markets in the crypto world and how you can address this market. 

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You can also listen to the analysis of this topic in our podcast, here.

🇧🇷 How Brazil's CBDC will impact the country?

Today I want us to dive deeper into Brazil's CBDC project by understanding 3 things:

  1. Why did they decide to launch a CBDC?

  2. The current situation of the DREX project

  3. How this CBDC will impact the country and its citizens

Why did they decide to launch a CBDC? 

Brazil has been known as the most technologically innovative country in Latin America.

Here are some examples backing that: NU is currently the world’s largest neobank with 100 million customers, it is the LATAM country with the most crypto startups, and they are the country with more tech Unicorns in the region

Btw, you can find more data on Brazil's crypto projects in our report, download it here.

What I want to emphasize is that Brazil is always at the forefront of innovation, especially in financial innovation.

A CBDC (Central Bank Digital Currency) is the next step in a country's financial innovation, and Brazil won’t be left behind. The Central Bank wants to launch this CBDC with 3 objectives:

  • Modernize the country’s financial system

  • Promote the efficiency of financial markets

  • Promote financial inclusion

In recent years, Brazil has positioned itself as one of the LATAM countries with the most progress in financial inclusion, with approximately 51% of its population using digital financial services, twice the percentage of people using digital financial services in Mexico.

The current situation of the DREX project: From idea to execution 

Since its inception in 2020, Banco Central do Brasil (Brazilian Central Bank, BCB)  has worked closely with commercial banks, financial institutions, and companies to define DREX's guidelines and use cases. In May 2021, the Central Bank officially presented the project’s guidelines, and in 2023, it launched the DREX platform pilot with a select group of participants such as Nubank, Microsoft, Visa and SETL.

The DREX platform is based on Distributed Ledger Technology (DLT), specifically Hyperledger Besu on Ethereum which makes it compatible with its base language, Java, or with Ethereum's, Solidity, also uses a QBFT consensus system (QBFT is the recommended enterprise-grade consensus protocol for private networks) to ensure secure and transparent transactions. 

Through this technology, financial intermediaries will be able to convert demand deposits and electronic money into DREX, enabling fast and secure financial transactions for the general population. Additionally, DREX will allow the implementation of smart contracts and programmable transactions, ushering in a new era of intelligent, automated, and accessible financial services.

Recently, the integration of Microsoft and Chainlink was announced. 

DREX will integrate Chainlink’s Cross-Chain Interoperability Protocol (CCIP), allowing secure transactions between different digital currencies and blockchains. This will enable Brazil to integrate into the global financial system and facilitate international operations, especially in cross-border trade.

Meanwhile, Microsoft plays the role of a partner. It has teamed up with BCB and other institutions to broaden access to intelligent financial services and strengthen the DREX ecosystem. 

Currently, the DREX pilot has just completed its first phase, which tested privacy and programmability through a specific use case: a federal delivery versus payment (DvP) protocol for public securities between clients of different institutions, along with the services involved in this transaction. This use case focused on privacy by promoting information exchange among platform participants while also testing the programmability and interoperability of the offered services. 

The second phase will focus on governance, the project will strictly adhere to regulatory standards, including banking secrecy and LGPD compliance, ensuring security and privacy.

New use cases expected to be announced in early 2025. 

How will this CBDC impact the country and its citizens? 

Currently, Brazil uses Pix, an instant payment system launched in 2020 that has transformed the way Brazilians conduct transactions.

Pix enables fast and free transfers, benefiting unbanked individuals, small businesses, and everyday users. Today, over 70% of adults in Brazil use Pix, and the system is in the process of expanding to support international payments.

In this context, Brazil plans to integrate Drex, its CBDC. Drex will function as an extension of the digital financial system, but with advanced capabilities such as smart contracts and asset tokenization. This opens the door to new opportunities in commerce, financing, and access to digital services, all within the secure and regulated framework of the Central Bank.

However, this shift poses challenges for stablecoins, as Brazil has proposed regulating them by restricting transfers to self-custody wallets.

Knowing that stablecoins represent 70% of international crypto transactions in the country, this regulation could limit their use as a tool for value preservation and cross-border payments.

What is certain is that Brazil aims to lead the digital economy with Pix and Drex, but the future of stablecoins will depend on how they can integrate with these new tools developed by the Central Bank.

