BC President Roberto Campos Neto says that data in DeFi cause concern.
The president of the Central Bank (BC), Roberto Campos, Neto, stated that the best thing the institution can do in relation to decentralized finance (DeFi) “is to participate in this space in some way.” For this reason, he stated that he seeks to closely monitor the DeFi projects that arise at the Lift – Financial Innovation Laboratory that the BC supports.
The statement came in a webinar from the Bank for International Settlements (BIS) last week. And it’s another sign that BC is seriously considering using the blockchain, the technology behind DeFi, for the country’s digital currency. Days earlier, for example, at the balance of payments press conference, he had said that “in the blockchain world, where we want to make the digital real”, several aspects are being considered.
According to Campos Neto, DeFi is “surprising” and leads to central bank digital currency (CBDC), in this case, the digital real. The BC president stated that out of every 10 projects that appear at the Lift, around 7 are DeFi. “All based on brokering segmentation”.
Most face issues in specific segments, which is good, he says. This “because they will be able to interact with open finance”. BC is about to implement the third phase of open banking. And open insurance is in the process of being initiated.
Although decentralized finance is still little used in Brazil, Campos Neto said that “the production of data in DeFi is one of the things that worries me the most”, since there is a lot of information originating from financial transactions. And he pointed out that the world’s central banks, although they cooperate, do not have the structure to act together on this issue.
In order to implement the CBDC, the BC is working so as not to compromise the banks’ balance sheets, said Campos Neto. One of the points is the issue of narrow banking, which can occur in certain designs of a CBDC.
This concept has been discussed for a long time and in general terms it means a separation of deposit accounts from other banking services. This means, for example, that the bank uses your money, as it happens today, to make loans to third parties without asking you if you agree with this, including the risk involved in the transaction.
“The term narrow banking refers to the situation in which all the resources put into circulation by a banking institution have 100% of backing deposited with the BC in the form of currency or high quality and highly liquid assets. Thus, having an impact on the credit provision capacity of these institutions, which makes it undesirable from our point of view”, the BC told Blocknews.
To solve this, BC works with a design in which banks issue stable currencies based on bank deposits and backed by the digital real. So the two coins “live together, but it’s not a stablecoin in the normal sense. It is a solution to avoid narrow banking and thus maintain the functions of banks as they are now”.
For him, stablecoins backed by up to two currencies don’t seem like a problem. But if they are a kind of currency basket it is like an index fund (ETF). “And it has the problems that an ETF has.” For example, in large ETFs, when you start to have differences between stablecoins, you will need to buy assets to take care of that and ensure a profit. And that causes distortions. “I don’t see (in basket-of-currency stablecoins) much growth potential.”
At the conference on the balance of payments, Campos Neto stated that in studies on the digital real, the BC found solutions to problems that it thought would be difficult to solve, including narrow banking. “We are advancing a lot and should have news soon.”
In addition, BC is studying issues such as the CBDC oracle. There is an “important issue which is how to communicate the oracle with the system, making sure that the government can regulate the information that goes to the nodes and the settlement part”.