Brazil CBDC faces setbacks as banking regulator suspends innovation lab

Brazil’s attempt to launch a central bank digital currency (CBDC) has run into trouble following the decision of the Banco Central do Brasil to suspend the innovation arm of the project, LIFT Lab.

The indefinite suspension appears to have grave consequences for the digital real as the banking regulator announced a pushback of the first stage of its CBDC pilot. The digital real pilot’s first milestone, initially set for completion in February 2024, has been rescheduled to May.

While the statement did not include reasons for the delays, pundits hinted at several issues plaguing Brazil’s attempt to launch a CBDC. Right out the gate, the banking regulator ran into technical difficulties in its attempt to onboard sixteen pilot projects for the digital real, leading to a two-month delay in Q2 of 2023.

Following the intricate onboarding process, the central bank disclosed its failure to finalize a “privacy-preserving technology,” expressing discontent with current solutions. Central bank executive Aristides Cavalcante remarked that the banking regulator will take a measured approach in deciding on a technical solution for the CBDC to guarantee the privacy and safety of user funds.

“We are not going to launch any solution without the necessary security,” said Cavalcante.

However, the indefinite suspension of LIFT Labs cast a strong shadow of doubt for the CBDC project. Since the initial announcement of the digital real, LIFT has played a vital role in the developments, famously launching a challenge dedicated to the CBDC.

Nine projects from LIFT’s challenge made the cut for advanced CBDC testing, with the sudden suspension raising eyebrows for industry analysts. Speculation has been rife that the innovation lab has been plagued by “operational and human resource limitations,” with staff reportedly pushing for higher pay, culminating in a 2022 strike.

“There is no innovation if there is no effort and dedication from qualified people, which in our case here are the specialists from the Central Bank,” said Cavalcante.

A global CBDC surge

Central banks worldwide are exploring the viability of CBDCs in their local economies at a frenetic pace. New research from the Atlantic Council noted that over 130 nations, primarily with developing economies, are currently investigating the offering.

Amid the mad dash for CBDCs, multiple studies have pointed out the lack of global standards guiding the development of CBDCs.

To solve the development of CBDCs in silos, the Bank for International Settlements (BIS) and the International Monetary Fund (IMF) have pushed out a series of initiatives, including launching a CBDC handbook to offer technical direction to central banks.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.