Drex: Can the Central Bank's digital currency end banking secrecy and increase government control?
The news that the Internal Revenue Service has expanded its surveillance of Pix has fueled a wave of misinformation on social networks. Mistaken comments from users pointed to an attempt to control transactions and create a new tax, which is false (as we explained in this article). The government eventually backtracked and repealed the new Pix rules. Now, similar questions are being asked about Drex.
Drex is a digital currency that has been under development by the Central Bank of Brazil since August 2020 - currently in its second testing phase. In practice, it will be the digital version of the traditional "real" and will have the same value and validity as physical currency.
There is no official launch date, but the expectation is that the "digital real" will reach the population between 2025 and 2026 - and this has worried some users. The fears revolve around state control over the currency. Unlike cryptocurrencies such as Bitcoin, Drex is centralized. This means that it will be issued and regulated by one institution. In this case, it will be the Central Bank.
The new technology should also enable transactions with smart contracts, i.e. conditions for a payment to be made. For example, when buying a car, the buyer will be able to condition the release of the money to the seller once the vehicle's registration document has been updated to the new owner's name. And this must be done automatically and simultaneously. In addition, Drex provides greater traceability of resources (see more in the topic "What's new about Drex").
These three factors - centralization, the possibility of conditioning and traceability - gave rise to the idea that the government could abolish physical money and, through Drex, control and restrict the use of money by the population. For example, "programming" the currency with expiration dates for use or with restrictions on specific products.
"They want to monitor and control all your money," says a post with 503 retweets and almost 2,000 likes on X (formerly Twitter). "Get your congressman and senator to work against the implementation of this evil project," says another post, viewed almost 30,000 times.
Does the government want to control your money with Drex?
E-Investidor questioned the Central Bank on the subject, which was adamant that "the Drex guidelines do not aim to control, restrict use or discriminate, nor is there an expiration date for the use of funds in Drex". Even if there were, these measures would be unconstitutional.
According to Marcel Mascarenhas, a partner at Warde Advogados and former deputy attorney general of the Central Bank, in order to restrict the use of cash by the population, the government would first need to change the legislation.
In particular, Complementary Law 105 of 2001, which deals with "banking secrecy" and prevents financial institutions from disclosing financial transactions made by clients to third parties, including the Executive. After all, in order to restrict consumption, it would be necessary to identify who is making these transactions and what products and services are being purchased.
Today, bank secrecy or tax secrecy can only be breached by court order or at the request of the Revenue Service, in cases where there is evidence that a crime has been committed, such as tax evasion or money laundering. With the arrival of Drex, there are no plans to change this.
"Drex is being designed to preserve bank secrecy and tax secrecy. This is one part that is being tested. The pilot project seeks precisely to verify the sufficiency of network mechanisms to ensure banking secrecy," says Mascarenhas.
In fact, Drex will make transactions more "traceable" by the Central Bank, but only for those situations in which there is judicial authorization. On a "day-to-day" basis, the monetary authority will have access to the data, but in an aggregated and anonymized form - such as the volume transacted and other variables that do not make the payer or buyer explicit. This is what Thiago do Amaral Santos, a partner at Barcellos Tucunduva Advogados (BTLaw) in the area of means of payment, points out.
"Drex is just another means of payment that will be subject to the same secrecy rules that exist today," says Amaral. However, not all experts are "calm" about the novelty.
For Marcelo Godke, a partner at Godke Advogados and a specialist in business and banking law, even though this is unconstitutional, Drex opens up a loophole for greater control of transactions. This is because, technically, the technology makes it possible to condition the use of the currency.
"A programmable currency that creates a kind of restriction on what citizens want to spend, in my opinion, is unconstitutional. But then the population will be at the mercy of the Federal Supreme Court (STF) to decide on this," says Godke, who recalls the "confiscation of savings". "It was later ruled unconstitutional, but everyone had to take legal action (to get their money back). I don't like it, I don't think Drex is necessary."
But what is new about Drex (that Pix and digital accounts don't have)?
One of the big questions about Drex is what's new about it and why the technology is different from Pix and the electronic representation of the real in digital bank accounts. To answer this, we first need to understand a little more about what the "digital real" is.
Drex has a technical name: CDBC (Central Bank Digital Currency). The Central Bank of Brazil is not alone in developing this type of technology: all over the world, there are projects carried out by central banks and which are at different stages of progress, as can be seen on the CBDC Tracker platform.
In practice, to access the digital real, citizens will need to log into the Central Bank's "Drex Platform", which is an environment under development that uses distributed ledger technology (DLT), a kind of digital database where transaction records will be stored, but which is shared by a computer network.
This access will be via a financial institution, which will transfer the amounts in your bank account to your "Drex digital wallet" on the platform. The main idea is for the digital real to be used whenever a transaction requires conditions to be met. In this way, it will be possible to "program" a payment as long as all the conditions agreed in a real estate or car purchase contract, for example, are met - which could reduce the occurrence of fraud.
"If you're buying a car, you might be afraid of paying and the seller not passing on ownership of the vehicle. With Drex, it doesn't matter who makes the first move, because the contract will only be concluded when both happen. Thus, the money and ownership of the car will be transferred simultaneously. If one of the parties fails, the amount paid and the car go back to their respective owners," says the Central Bank on the official Drex page.
The purchasing process in these situations can also be much faster. "When you pay a tax with Pix, the payment is instant, but processing that transaction can take days. Drex will do this automatically, since a payment will always be linked to the function of that payment," says Eduardo Diniz, a professor at FGV EAESP. "That's why Drex will be more relevant for larger amounts, larger purchases."
This is also the vision of Jonatas Montanini, Co-CEO of Zuvia: "Drex can be used for automatic payments scheduled to occur when certain conditions are met, such as the automatic discharge of rents or financing," he says,
There are other use cases, such as using Drex to buy and sell financial products, without the need for a broker. One example would be to use the digital currency to buy government bonds - which would need to be tokenized (have a digital representation) and registered with Drex's DLT. It is also possible to integrate the Brazilian digital currency with other CBDCs in order to facilitate international trade, which today is mostly done in dollars.
However, it must be stressed that Drex is not a cryptocurrency, but a digital representation of the real thing. "Cryptos are not issued by governments or central banks, but are decentralized and based on a public blockchain. Their operation is generally anonymous and outside the traditional financial system," says Montanini, Co-CEO of Zuvia.
Drex is therefore designed for unconventional forms of payment, such as those made today through digital accounts. For the rest, simple transactions, Pix should continue to be used.
Will Drex do away with cash?
The Central Bank confirmed to E-Investidor that there are no plans by the institution to replace physical cash. However, experts point out that this is the big trend in the long term, as the Brazilian population moves towards bankarization and access to digital accounts. Not by state imposition, but by behavior.
After the success of Pix, Drex should be another step towards financial digitalization. "What will happen is that physical money will become much more restricted, used mainly for illegal activities," says Diniz, a professor at FGV EAESP. This is because, as well as being less practical than Pix and possibly Drex, physical money is more difficult to trace.
Cristina Helena de Mello, professor of economics at PUC-SP, also highlights this aspect. In her opinion, citizens shouldn't be afraid of the greater traceability of money through innovations such as Drex, since it facilitates the work of combating financial crimes.
"Physical money favors the criminal action of money laundering and this is a practice that punishes society as a whole. Firstly, it doesn't collect the taxes that should finance government spending on health and education, for example. Secondly, it feeds a criminal chain that has no scruples," he says, commenting on the difference to a digital currency like Drex.