Real Digital or Drex is the Brazilian digital currency that has been developed by the Central Bank since August 2020, during the government of former president Jair Bolsonaro (PL). In addition to being regulated and issued by the monetary authority, the Drex will have the same value and acceptance as the traditional real, as well as the same security guarantees, according to the BC.
Some right-wing representatives, however, have argued that Drex could serve as an instrument of “state surveillance” and “censorship and social control”. Other concerns are the possible extinction of paper money (“cash”), cyber security and the exclusion of portions of the population with little technological knowledge and limited access to the internet.
Representative Júlia Zanatta (PL-SC) is one of the right-wing representatives who has taken a stand against Drex and in favor of the population’s economic freedom. According to the parliamentarian, Drex is “social control”. “A digital currency centralized and controlled by the Central Bank that can and will be used to impose restrictions on Brazilian citizens,” he recently stated.
In August of this year, the deputy filed Bill 3341/2024 on the table of the Chamber of Deputies, which prohibits the extinction of paper money to replace digital currency.
Another ongoing initiative by the parliamentarian is the attempt to file a proposed amendment to the Constitution (PEC) so that both the implementation of Drex and an eventual extinction of paper money can only occur after approval by a qualified majority of the National Congress, that is, 60% votes from members of each House, in two rounds of discussion and voting.
In a column published in People’s Gazette on October 7, deputy Luiz Philippe de Orleans e Bragança (PL-SP) also criticized the Brazilian state currency. After commenting on the decision of the Federal Supreme Court (STF) that “ended” banking secrecy, the parliamentarian stated that “there is no way to escape to the informal economy if the “system” is monitoring your bank accounts”.
In the text, the parliamentarian says that, as a kind of “official state bitcoin”, Drex “will give complete visibility to the government of who is buying what, from whom, for what value, where, on what exact day and time” . He also concludes that, although it is still optional, “it is obvious that it will become mandatory in a second moment, due to the total control power that this digital currency will give to the government”.
Not all views regarding Drex are so critical, despite warning about care that must be taken in its implementation. Fernando Chertman, professor of Macroeconomics and Mathematical Economics at Faculdade Belavista, assesses that the implementation of a national digital currency, such as Drex, can be beneficial by improving financial efficiency and giving new tools to the Central Bank.
“However, its implementation must be done with caution, ensuring transparency, security and privacy to avoid risks of abuse of power and financial exclusion”, he says.
A People’s Gazette questioned the Central Bank about its position regarding the main criticisms of Drex, but the institution did not respond until the publication of this report. The space remains open.
What is Drex?
Drex is a CBDC (from English Central Bank Digital Currency), that is, a “digital currency issued by a central bank”. In this case, a virtual version of the Brazilian currency, the real. Although it may resemble other digital assets such as Bitcoin and Ethereum, there is one main aspect that differentiates them: centralization or decentralization.
According to the BC page, financial services will be settled by banks within the Real Digital platform provided by the Central Bank, which is the central authority. In other words, Drex is a digital asset centralized in the form of the Central Bank and the banks that are part of this network. In the case of Bitcoin, for example, the crypto asset is decentralized, that is, there is no central authority that regulates it.
The BC also informs that the Drex platform is developed using distributed registry technology (Distributed Ledge Technologyor DLT). This technology allows the record of any transactions and information to be shared by multiple participants in a network.
In the case of DLT, the distribution of information is a guarantee that all parties have identical and updated access to data, which would avoid dependence on a central authority, which is not the case with Drex. Furthermore, this standard makes it difficult for any subsequent changes to be made to transactions, which increases security against fraud and tampering.
In the case of Drex, to access the platform or system on which operations will be carried out, the user will need an authorized financial intermediary – a bank, for example. This intermediary will be responsible for converting the amounts existing in the user’s common current account to their digital wallet.
One of the possibilities highlighted by the BC in the development of Real Digital are digital smart contracts. In this modality, the purchase of an asset, such as a car, for example, will only be completed by the system when the seller offers all the papers to transfer the vehicle and the buyer has the entire amount available to make the purchase.
Cost reduction, financial inclusion and control of monetary and fiscal policy
According to Fernando Chertman, the implementation of CBDCs brings some advantages, such as reducing costs in the financial system. This would occur mainly in the case of international transfers, which currently face barriers such as high conversion rates and processing time.
In Brazil, these costs are particularly high, points out the professor. “And a well-integrated CBDC could simplify operations and facilitate the use of technologies such as smart contracts, speeding up payments and simplifying audits and tracking,” he says.
