25-03 ikigii Stage 15:20-15:50 DREX & the Future of Cross-Border Payments – Brazil’s Digital Real

Hola. Well, we are switched to English. This is a a panel full of Brazilians. It's awkward for us to speak English. All colleagues are here speak Portuguese daily.

Uh maybe it's a warm up for the match tonight. And now we are trying to score here. I'm going to pass the ball to my colleagues here. Uh my name is Diego Perez. I'm the president of AB Fintech, the Fintech Association of Brazil.

and also uh I'm part of the FIFA fintech America which is an alliance of fa associations from Latan Portugal and Spain and we are here to speak to talk about the DRA the platform that has been developed by the Brazilian central bank uh to to to promote or to put in place an an environment for the tokenization of assets in Brazil. I have here Fabu from the Brazilian central bank. I have Lisa Mora from Ital also Marcus Vidiato from Parin and Philippe from Taos. Welcome to the panel here. Uh I'm going to ask some questions here that I have initially prepared for my friends here and starting with you Fabio.

uh what is uh actually drags for for those here in the audience to bring them up to speed and what are the reasons related to the origins of the drags and what we have reached so far what can we speak about before we enter the the main topic here thanks Diego thanks everybody it's a pleasure to be speaking about tracks here and I think I'm going to start from the motivation because that that's always what we do at the central bank. We think about what can be done and then we we try to set up the system that can achieve that. And when we we started the discussion back in 2020 2021, we had peaks already. It was a huge success. Then when you look into a CBDC and look into the the work that other banks have conducted before.

They were pretty much thinking about uh retail payments, fast payments or wholesale payments, the RTGS, the real time gross salon system. And another possibility was cross border. When we looked into this this span of possibilities, we figured very early that we didn't need anything for that because our RTGS is is good. Our um instant payment system is a huge success and in terms of cross border we we have lots of other layers to be peeled before you can apply the technology. then it would be a discussion that would be much more uh international relations than central banking.

Uh then the first the first uh thing that came to as a result was um what what can we do with that? It it's not necessary but this technology can bring so much more. What can be done with this with digital assets and we have a problem of financial inclusion in Brazil? PS helped a lot. 70 million people use digital transfers for the first time in their lives using PICSS.

But financial inclusion go much further, needs to go much beyond payment. it needs to to go into investment opportunities, cheaper credit lines for for the population. And with that we have lots of problems. We have uh operational costs. We have uh the the difficulties of interoperating different systems and this platform give us all the the tools that we need to achieve those goals.

We we have standardization, replication, composibility and then you can reduce the cost of managing financial contracts and to include more people into the financial sector. That that's the the final goal and that's our motivation for trying to put this platform together. And then I I come to the first part of your question. Drax is a CBDC but actually is much more a platform than a CBDC because when we think about how to include people in in the financial market in a efficient way using digital assets technology you you cannot uh you cannot but to talk about tokenization and for for set for the settlement of digital assets you need digital money. It can be done with with private money.

That's okay. We we understand that. And as a central bank, we we know how to run that sort of system. But always when you have the the private money, you need to have the central bank money together to make sure that things are stable. And if there is a a liquidity problem, you can use hard money from the central bank that is is never going to be uh default on.

Then it assures that we can create an entire platform with tokenization, private money and central bank money to have stability in the system and to reach the the broader part of the Brazilian population that today cannot have access to most of the service that could be provided in their apps. Well, amazing. It's important to highlight that it's not only a CBDC. It's way more than CBDC. It's a full whole platform and it's going to be available initially for wholesale transactions.

Yeah. Or or for the retails customers sometime maybe in the future. Yeah. Actually what we are we are doing right now the the CBDC the central bank money is working only on the hotel wholesale part of the the economy and the retail it's it's going to be provided the the settlement assets going to be provided by the market in the same way that we do today. The banks have the the their money for people to operate and among the banks they use central bank money.

