Central banks push CBDCs in LatAm as stablecoins take hold

The central bank of Brazil will kick off its digital currency pilot project this month, one of the most advanced initiatives regarding CBDCs in Latin America and potentially a turning point for the technology in the region.

The regulator will select at least ten companies- from banks to fintechs and financial brokers – to test the digital Real prototype in transactions ranging from payments to government bond trading. The new phase comes after the central bank developed different use cases for the central bank digital currency (CBDC) within its innovation hub.

“These projects provided significant learning for Banco Central do Brasil on how to improve guidelines for the ‘Real Digital’ and identify the challenges and scope for its pilot project,” André Siqueira, Chief of Division at the bank’s Information Technology Department, said.

Replicate the success of Pix

With the digital Real, the bank is looking to replicate the success of Pix, a low-value instant payment system that saw massive adoption in Brazil. Announced in 2021, the regulator postponed its launch because of a long, drawn-out strike at the regulator last year.

But the project is now in full swing.

“In Brazil, the digital Real was included in the Central Bank’s innovation agenda, signaling to the market that the project is a clear priority,” Carlos Augusto de Oliveira, executive director at ABFintechs association in Brazil, told Fintech Nexus. “The regulator expects to launch the digital currency (a stablecoin which it will control) by the end of 2024.”

Central banks in Latin America have shown a growing interest in the technology behind crypto. According to a report by the Bank for International Settlements, the number of Latam banks working on such projects was “unusually high.”

At least five countries in the region are exploring a central bank digital currency, with Brazil as the primary country carrying the baton forward.

Other countries that have also shown interest include Uruguay, which released a pilot program for its digital currency, the e-peso. Mexico, Argentina, Chile, and Peru are all in the research stages.

Latam CBDCs amid strong stablecoin adoption

Regulators are interested in the technology as they explore financial inclusion alternatives. Also, to design a system that potentially competes with stablecoins. Cryptocurrencies pegged to stable currencies have gained relevant size in Latin America, often as a solution for many underbanked adults.

The case for crypto regulation has grown stronger globally, especially after the FTX downfall in the United States and Signature Bank’s failure later.

In a recent paper, the International Monetary Fund warned against stablecoins eventually becoming a threat to fiat currencies in these countries. The fund called for regulation and, interestingly, CBDCs that could compete with the benefits that stablecoins provide today.

To be sure, stablecoins are surging in inflation hotspots in Latin America. People use them as a vehicle for cross-border transactions, a hedge against inflation, and an alternative to weak fiat currencies. 

A 2022 study by Mastercard revealed that most adults in the region have already carried out some kind of transaction related to crypto. Also, a third at least have made a purchase using a stablecoin. This compares to 11% at a global level.

Carlos Augusto de Oliveira headshot
Carlos Augusto de Oliveira, executive director at ABFintechs.

In its report, the Bank for International Settlement said privately issued stablecoins “could be a threat in the absence of a CBDC.” It also noted that low-cost instant payments such as Pix in Brazil were a “line of defense” against the widespread use of crypto.

Pix as a foothold for the Digital Real

When Pix began to gain massive adoption in Brazil, central bank governor Roberto Campos Neto quickly stressed that it was one step in a broader agenda for modernizing the country’s financial system.

In that regard, the Brazilian digital real will operate within that environment, integrated into Pix. One of the use cases under study is “Offline Pix.” Itau, the largest traditional bank in Brazil, brought forward the initiative. It would essentially allow customers to make Pix transactions through NFC technology. That is, by approaching a mobile phone close to another.

“While Pix is an absolute success among consumers and should continue to gain strength with companies, the digital Real should provide a solution for large-volume and cross-border operations,” Bruno Diniz, a fintech advisor and book author in Brazil, said to Fintech Nexus. The CBDC, he said, should complement Pix use cases today, which are primarily used for low-ticket transactions.

  • David Feliba

    David is a Latin American journalist. He reports regularly on the region for global news organizations such as The Washington Post, The New York Times, The Financial Times, and Americas Quarterly.

    He has worked for S&P Global Market Intelligence as a LatAm financial reporter and has built expertise on fintech and market trends in the region.

    He lives in Buenos Aires.