He assesses that, if there is widespread adoption of Drex, the population without a bank account could benefit, as the digital currency can facilitate payments with low or no fees and create incentives for small businesses.
From a macroeconomic point of view, Real Digital can give the Central Bank more control over monetary policy. “Depending on the design of the CBDC, the Central Bank could adjust rates directly on digital balances or, in extreme scenarios, promote fiscal policies via direct transfers, such as emergency aid, more easily and at a lower cost”, he assesses.
CBDCs bring challenges regarding cyberattacks, privacy, censorship and financial exclusion
However, it is exactly some of these features and facilities provided by Drex that have raised concerns among those on the right and even among analysts and experts in digital financial assets.
Professor Chertman assesses that one of the risks of CBDCs is the loss of privacy, as, in a centralized system, the authority would have potential visibility and control over all transactions.
“This raises legitimate concerns of abuses such as account freezing or financial restrictions for social control or censorship. In Brazil, which faces challenges regarding institutional trust, this is a valid concern, and the Central Bank would need a CBDC model that guarantees the protection of citizens’ data”, he assesses.
On its Drex page, the BC states that the Brazilian digital currency is being developed to guarantee legal security in operations and the principles and rules of privacy and security provided for in Brazilian law, especially in the bank secrecy law and the General Law of Personal Data Protection (LGPD).
Chertman also assesses that the CBDC model can bring security challenges, as centralization makes the system susceptible to cyberattacks. These security vulnerabilities could cause instability and affect trust in the system itself.
Another risk would be the exclusion of part of the population that does not have access to technology. If not well thought out, the implementation could result in portions of the population, for example, who already have limited access to the internet, being unable to use Drex.
Developers found that Drex allows complete control of the user’s financial life
In August 2023, the developer specializing in blockchain (a technology used in cryptocurrencies) Pedro Magalhães discovered that Real Digital allowed the central authority, in this case the BC, unrestricted access to users’ assets.
He tested the digital currency pilot project made available by the Central Bank itself and discovered that the model allows the system authority to transfer amounts to other accounts, deduct taxes directly from income, decide how long resources can be stored or simply freeze a user’s entire digital assets.
The Drex system also did not present any restrictions for the creation of new digital currencies, which would be equivalent to printing banknotes even without backing. Another important aspect is that the pilot project also offered a practically instantaneous ability to track and access any and all information about its users by the central authority.
Magellan’s discovery was first publicized by the Portal do Bitcoinwho asked other developers to confirm the initial findings, and the answer was affirmative. THE People’s Gazette reported the facts on that occasion and questioned the BC about it, but received no response.
Traditional digital currencies are decentralized
Such possibilities verified in Real Digital do not exist in cryptoactives such as Bitcoin or Ethereum, for example. Firstly, because their networks or systems are decentralized and therefore there is no central authority that can make all these decisions.
Furthermore, transactions can only be carried out within the rules of the system and with the validation of a “node”, a type of guarantor instance of the network. According to Victor Valente, lawyer and president of the Blockchain and Cryptoassets Commission of the OAB of Niterói (RJ), Bitcoin, which he considers to be the state of the art in cryptocurrencies, has around 54 thousand “nodes”.
In other words, any operation can only be carried out within the rules established in the system, which, in turn, allows the validation of “nodes”. However, in the case of Drex, Valente warns that, in addition to the wide possibilities allowed by the system configuration, there are very few “nodes”.
These are institutions already established in the financial market, including large banks and credit unions that have joined forces to participate in the development of Real Digital with the BC.
In other words, in addition to the broad possibilities that the Drex system offers, only a few institutions will act as “guarantors” of the operations that occur on the network, which would generate even more centralization and the possibility of control.
Ordinary citizens would have little to gain from Drex
According to Pedro Magalhães, the problems he found in the original Real Digital model still remain. “The main stakeholders are regulators and banks, while ordinary citizens have little to gain from Drex in terms of practical benefits,” he says.
The developer argues that, according to the model, the BC will have expanded powers to monitor and control the financial activities of all people who use the Brazilian CBDC. Regarding smart contracts, he also points out that they can only be implemented by large banks and banking consortia, the “nodes” of the system.
Victor Valente also highlights that the contracts established between the BC and the institutions – which will be the “nodes” of the system and which are helping to develop its functionalities – are not transparent, that is, the real bases on which they were agreed are not known. these partnerships.
In other words, unlike what occurs in virtual currency networks, in which users have autonomy and freedom to manage their portfolios without institutional intermediation, Drex would enable broad control of its assets by the financial authority or institutions designated by it over the users and their assets.
