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Privacy concerns have impeded the progress of Brazil’s central bank digital currency (CBDC) in the ongoing pilot phase, a new report by the country’s top bank has revealed.
In a paper detailing the first phase of the CBDC pilot, the Banco Central do Brasil (BCB) noted that while the issuance, distribution and redemption of the DREX digital currency were relatively straightforward, it faced challenges on the technical aspects. The first phase started in March 2023 and ended over a year later in May 2024. The second phase was set to begin immediately, but was delayed over privacy concerns; it started towards the end of last year.
The paper revealed that the central bank explored four different privacy solutions, but none fully solved the challenge.
The first two solutions—confidential computing and centralized restriction—were quickly dismissed. The latter goes against the decentralization ethos that BCB believes will be critical to the success of DREX. The bank is building the CBDC on a DLT-based unified ledger for enhanced transparency and efficiency. DLT also allows the integration of smart contracts and tokenization.
While confidential computing offers much-needed privacy, it was dismissed because it relies on third parties, which also goes against decentralization and creates central points of failure.
The two solutions that fared better were zero-knowledge proofs and network segregation. The latter falls somewhere between overlay networks on Bitcoin and Layer 2 networks on other blockchains. While overlays on Bitcoin have been proven to work, offering privacy and customizable access, Layer 2s haven’t fared as well. Cybercriminals have routinely targeted the bridges that connect these networks; Axie Infinity and Poly Network lost over $600 million each in bridge hacks.
That leaves zero-knowledge proofs (ZKPs). Here, BCB tested solutions such as Zether from JPMorgan (NASDAQ: JPM), Starlight from Ernst & Young and Rayls, a ZKP solution on Ethereum’s EVM. It also tested ZKP Nova from Microsoft (NASDAQ: MSFT), but the paper was authored before its results were analyzed.
While ZKPs enhanced privacy, it came at a cost: the BCB also lost access to the transactions and could not implement monetary controls or KYC and AML programs.
“It is essential that authorities have visibility and control over the token to comply with their legal, regulatory or contractual obligations,” the bank concluded.
“Without this ability, authorities would not be able to monitor suspicious activity, prevent fraud or ensure compliance with applicable laws and regulations, compromising the security and integrity of the Drex Platform.”
Despite the setbacks, BCB is pushing on with the second phase, in which it has expanded the scope of the CBDC and is working with more institutions. The bank received 101 applications from interested parties but only selected 50 as some of the applicants had duplicated focus areas and proposed solutions.
Brazil is one of the countries that has stuck to developing a retail CBDC, which seems to have lost its appeal in recent years. Studies from the BIS and other global organizations reveal that central banks are now more focused on wholesale CBDCs, especially in the developed world where existing digital payment solutions are deemed sufficient.
Pakistan to launch a ‘National Crypto Council’
Elsewhere, Pakistan intends to launch a “National Crypto Council” to boost digital asset adoption in the South Asian nation.
The initiative comes after Pakistan’s finance ministry recently held a meeting with a delegation of digital currency leaders from the U.S., “including President Trump’s advisers for digital assets.”
One local outlet reports that among the attendees was Gentry Beach Jr., an associate of President Trump and whose father led campaign fundraising for the Republican leader. Beach has been on a tour of South Asia, and his other recent meetings in Pakistan have been widely covered. However, the U.S. embassy did not officially announce the meeting with the Finance Ministry on digital assets.
The new council will be a dedicated body comprising of key government officials, regulators and industry experts. It will work on new policies, lay the groundwork for adoption, and collaborate with other nations to set regional standards.
The initiative signals a shift from the Pakistani government’s previous hostility towards digital assets. As recently as 2023, then-Finance Minister Aisha Ghaus Pasha stated that “crypto will never be legalized in Pakistan.”
However, the current minister, Muhammad Aurangzeb, has been friendlier toward digital assets, calling for “an open mind” toward the sector.
Pakistan ranked ninth globally for digital asset adoption last year, according to a Chainalysis survey.
Watch: Finding ways to use CBDC outside of digital currencies
English (US) · 