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Blockchain Privacy Delays Brazil’s DREX CBDC Launch and Enters Phase 2 – Ledger Insights
Last week Central Bank of Brazil formally announced a delay in its central bank digital currency DREX (CBDC) because it still needs to do more work to explore privacy solutions. In the meantime, it plans to launch Phase 2 which will broaden the range of use cases, with a call for suggestions expected in the third quarter. Testing of additional applications will occur in the first half of 2025. With this expansion, the governance of the CBDC platform will need to evolve. The Securities and Exchange Commission (CVM) will likely join the governance structure following its observer role during Phase 1.
As context, DREX it’s a Wholesale CBDC solution with the digital reality used for interbank settlement. Retail-facing digital currency is the form of tokenized deposits from commercial banks. The project focuses on enabling programmability and using blockchain and tokenization for financial transactions such as investments.
In the first phase, the DREX platform had only three assets and a single application. The assets were wholesale CBDCs, tokenized deposits, and digital treasuries (federal government securities). Therefore, smart contracts written by the central bank enabled their issuance, transfer and settlement. The second phase will become much more interesting with a wider range of use cases. Since these will be securities, it is necessary for the CVM to be involved in governance.
Maturity of privacy solutions
The formal announcement of the delay by the central bank stated that “the privacy solutions tested up to the current pilot phase have not presented the necessary maturity to ensure compliance with all legal requirements relating to the protection of citizens’ privacy , despite having evolved over time. “
However, the central bank project managers emphasized the “up to the present stage” aspect. It’s still a work in progress.
They had planned to evaluate the privacy feature by May, and the work had not yet been completed satisfactorily. They noted that their use case involving two currencies and federal securities was more complex than most, so they ran into problems. In some cases, the problems were not related to basic transactions, such as transferring money. Challenges have arisen in testing delivery versus payment.
The three privacy solutions tested
The DREX platform uses a permissioned version of Ethereum’s Hyperledger Besu, with multiple parties hosting the blockchain nodes. Since blockchains are inherently transparent, a privacy solution is needed to comply with banking privacy legislation.
The central bank has tested three privacy solutions so far: Anonymous Zether, Ernst and Young’s Starlight and Parfin’s Rayls. The first didn’t work for his purposes, but EY and Parfin adapted their solutions. They just received the latest EY iteration and the updated Parfin solution requires extensive testing. Hence the conclusion that the test status sounds more like a work in progress than “it doesn’t work.” That said, the tested solutions are quite cutting-edge, rather than having a long track record in use.
Additionally, Microsoft, one of the participants in the pilot project, proposed its ZKP Nova solution, which the central bank is starting to explore.
Technically Anonymous Zether, Starlight and ZKP Nova involve zero proof of knowledge, while Rayls is a blockchain interoperability solution that supports the integration of private blockchains using private bridges. Accenture is a supporter of developer Rayls Parfinwhich counts the Brazilian Stock Exchange as a client and is collaborating with Santander on digital Real pilot projects.
An advantage of the delay is that privacy solutions can be tested in a more complex environment with broader use cases.
DREX for open banking
Meanwhile, the central bank launched the Pix instant payment solution in 2020 which was a resounding success. DREX is not positioned as a pure payment solution. Instead, these are programmable payments and features similar to open banking. The ultimate goal is to enable financial inclusion by making access to credit or investments cheaper.