Analysis: Virtual Currencies Gain Ground and Market in Brazil

RIO DE JANEIRO, BRAZIL – Across the developed world, central banks are being drawn into the 21st century financial system. The main challenge for these institutions has been to keep up with the pace of innovations introduced by the market to revolutionize payment methods.

In very few areas this can be perceived as well as in relation to digital currencies, a new territory in which the Brazilian government is starting to venture. Earlier this month, celebrating Senate approval of Central Bank (BC) autonomy, Minister of Economy Paulo Guedes announced that the country will create the digital real, a virtual currency backed by the national monetary unit.

The innovation is in line with others that have been prepared by the Central Bank, such as the sharing of financial data from open banking and the new digital transaction system, PIX. “Brazil will have digital currency, we are ahead of many countries,” Guedes said at the time. The plan is to implement what is already known abroad by the acronym CBDC (Central Bank Digital Currency). According to Roberto Campos Neto, Central Bank president, the project should be ready by 2022.

The main advantages observed by several central banks worldwide are the efficiency that currency digitalization can add to the payment system and the elimination of costs with paper, printing and safe transportation necessary for physical currency. However, the implementation results are still unclear; after all, no country uses a sovereign digital currency on a large scale.

“The identification of advantages is dependent on each country’s specific situation,” said Aristides Andrade Cavalcante Neto, deputy head of the Central Bank’s technology department, coordinator of the study group on digital currency issuance. “One of the goals is the digitalization of payments, quickly, cheaply, safely and efficiently,” he explains.

The main challenge is to identify which model of digital currency would be more appropriate to the Brazilian context and that would ultimately complement the use of PIX, which is officially launched on Monday, November 16th.

The studies are in line with what the Federal Reserve (Fed), the American central bank, is also doing. Administrator of the dollar, the dominant currency in international trade relations, the institution could not turn a blind eye to the advances made in countries such as China, South Korea and France with their national cryptocurrencies.

However, the institution is conducting the issue with caution. “It is more important for the United States to get it right than to be the first,” said Fed Chair Jerome Powell recently at an International Monetary Fund (IMF) event when referring to plans to introduce the digital currency. If Americans care about security, in terms of speed, the Chinese central bank is ahead of everyone, reflecting the rapid pace with which the country has entered the era of virtual money – with the caveat that data released by the Chinese state is not often fully transparent.

Earlier this month, the head of the People’s Bank of China, Yi Gang, said the pilot program to implement the digital yuan in four Chinese cities was successful, with four million transactions worth 2 billion yuan (about US$300 million – R$1.64 billion).

Digital currencies are the new chapter in the revolution brought about by the Internet. It all began with the inception of the Bitcoin in 2008, an electronic system for exchanging money peer-to-peer that has the advantage of ease of transactions, without the need for intermediaries such as banks or payment of fees. Since then, more digital currencies have been created, such as the Ethereum and the Tether, and the pandemic has increased their use.

According to the price tracking website CoinMarketCap, the Bitcoin’s 24-hour volume of transactions after the emergence of Covid-19 exceeded US$70 billion – the previous record amounted to about US$45 billion. The growth of cryptocurrencies is such that large payment companies will start to accept them from next year, like PayPal.

This is a great achievement for its supporters. And here lies the central banks’ major concern in not being left out of the game: the risk is of non-sovereign currencies, which they cannot handle through monetary policy, gaining plenty of room in international transactions. One of the main reasons for the United States to be able to run up heavy debts without taking the same risks as other governments is that the country can make much larger issues of its currency and still secure loans with lower interest rates, since the dollar has global demand. Losing an advantage like this would have the potential to produce major impacts for the world’s largest economy.

Despite the growth in demand for digital money, regulation in the area is only just starting. On Monday, November 9th, the Central Bank authorized the Mercado Crédito, one of the arms of Mercado Libre e-commerce company, to operate as a financial institution. In practice, this means that the Argentine digital conglomerate’s platform will be able to offer financial products such as loans through its own funds, with no need for the intermediation of a bank.

The company, which conducted credit operations worth R$2 billion between January and September, monitors Central Bank regulations, but already considers PIX as the path to Brazil’s digital currency. “This new electronic payment system has the potential to replace money through app-based transactions, for instance,” says Rodrigo Furiato, Mercado Pago’s digital portfolio director.

In China, Alibaba, another e-commerce company, gave the initial push for transformation. However, some friction with the government began to emerge when the Ant Group, a payment giant founded by billionaire Jack Ma, was preparing to go public in the first week of November.

A total of US$34 billion was expected to be raised in the operation, the largest in the world. On the eve of the public offering on the Shanghai and Hong Kong stock exchanges, Ma was called to a meeting with Chinese monetary authorities and the process was suspended.

The reason alleged for the cancellation was the need to comply with a new regulation about to be implemented by Beijing. An indication that not even the government most open to the novelties of digital finance is willing to be run over by such radical changes.

Source: Veja