So you can have the stability in the transaction. So in order for a new user to start a transaction through Drax you need to be connected to a bank or to a fintech then the transaction will happen through Drax. Exactly. Yeah. This the platform that we are building is a a private permission platform.

run a node there. We we have to have a strong governance on the participants. It's we know that uh defy is is very interesting. But if we just allow someone to start issuing uh code and deploying code into the network, people could start using that without any sort of assurance. Then at least for the beginning while we don't have a very well- definfined ways of white listening and blacklist listening it's it's best to to start the development of the system in a private space.

Okay perfect. Well Vidato my friend how are you? Good. So Parfin plays a key role in the ecosystem especially for infrastructure. Okay and if you could say a few words about Parfin and how the companies contributing to the development of drugs nowadays.

Yeah. Um so uh it's a pleasure to be here. We can't see much of the audience because there's a light here on our face but um yeah we we we started few years ago with the view that the banks and financial institutions would require technology to deal with crypto u stable coins tokenization. With that in mind, coming from banks, we start designing uh the technology to allow banks to adopt this. Uh we believe that the next few years, now it's more when we started five years ago, it was forbidden to talk about crypto about uh in banks.

Now is is more common. But the view is that every the whole financial markets as we know will be migrated on chain the coming years. You know, stocks, bonds, uh currencies, stable coins and so on. Um and that's where we're building in in terms of the DRA we were one of the and and again I think that DRA is a journey is not you know is a is a journey to build a platform as as father said back back in 2022 when the the central bank started the sandbox it's called lift challenge um we uh one of the banks in Brazil uh was selected to contribute to that was at the very beginning of the journey I believe you in terms of real implementation. So we partnered with this bank uh to help them build the smart contracts and that was a case for loans and car loans and u on the C2C to to do deliver payment.

It was very interesting and we we we've learned a lot uh because uh surprisingly there was no specification of technology blockchain and surprisingly we we've used Basel which is the one that the central bank selected later. Um but from there we realized that there will be need for privacy. It's one of the main requirements. Uh so we start building this um um protocol to allow transactions in blockchain with privacy and and I think later uh the central bank selected three players the starlight u and rails uh the the privacy preserving protocol we built um and last year was the year where we we've been tested there are pros and cons of each one of the solutions that there was a a very clear report issued by the central bank and I think the technology as as everything is evolving. Uh so um and I think we're getting to a point where probably in the coming months there will be enough maturity to check all the box and say oh now I have something uh to to promote the production one day.

Uh and again this is again uh if you look the use of of zero knowledge even on the blockchain space started a year or so ago or a year and a half. So it's something relatively new as as any new technology it takes time to mature and I think now after this kind of almost three years uh it's getting to the maturity and uh so we are super excited I think again and I want to congratulate the central bank because uh the central bank of Brazil won three years in a row the best central bank in the world u and not only for you know the the drags etc but I think the quality of people that working there sometimes without much resources you know and and that's that's something amazing because we go abroad we are recognized by one of the most advanced you know uh central banks in the world and we as Brazilians we we should be proud of it you know and and again I think DRA is not in our view right we are contributing we want to me to make this successful regardless of the technology that's selected uh because you know we will be ahead and that's our kind of uh goal we're super excited excited about that and I think now there's the second phase with uh some very interesting cases and uh I think there will be a matter of time to for the technology to mature the the banks to kind of also uh embrace this I think banks in Brazil as well they've kind of contributed a lot so it's a combination of effort so I think we'll we'll see some results hopefully uh later this year very good very good and Lisa It is one of the major banks in the region and mostly has invested a lot in blockchain technology. Uh so in this specific cases including uh the own digital assets projects how is the bank exploring DAX? What can you present to the audience the experience of developing something on top of the DAX nowadays? There you go.

