Real digital: BC plans to limit withdrawals in times of crisis and coexistence with stablecoins

The Central Bank (BC) will be able to use mechanisms in the digital real that will avoid a bank run in the event of a crisis. Mechanisms include limits for converting tokens into digital real. In addition, the regulator may use the so-called “backstop”, which is a resource that pays liabilities that a financial institution cannot meet.

In addition, it is anticipated that there will be two types of regulated stablecoins in the Brazilian economy, but others could be added to the portfolio, and all would coexist with the digital real. Payment service provider (PSP) tokens would have the basic feature of a stablecoin, with deposits fully backed by their BC reserves. But banks would issue, and could go beyond deposits. And in this case, stability would come from regulations on liquidity constraints, portfolio risk and backstops. Which is what happens today to maintain parity between bank deposits and the national currency (fiat).

The information is in the text “Initial steps towards a central bank digital currency by the Central Bank of Brazil”, signed by Fabio Araújo, coordinator of the real digital project at BC. The text is part of a collection by the Bank for International Settlements (BIS).

According to Araújo, when using mechanisms with the backstop, the tokens issued on the regulated debt network can remain stable. “But one of the sources of concern is the speed at which private tokens can convert to CBDCs.”

And to avoid that, big conversions could only happen with advance scheduling and with limitations for daily conversions. In addition, there could be automatic stoppages (circuit breaker) when the outflow of tokens from an institution could put it at risk.

According to Araújo, a regulated network of liabilities can prevent financial disintermediation, which the Central Bank does not want to happen. The BC design for the digital real envisages the CBDC coexisting with private money from institutions, in this case stablecoins. But, the point here is this: since the digital real will not pay interest, users can prefer these stablecoins to the digital real, if they seem safe and give advantages like some gain over their values.

The model predicts that the coexistence of tokens will happen on the smart payments platform. This involves, for example, the programmable money that smart contracts allow and what cryptocurrencies use. Thus, users can transform their deposits at banks or payment service providers (PSPs) into tokens (stablecoins). In this way, they will be able to access the service platform, because there will be a commitment from banks and PSPs to convert the tokens into CBDC, if necessary.

And these tokens must follow the regulation of their original assets, such as backstops and fractional reserve requirements. These reserves mean that banks can lend or invest more than the money they have on deposit. Deposit tokens on PSPs, on the other hand, would have the current characteristics, such as the full reserve requirement.