The digital finance race is heating up…

Since I recommended Bitcoin to Distortion Report subscribers last May, its price has more than doubled.

But there’s another story that fewer people are paying attention to. And yet, it confirms something I’ve been telling you for over a year now…

Central bank digital currencies (CBDCs) are coming.

It’s only a matter of time before digital platforms and CBDCs become the norm for payments in the U.S. and worldwide.

And my latest research trip confirmed this.

I recently got back from a string of meetings in Brazil.

I met with representatives from Brazil’s Ministry of Finance… its Congress… and corporations involved in the intersection of energy and technology.

Why Brazil?

First, Brazil plays an important role in the global natural resources supply chain. Energy materials from oil to aluminum to nickel are sourced in Brazil.

Such resources drive global economic development… energy transformation… and AI-driven technology growth.

Second, Brazil is hosting the annual G20 conference in Rio de Janeiro in November.

That means it will have a critical role in shaping the content of that marquee global conference. And it will have more “floor time” to discuss its initiatives on the world stage.

Third, my connection to Brazil adds a unique perspective to my analysis.

I earned my PhD in International Strategies from Brazil’s most prestigious university. I studied under the same department as a former president of Brazil.

So I’m recognized there as a leading global geo-economist. This makes it possible for me to meet with people who drive big decisions in Brazil.

And that’s what I did on my latest trip.

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On-the-ground research at Brazil’s Ministry of Finance

In my meetings, I discovered that digital finance will be a topic at the G20 conference this fall.

And believe it or not, this could have implications for your money.

Let me explain.

Digital Platforms Kick Up a Notch

My research took me to the Ministry of Finance offices in Brasilia, Brazil’s capital. There, I met for two hours with Cristiano Boaventura Duarte.

Dr. Duarte is a senior macroeconomist at the Ministry of Finance’s Economic Division. Before that, he was an economist at the Central Bank of Brazil.

He and I discussed a range of topics. From foreign direct investment in Brazil… to the energy transition… to monetary policy.

One issue struck a chord with me.

Dr. Duarte underscored Brazil’s momentum in digital finance. He told me that Brazil has a significant focus in three areas:

  1. The “tokenization” of contracts. It’s an idea that has been gaining traction over the last several years. It means turning a contract into lots of small, tradable pieces. Those pieces are “tokens.” People can then own and exchange those tokens.

  2. The issue of the Drex and its blockchain technology. The Drex is a digital form of the Brazilian currency, the real. Think of it as the Brazilian “Bitcoin.”

  3. Reducing dependency on “paper bureaucracy.”

He also mentioned that several organizations are creating a currency-hedging mechanism.

The goal of that is to support energy transition projects during times of volatility. It would help companies from around the world that are working on new energy projects in Brazil.

This highlights the intersection of energy and digital currency policy. I’ll focus more on that in the coming months.

But first, let me tell you about Brazil’s acceleration in digital leadership. At the center of it is a Brazilian payments platform called Pix.

Brazil’s Path to Global CBDCs

Pix arose in late 2020, during the Covid-19 pandemic. People didn’t want to touch physical money. Plus, they were doing more remote transactions.

But Pix’s use didn’t stop when the pandemic ended. Since its launch, more Brazilians have moved toward Pix and away from debit and credit cards.

Use of Pix surged 74% last year to almost 42 billion payments. This surpassed credit and debit card charges, combined, by about 23%.

So what is Pix, and why are more Brazilians using it?

Pix is like PayPal or Venmo. It allows users to make payments online or in stores. You input a code into a Pix-enabled payment or banking app…

Or you scan a QR with your phone, like the photo below shows.

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A Pix user scans a QR code to pay
Source: Shutterstock, for Editorial use only

Pix has 170 million users. It enables billions of transactions. And it transfers more than a trillion Brazilian reals (about 190 billion U.S. dollars) a month.

But it is different from other popular payment apps in one crucial aspect. The Central Bank of Brazil owns and manages it. Think PayPal or Venmo controlled by the Federal Reserve!

The five biggest banks in Brazil backed the free system. That’s similar to how the biggest Swedish banks backed their financial app, Swish. (I wrote about that last year.)

You need a Brazilian bank account to use Pix. Otherwise, you need to find an ATM if you want to pay venders that prefer not to take fee-based credit cards. And trust me, that’s no easy task.

So what does this have to do with my meetings in Brasilia?

Dr. Duarte told me that Brazil’s plan is to tokenize contracts. Contracts for things like real estate deals, cars, and big-ticket items. He said that would help reduce Brazil’s paperwork and bureaucracy.

These tokenized contracts would be payable through Pix. In the long run, they would be programmable with CBDCs.

In other words, I’ll give you digital currency if you give me digital contracts.

Brazil could then scale this process… And use it to convert the entire financial and economic system to digital currencies.

Brazil Is Showing the Direction for CBDCs

Now, this conversion process won’t happen right away. But Brazil is showing the direction and path.

Dr. Duarte told me that Brazil is in test mode for the next year. And that it is balancing tradeoffs between scalability and privacy concerns.

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Nomi meets with Dr. Duarte (far left) and Dr. Roberto Uebel, a PhD professor of International Economics

Here’s how the token process would work.

Commercial banks would issue digital deposits or tokens. They would do this under the same regulations as current deposits.

That’s how the central bank would issue and then get CBDCs into the commercial banking system.

From there, CBDCs could flow into people’s bank accounts. Those accounts would have tokenized deposits.

Dr. Duarte said this development is years off. But as soon as next year, the Ministry of Finance and Brazil’s central bank will discuss how to put it in place.

And at the G20 this fall, Brazil and Italy will show a new way for countries to send money to each other. Already…

  • Italy has been looking at how Pix works for sending money between two countries.

  • Brazil’s central bank is considering agreements to connect Pix with instant payment platforms in other countries.

  • Argentina and Uruguay are using Pix.

And there’s another international platform worth watching. It’s called Nexus, and it could operate alongside Pix and other domestic systems.

Nexus is a project from the Bank for International Settlements (BIS). Its goal is to develop a platform that connects other fast money systems around the world.

And Brazil’s central bank has also expressed interest in it.

Digital Payment Systems Are Necessary Foundations for CBDCs

A global digital payments system is a necessary first step toward global CBDC payments. Longtime readers already know this.

But if you’re a central bank, how do you convert retail accounts to CBDC-backed ones? There are two components.

First, central banks need a financial platform that enables digital payments.

A platform like Pix for retail payments in Brazil. Or like FedNow for banks and corporations in the U.S. (catch up on that here and here).

Second, central banks need to create their own digital currency. Brazil is moving ahead on that front with the Drex.

Brazil’s central bank kicked off its CBDC journey in late 2020. Since then, it has made significant progress.

It established a pilot project that will announce new conclusions on the trajectory of the Drex. That is set to happen within the next couple of months.

But I learned more from our meeting. It’s about this year’s G20 conference.

I discovered that Brazil’s Ministry of Finance will lead the coordination of international digital policy there.

Brazil and Italy will develop an agenda for a global payment system. The agenda will cover cross-border and instant payment rules.

The goal is to “bridge” the tech gap between existing payment systems and a global one. And to enable countries and their cities to connect with that new global system.

Like I said, this is a necessary first step toward global CBDC payments.

In my next essay, I’ll tell you more about why all this matters for you and your money, and what you can do about it.

Regards,

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Nomi Prins
Editor, Inside Wall Street with Nomi Prins