In an article recently published by the Bank for International Settlements (BIS), Fabio Araujo, an economist at the Central Bank of Brazil (CBB) who is also responsible for the country’s central bank’s digital currency work, revealed that the monetary authority will have greater control over people’s money once its CBDC is deployed. Thanks to the so-called Real Digital, the central bank will be able to stop bank runs and impose other restrictions on citizens’ access to money.

Real Digital, the digital version of Brazil’s national currency, has been debated at the central bank since 2015 and will see its first tests in 2023 through nine solutions presented by private companies at the recent Lift Challenge event organized by the CBB.

Cointelegraph reported that the value of the upcoming CBDC will be pegged to the STR National Trust Payment System, also known as the Reserve Transfer System.

Thanks to Real Digital, the central bank says it wants to enable so-called smart payments in a regulated environment. Smart payments include smart contracts, transactions with Internet of Things devices, and even decentralized finance (DeFi) applications.

In the BRI document, Araujo said the main objective of introducing a CBDC is to provide entrepreneurs with a safe and reliable environment in which to innovate through the use of programmability technologies that make smart payments a reality. .

“The technologies available for smart payments, as seen in crypto assets, are giving way to new business models and are better suited to meet people’s demand,” he said.

Related: Fed paper examines CBDC’s potential effects on monetary policy

The Central Bank could “stop” withdrawals

In the document, Araujo emphasizes that the central bank must maintain a partnership with the private sector to provide liquidity to the market. According to Araujo, the central bank is considering the coexistence between Real Digital and private currency issued by CBB-regulated institutions in the planned smart payments.

Thus, individuals could convert their deposits into tokens capable of accessing the services provided on this new platform, subject to the commitment that these tokens will be converted into Real Digital. In other words, banks will be able to issue their own tokens intended for smart contract applications having their balance in Real Digital as a guarantor of operations.

“Commercial bank deposit tokens would inherit all the regulations and features of their parent assets, such as fractional reserve requirements,” he said. “Likewise, [payment service provider] deposit tokens would inherit their characteristics, such as total reserve requirements.

However, unlike the cryptocurrency ecosystem where users own their assets and no one can lock their operations, there will be a system to lock withdrawals in the CBDC of Brazil.

Araujo points out that at some point and for various reasons, there may be a bank run where users wish to convert these tokens into Real Digital, which would be guaranteed by the central bank. To avoid such bank runs, the CBB already provides “safety nets and restrictions on the flow of conversion to and from CBDCs”.

The central bank points out that the exchange flow of these tokens to Real Digital would have a limit and should even be scheduled in advance. In other words, the central bank will have the power to control the flow of money within the system.

Related: Brazil Stock Exchange wants to provide oracles for Real Digital

The paper explains:

“A cause for concern, however, is the speed at which private tokens could be converted into CBDCs, which could restore coordination mechanisms. To avoid such unwanted flows, large conversions could only be available if planned. in advance and constraints on daily conversions could be In addition to this, circuit breaker mechanisms could be automatically applicable when the continuous draining of tokens from a specific institution makes it vulnerable.

Araujo concludes the document by highlighting that Real Digital, by enabling smart contract and programmable money solutions in the Brazilian financial environment, will enable the creation of personalized financial services to meet the different demands of society.

The paper concludes that these resources, when combined with financial education, can bring efficiency gains and serve the entire population of the country, even those who are still on the margins of the financial system.