Um Nice, very nice to here today. Um, I'm representing a a huge team of Taw, one of the largest banks in Brazil. We have a business unit at it almost with 70 people working not only on drags but also with uh blockchain initiatives as um our buy and sell solution. we have our proper uh custody and also um cash and trady uh treasure operations and uh it's very interesting that we not only see all the challenges that Fabio and Vidato said uh just now but we are uh since 2021 I believe in the innovation lab with central bank seeing that uh there are lots of challenge to overcome with the direct initiative but we are seeing that um we are getting there. It's not something in that in the short term will uh overcome but it's something that we bear in mind that uh all the challenges all the options that we are uh following are will be overcome in the near future.

So it's something very interesting and related to drags we took part on the first phase where we were alongside other participants 16 participants to develop and test one use case and after that on the second phase which is the phase that we are developing right now we have the opportunity to see that there are lots of use cases with the potential to get the the whole project to go to production. So the main challenge right now is to see that which will be the killer app for the use of the infrastructure. So uh I believe that Vidiato said very uh it's a good vision that right now we don't see uh the drugs pilot as only the CBDC token for Brazilians but we see that the opportunity to develop a good infrastructure like a settlement layer uh with of course one token to settle which is the uh all the operations that the use cases will be developed using smart contracts and also to uh could offer to Brazilians the potential and benefits of the blockchain technology. So uh as a we see with uh good eyes and it with a positive view the whole uh initiative not only the first phase or the second phase but we believe that in the medium and the long term will achieve what we are seeking right now. It's not it's not something easy to overcome but we'll eventually get there.

And is there any killer app in your mind that you think it's going to drive in the sector? It's something very uh hard to find out right now. But in the second phase, we are developing alongside uh Bradesco and Branco Brazil. One use case that we believe it's a good uh a good use case to find out the hypothesis of the usage of the technology. we are tokenizing a bank deposit certificate and using as a collateral for credit operations.

So uh it doesn't mean uh that has to be a bank deposit certificate but in the future could be a debenture or even uh bond. Yeah, it doesn't matter. So it's a good use case to find out the benefits of the the technology. Yeah. Amazing.

It's going to a lot of efficiency for the system. Yeah. Yeah. So, Philippe, my friend, how are you? Fine.

Feeling good. Very good. Okay. Perfect. So, uh Taurus, the company that you represent has been a key player in the digital asset custody.

Okay. And especially tokenization for financial institutions. If you could present for the audience what Taros does and also how is the company exploring Drax? Very good. So Taurus is a leading provider of technology for custody and tokenization and for financial service.

So Taurus was founded in 2018 with the vision of the the founders that they came from the traditional finance working in a bank at that time that everything will converge uh to the to the banking system and the digital assets. It would be a massive opportunity that they will explore and they will need solutions that provide governance that provide scalability that provide them the ability to explore this opportunity. So they started to build the platform in 2018. Taos was very focused on the beginning on the Swiss market. Taos is a Swiss company based in Geneva and at that time a lot of things were happening in Switzerland.

No a lot of things. So the regulation was happening in Switzerland at that time. So to work very close to the regulators, very close to FINMA and and with the the standards of smart contracts and everything. So we are very focused on Switzerland and Europe after K Mika and we are very focused in Europe. Why I'm telling that?

Because we are not present in Brazil. By the time that the central bank started the DRA project and the DRA project they they selected some companies, some participants on the beginning they create the consortions and and they are they are they are working only with these companies on the consortium and now with the the report of the phase one they'll probably not include but this doesn't prevent us to help because We are talking always with Fabio, with Larissa, with Vidiato. We are always trying to provide some insights because every single thing that's being tested on DX, we already did it in production with a large financial institution. So we are probably the only company in the world that has all the use cases for tokenization with tokenized funds, equity, CBDC's, stable coins. So we have real life examples in a lot of large financial institutions about how to do it and what's possible to do and what's not and we are contributing in a lot of areas of innovation.