With 💜 Rivv & Ab 🧡

📰 Latam Crypto News 📰

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Key stories of crypto in LATAM this week

Visa and Nuvei, with BitGo and Rain, now support B2B cross-border payments in Latin America using stablecoins like USDC for faster, secure, and flexible transactions.

📣 Outlier Ventures announced the cohort for its first Latam Base Camp accelerator program aimed at Latin American Web3 startups. Projects participating in the 12-week program include: Bando (Mexico), Berry Investing (Argentina), Fact Finance (Brazil), Loula (Argentina) and IDENTI (Peru).

Statista reports that Argentina, Ecuador, and Peru lead with 5% crypto use for gaming, above the global average of 3%. Brazil, Chile, and Mexico have the lowest at 2%.

💰 Crypto fund targets Latin America

Hyla Fund Management launches a $30M crypto fund for Latin America, aiming to become the "Goldman Sachs of digital assets". The fund will focus on sectors like remittances, mobile payments, and the growing crypto talent in the region.

🇧🇷 Brazil 

🇧🇷 Coinbase is now the most downloaded Crypto app in Brazil
Coinbase ranks as Brazil's #1 crypto app and a top 3 finance app overall. Trusted for secure and reliable crypto transactions, it's a favorite among Brazilians. 

Brazil's Receita Federal extended the public consultation for DeCripto, a new crypto reporting model, until Dec 20. It replaces the 2019 rules and aligns with OECD's CARF standards.

Itaú tests crypto transfers for Bitcoin and Ethereum, launching in 2025. Crypto trades in its app grew 300%, with plans to expand tokens and enhance secure digital banking experiences.

Personal investments grew 11.5% YoY, led by fixed income (+13.8%) and ETFs (+42.9%). Rising Selic rates fueled demand for stability and returns.

🇧🇷 Visa launches VTAP tokenization platform for Drex testing
Visa introduces VTAP to tokenize assets securely, aiming to optimize exchange markets. It enhances transparency and efficiency in currency transactions, available for Visa partners globally.

🇲🇽 Mexico

Although awareness is high, barriers like technical complexity and volatility limit adoption. Companies face challenges in building trust for first-time users.

Key metrics:

  • 95% of Mexicans have heard of cryptocurrencies.

  • 47% understand what cryptocurrencies are.

  • 34% are considering investing in crypto (below the global average).

  • 3.1M Mexicans hold crypto (2.5% of the population).

  • 55% believe cryptocurrencies are eco-friendly, with Bitcoin seen as the most sustainable.

  • 52% feel the financial system works but could improve, while 15% believe it needs an overhaul.

  • Survey conducted with 1,006 respondents aged 18-56 from Feb 12 to May 2, 2024.

Well, this data is incorrect, but we added it so you can see how the media manipulates the information, our team is Mexican and we know that this is not real, in future editions we’ll bring the true data.

🇦🇷 Argentina

ARS/USD is at the same level as a year ago. Inflation, once seemingly unstoppable, has decreased significantly in recent months.

Argentina's fintech sector is booming, growing 11.7% year-over-year, with startups rising from 343 to 383. Crypto leads the way, with local startups increasing from 20 to 36, making it the fastest-growing segment. Argentina now has 49 crypto companies, second only to Brazil in Latin America. Blockchain adoption is expanding, and 72.6% of fintechs operate internationally, targeting Colombia, Mexico, and Chile. Growth aligns with advancing VASP regulations, cementing Argentina's regional leadership.

🇦🇷 Prosegur opens crypto bunker in Buenos Aires
Prosegur Crypto launches a high-security crypto custody facility in Argentina, combining military-grade physical and digital protections for institutional clients.

🇧🇴 Bolivia

A legal reform seeks to recognize Tether as a valid reference index for financial contracts, addressing economic challenges and modernizing Bolivia’s financial practices.

🇵🇪 Perú

Jorge Zeballos introduced a bill to enable Peruvians living abroad to vote electronically using blockchain, ensuring secure and auditable elections.

🇸🇻 El Salvador

🇸🇻 El Salvador can eliminate the mandatory use of Bitcoin
To secure a $1.3B IMF deal, El Salvador might make BTC acceptance voluntary, easing concerns but potentially slowing crypto innovation in the country.

🇸🇻 El Salvador and Argentina join forces for the growth of crypto
Regulators from El Salvador and Argentina sign a historic agreement to share experience and promote crypto innovation, strengthening regional cooperation in the digital asset industry. 🌐

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