These digital currencies aim to complement physical cash, offering a government-backed alternative to private cryptocurrencies. In Latin America and Brazil, CBDCs are being developed to enhance financial inclusion and modernize payment systems.

Why are countries interested in issuing their own digital money?

CBDCs offer several potential benefits:

• Enhanced payment efficiency: CBDCs can facilitate real-time transactions, reducing the reliance on intermediaries and improving the efficiency of payment systems.

• Cost reduction: Managing physical cash is expensive, often accounting for up to 1.5% of a country's GDP. Digital currencies can significantly reduce these costs.

• Financial inclusion: In regions with limited access to traditional banking, CBDCs can provide a secure and accessible means of participating in the digital economy.

In Latin America, regulators are particularly interested in leveraging CBDCs to promote financial inclusion, aiming to provide unbanked populations with access to digital financial services.

Are CBDCs like private cryptocurrencies?

While both CBDCs and private cryptocurrencies are digital forms of currency, there are key differences:

• Issuance and control: CBDCs are issued and regulated by central banks, ensuring stability and trust. In contrast, private cryptocurrencies like Bitcoin are decentralized and not backed by any government authority.

• Stability: CBDCs are designed to maintain a stable value equivalent to the national currency, whereas private cryptocurrencies can experience significant volatility.

In Brazil, for example, the central bank is developing its own CBDC, known as Drex, to provide a stable and secure digital payment option.

How quickly will CBDCs take off?

As of March 2024, over 130 countries were actively engaged in CBDC research, with several having launched or piloted their digital currencies.

In Latin America:

• Brazil: The Central Bank of Brazil is developing Drex, with guidelines established in May 2021 and a planned release by the end of 2024.

• Mexico: The country is making steady progress toward issuing its own CBDC, with plans to launch by 2024.

These developments indicate a growing momentum toward the adoption of CBDCs in the region.

Will CBDCs replace paper currency?

While CBDCs offer numerous advantages, it is unlikely they will completely replace physical cash in the near future. Cash remains a popular means of transaction, especially in developing markets. Most central banks, including those in Latin America, have expressed commitment to continue issuing physical cash as long as there is demand. CBDCs are expected to complement existing payment methods, providing additional choices and security to consumers.

How would paying with a CBDC actually work?

The implementation of CBDCs may vary by country, but a common approach involves:

1. Distribution: The central bank issues digital currency to financial institutions or directly to consumers through digital wallets.

2. Transactions: Consumers use digital wallets on their smartphones to make payments, similar to existing mobile payment systems.

3. Integration: CBDCs are integrated into the existing financial infrastructure, allowing seamless transactions between digital and traditional currencies.

In Brazil, the Drex pilot program is exploring such integrations, aiming to enhance the efficiency and security of digital payments.

CBDCs represent a significant evolution in the monetary system, offering potential benefits such as improved payment efficiency, reduced costs, and greater financial inclusion. In Latin America and Brazil, the development of CBDCs like Drex reflects a commitment to embracing digital innovation while addressing regional financial challenges. As these initiatives progress, they will provide valuable insights into the future of digital currencies globally. Their use should not be forced on citizens, but their benefits are too great to ignore.