Institutional Experimentation in Central Bank Digital Currencies (CBDCs): The case of the Brazilian “Drex”

Abstract Central Bank Digital Currencies (CBDCs) are being currently developed by most central banks in the world as a promising development mechanism: they may foster innovation in a somehow stagnant financial sector, stimulate diversification in products and services offered to consumers, and grant citizens broader access to sophisticated market products that are up to this moment available only to professional investors. All these potential benefits, however, come along with raising concerns. CBDCs are looked down by those who see relevant risks for data privacy. Critics also highlight the underpinning risks for financial stability, considering that radical changes in money issuance may affect the most prominent actors of the financial system – the banks, which may no longer play such a relevant role in the economic process. Though sometimes far-fetched, these issues are still relevant in the current debate. When supporters and critics brandish their perspectives in general terms, however, the high level of experimentalism involved in designing CBDCs is overlooked, in spite of its importance to understanding monetary innovation. This paper proposes a more empirical and less abstract approach to institutional aspects of CBDCs. The main goal of this work is to emphasize how official digital currencies should consider the regulatory framework under which they will effectively operate. This regulatory perspective reveals not only the varied legal landscape of official digital money but also how the potential contribution of CBDCs to development is conditioned by their institutional design, reflecting policy ambitions and also deep political and economic constraints. Within this empirical agenda, the paper analyzes one particular case of CBDC implementation, the Brazilian “Drex,” exploring its main strategic decisions as well as the policy choices for regulatory design.