The Brazilian central bank governor describes how the CBDC system can stop a bank run

The Brazilian central bank governor describes how the CBDC system can stop a bank run – Mail Bonus

In an article recently published by the Bank for International Settlements (BIS), Fabio Araujo, an economist at the Central Bank of Brazil (CBB), who is also responsible for the digital banking of the country’s central bank, revealed that monetary power will have more control over the population’s CBDC set up. With so-called Real Digital, the central bank will be able to stop a bank run and impose other restrictions on citizens’ access to money.

Real Digital, the digital version of Brazil’s national currency, has been under discussion at the central bank since 2015 and will be in the first tests in 2023 with nine solutions presented by private companies at a recent Lift Challenge event hosted by CBB.

Cointelegraph reported that the value of the upcoming CBDC would be linked to the domestic fiat payment system STR, also known as the Reserve Transfer System.

Through Real Digital, the central bank says it wants to enable so-called smart payments within a regular environment. Smart payments include smart contracts, transactions with Internet of Things devices and even distributed financial applications (DeFi).

In the BIS document, Araujo said that the main goal of promoting the CBDC was to provide entrepreneurs with a safe and reliable environment where they can take advantage of innovation using programming technology that makes smart payments a reality.

“Technology available for smart payments, as evidenced by cryptocurrencies, provides space for new business models and is better suited to meet the demand of the population,” he said.

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The Central Bank can “stop” withdrawals

In the paper, Araujo emphasizes that the central bank must maintain co-operation with the private sector in providing liquidity in the market. According to Araujo, the central bank envisages coexistence between Real Digital and private money issued by institutions controlled by the CBB in planned smart payments.

Therefore, individuals could convert their deposits into tokens that can access the service provided in this new platform, under a commitment to convert these tokens into Real Digital. In other words, banks will be able to issue their own tokens aimed at smart card applications having their position in Real Digital as the guarantor of the business.

“Commercial bank deposit tokens would inherit all the rules and characteristics of their parent assets, such as reserve requirements,” he said. “Like [payment service provider] deposit tokens would inherit their properties, such as the total reserve requirement.

However, unlike the cryptocurrency ecosystem where users own their assets and no one can lock their operations, there is a system for locking withdrawals at the CBDC in Brazil.

Araujo points out that at certain times and for various reasons, there could be a bank run where users want to change these symbols to Real Digital, which would be guaranteed by the central bank. To avoid such a bank run, the CBB already provides “backstops and restrictions on the flow of transactions to and from the CBDCs.”

The Central Bank points out that the exchange flow of these symbols to Real Digital would be limited and would even need to be planned in advance. In other words, the central bank will have the power to control the flow of money within the system.

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The paper explains:

“One source of concern, however, is the speed at which CBDCs can be modified, which could restore a co-ordination system. To avoid such unwanted flows, large transformations could only be available if planned in advance and daily transition restrictions could be in place. in doing so, a circuit breaker system could be automatically applied when continued depletion of symbols from any particular institution would make it vulnerable. “

Araujo concludes the document by pointing out that Real Digital, by enabling smart contracts and programmable monetary solutions in Brazil’s financial environment, can create customized financial services to meet the different demands of society.

The paper concludes that these resources, when combined with financial education, can be cost-effective and serve all the people of the country, even those who are still on the fringes of the financial system.