Of course the dra pick uh the the hyperia bezel for as the platform and for some very reasonable reasons. But last week two weeks ago we published a paper where we worked with Aztec which is a layer two that's going to the test net is going to come in the June July and the mainet will come September and we could prove privacy in the public blockchain. So we did all the transaction and everything went smoothly with 100% of privacy. So that's the type of things that Taos is doing. Taos is very ahead in terms of technology and always looking for innovation and open to to support.

But and just make me just Let me make uh one point regarding the the central bank. This project is is insane. It's amazing because it create an ecosystem in Brazil that probably is ahead of any other ecosystem across the globe. No. So we are talking with ecosystems in Turkey, in Dubai, in France, in Switzerland and what the central bank could make with DRA and bringing the consortants and everybody the banks putting people from them working at the Drax project is something that's very remarkable and very important to say that these guys here they couldn't hire people.

They didn't receive raises for like several years based on Brazilian rules and budget cuts all the time. Yes. We are heroes. No, we one day Fabio will deserve some recognition from the from the broad audience. Thank you.

And Fabio, we are running out of time, but I I need to ask this questions and maybe I can extend the same questions to the panelist to enclosure the session. Uh in the context of the international uh payments, what challenges just does the central bank foresee the adoption of the drags and how does this align with global inter interoperability initiatives such such as the BIS and other international civil DC projects. We we are working together with the BIS and there are some challenges that are specific to to DRAs that are mostly related to the Brazilian economy. But I I would like to to stress the the the challenges that apply to all the currencies in in crossber payments. I I two major problems.

One is provision of liquidity and another one is compliance to travel rules. Once you you get these two sorted out pretty much you have the system uh fixed and with digital assets technology you have tools for dealing with that with liquidity pools for providing the liquidity. You you can bring as much liquidity as possible into those pools to to make the information as um efficient as possible and on the other hand you have to to sort out the matter of uh travel rule you you have the verifiable credentials that's a technology that's in development and it's being used I I think that would be would make possible that any bank could operate as a as a respondent then the market just would just open for for international payments in a much simpler way than what we have today. Perfect. And 30 seconds for each one.

The main challenge in your vision for the direct to drive and especially for international transactions. Yeah, I believe that there is a political alignment between countries for us is the main challenge right now. But uh just to give another uh view regarding crossber payments. Uh of course DRA is a huge opportunity to to have this infrastructure to settle these cross cross transactions operations. But we see that uh stable coins already found the product market fit for have having uh instant settlements between countries.

So in the short term we believe that uh stable coins will really reach mainstream market right now uh covering all these aspects of course CBDC's and drafts infrastructure will have a huge impact on the future having of course uh the uh the security of the currency but in the short term uh we see that stable coins have a greater impact for people and clients and your views. Yeah. Yeah. I I think um you know um if we overcome the challenges of implementing the 13 cases that will be enough. I don't think even about using CBDC now for across border as Larissa mentioned the stoable coin are playing their roles and it's from a regulatory perspective uh you moving a CBDC out of the country's jurisdiction to another country it's kind of uh there will be a lot of discussions about that there sovereignt sovereignty problems there's a bunch of u you know um um um regulatory related aspects that needs to be thought.

So I wouldn't see a CBDC to be used for cross border in the short term. Maybe maybe medium term but you know the focus I think is to overcome this 13 cases and then we're going to have a real tokenized economy in Brazil boosting you know you know better credit rates uh you know investing in in in the real economy. So I think the opportunity is there. I would look initially to to overcome this to achieve this uh success in the economy you know and Philippe the last one just it's complex cross border across 180 countries with different regulations we saw when started back in the 70s so it's going to be a lot of work and a lot of things to to go on that but I think that is in the right path and we we can just sitting as an example swift is moving. No.

So if there is nothing happening, Swift will stay on their their place without doing nothing. Now they are faster. They are not cheaper yet, but they are faster and a lot of things are happening on this and I think this Zagura project of the BIS will be a very project. Okay. Thank you very much.

Thank you everyone for being here. It's a pleasure.