Central Bank reveals that it will be able to stop people’s withdrawals on Real Digital and freeze money

In an article published by the Bank for International Settlements (BIS) the coordinator of Real Digital, Fábio Araujo, revealed that the central bank will have full control over the population’s money in Real Digital and, with that, it will be able to ‘stop’ people’s withdrawals and freeze/postpone the redemption of the money.

The Real Digital, the digital version of the Real, has been debated at the Central Bank of Brazil (BC) since 2015 and will have its first tests in 2023 through 9 solutions presented by private companies during the Lift Challenger.

BC’s intention with the launch of a Digital Currency for Brazil is to enable the possibility, within a regulated environment, of executing what the BC calls smart payments that includes smart contracts, Internet of Things payments and even Decentralized Finance applications (DeFi).

In the BIS document Araújo points out that the main objective of introducing a CBDC is to provide entrepreneurs with a safe and reliable environment to innovate through the use of programmability technologies in order to program intelligent payments like what happens in the cryptocurrency environment.

“Technologies available for smart payments, as seen in crypto assets, make room for new business models and are better suited to meet the population’s demand,” he said.

Central Bank may ‘stop’ withdrawals

In the article describing Real Digital and its functioning for the BIS, Araújo highlights that the Central Bank must maintain a partnership with the private sector in providing liquidity to the market.

Therefore, according to the executive, the BC envisions the coexistence between the Brazilian digital real and private money issued by institutions regulated by the BCB in the intended smart payments.

Therefore, individuals could transform their deposits into tokens capable of accessing the services provided on this new platform, under a commitment that these tokens will be converted into Digital Real, that is, banks will be able to issue their own tokens aimed at smart contract applications having their balance in Real Digital as guarantor of the operations.

“Commercial bank deposit tokens would inherit all the regulations and characteristics of their parent assets, such as fractional reserve requirements. Likewise, PSP deposit tokens would inherit their characteristics, such as total reserve requirements,” he points out.

However, unlike the cryptocurrency ecosystem, in which users own their assets and no one can ‘lock’ their operations, in Brazil’s CBDC there will be a system to ‘lock’ withdrawals.

Araujo points out that at a given time and for various reasons, there may be a bank run in search of converting these tokens into the Digital Real that will be guaranteed by the Central Bank and to avoid this, the Central Bank already provides “backstops and restrictions on the conversion flow to and from CBDCs”.

As ‘conversion restrictions’, the Central Bank points out that the flow of exchange of these tokens to Real Digital would have a limit and would even need to be scheduled in advance, so the Central Bank will have the power to control the flow of money within the system of the Real Digital and already provides locks to control this flow.

“A source of concern, however, is the speed at which private tokens can be converted into CBDCs, which could restore coordination mechanisms. To avoid these unwanted flows, large conversions could only be available if scheduled in advance and restrictions of daily conversions can be set. In addition, circuit breaker mechanisms can be automatically applied when the continued draining of tokens from any institution would make it vulnerable,” the article describes.

Araújo concludes the document by pointing out that Real Digital, by enabling smart contract and programmable money solutions in Brazil’s financial environment, will allow the creation of customized financial services solutions to meet the different demands of the evolution of society and the continental characteristics of Brazil.

It concludes that these resources, when combined with financial education actions, can provide efficiency gains throughout the system that can also serve the entire population of the country, even those who are still on the margins of the financial system.

Check the full document