DREX
There is a lot of anticipation in the financial market about what Brazil’s Central Bank (BACEN) will do after PIX. The platform revolutionized money transfers: today it is simple and convenient to pay almost anywhere. After that success, BACEN introduced a new idea, aligned with CBDC and Web3 proposals, to make room for more effective financial products.
That platform is DREX, Digital REal X. The X at the end sets off an alarm for me and reminds me of Eike Batista’s book, O X da Questão. While other blockchains follow a decentralized, permissionless model, BACEN is creating a centralized, permissioned network where it chooses which companies can participate. In practice, we will have a blockchain with smart contracts used by Itaú, Bradesco, BB, Nubank, and others, running on Hyperledger Fabric, backed by the Linux Foundation.
BACEN seems to be preparing the way for its own CBDC. The custody of money at the central bank may be controversial among retail banks, but I want to talk about another possibility: smart contracts and the market that could emerge around them.
Smart contracts
Last year, I wrote about my doubts concerning blockchain in this post: blockchain or decentralized governance. Much of the Web3 community is still trying to figure out how to make decentralized governance work. It is a huge challenge. Vitalik, the creator of Ethereum, publishes many articles and ideas on the subject. Proposals are implemented and tested to give authority to those who deserve it, all in a decentralized way. I think it is great, but it takes an enormous amount of work.
Centralization also has advantages. When offering retail financial products, security is the starting point. Bitcoin, Ethereum, and related networks are resilient because they are decentralized, but there is no authority to define good practices and regulate the products being offered. Today, most DApps are gambling games. Nobody puts sound money into an insurance policy from some random company on Ethereum.
Old problems, new solutions
One solution shown in DREX videos is buying a car from another individual. Anyone who has done this knows the risk that the transaction will not go through. The steps are usually these:
- Find the car on an online platform (OLX, CompreCar, WebMotors, Mercado Livre, and so on).
- Contact the seller to check whether the vehicle is available and arrange a meeting to see it.
- Inspect the car, take it to a mechanic, and make an offer.
- Accept the offer, transfer the money, fill out the CRV, and have the ownership transfer notarized.
At the last step, neither side fully trusts the other. The buyer thinks: “I’ll transfer the money, but I want the car keys and the completed paperwork.” The seller, in turn, thinks: “I’ll transfer the title into your name, but I want the money.”
A smart contract could solve this kind of problem. Escrow checks and similar solutions seem like relics in an increasingly digital world.
One solution would be for both parties to access their DREX accounts through a third-party app and sign a vehicle purchase agreement. The money would only be transferred once the CRV was in the buyer’s name. This app, probably one of the banks’ super-apps, would communicate with DREX, DETRAN, and the other platforms needed to execute the contract.
Old solutions, more competition
The car example is just one of many financial products still offered in an analog way. Insurance, for example, could be written as a smart contract and triggered when certain conditions are met. In the case of car insurance, the contract could be triggered as soon as an inspector records an accident. The contract could also be traded and renegotiated through a token, adding liquidity to the market, reducing the cost of insurance, and increasing its premium.
I do not know how far BACEN’s blockchain platform will go. Maybe they do not know which products might emerge either. After all, who could have imagined people sending messages with PIX transfers of one cent?
Logistics could benefit too, as long as companies know how to operate their supply chain on this platform. A supplier could confirm delivery to a customer and, from that date, start automatic charges in 30, 60, or 90 days on the retailer’s account. These receivables could also be traded on the secondary market, creating liquidity and spreading the supplier’s risk.
Conclusion
There are many possible solutions, but we still lack a concrete, working platform. BACEN and its partners are building one; if I were a manager, I would keep an eye on ways to modernize my business with it. As a curious observer of Web3, I am excited to see solutions emerging from a public initiative in Brazil. We have everything it takes to create a market for digital financial solutions here and become exporters of art, as Tom Zé would say, “the highest degree of human capacity.” What a daring little people. What a civilized people.
Sources
https://www.bcb.gov.br/estabilidadefinanceira/drex
https://pt.wikipedia.org/wiki/Drex
https://www.youtube.com/watch?v=U4mM6KS1XbA
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