Opinion – Helio Beltrão: Digital real has more challenges than stablecoins

Fintechs and big techs are dedicating multibillion-dollar resources to disintermediate banks in payment methods. There is pent-up demand for an immediate and safe way to transfer money through Whatsapp, Facebook and other networks, nationally or internationally, regardless of the banks.

The debanked, although in decline, are still numerous. Private technology enables inclusion and lowers costs. Last year, for example, a cryptocurrency was used as a delivery vehicle for humanitarian aid in Venezuela at the height of the pandemic.

Many governments, however, are wary of allowing private payment solutions, and allege a mix of reasons, some more reasonable than others. If they react badly –over-regulating or even banning, out of fear or ignorance–, the official currency itself may suffer disruption in the future.

Mercado Livre has just announced an application for digital payments dedicated to cryptocurrencies. Starting in Brazil, customers will be able to buy, sell and hold ‘cryptos’ in their digital wallets. PayPal and Venmo announced similar initiatives. Facebook announced a month ago at Money2020 in Las Vegas the launch of the Novi wallet, which will use Pax Dollar, a stablecoin, as payment method.

Stablecoins are backed cryptocurrencies, usually fixed to a fiat currency such as the dollar. The Pax Dollar is not a real dollar, but a ‘digital token’ whose management company is obligated to be fully backed in real dollars.

It is the first time that stablecoins will be available in ready-to-consume digital wallets outside the parallel cryptocurrency ecosystem. Mercado Livre has around 100 million users and Facebook nearly 3 billion around the world. The next step is for users’ cryptocurrencies and stablecoins to be used for payment.

When stablecoins (or other cryptocurrencies) are used for cross-border payments, there will be a leap in practicality with less bureaucracy and transaction costs, as there is no exchange closing. For the first time, international transactions will be able to be carried out almost frictionless, instantly, in a payment method that is accepted worldwide.

Developments in recent years have prompted central banks to improve their own centralized payment systems and envision the digital version of their official currency.

Nothing like competition to improve services. In Brazil, the first step was the Pix (“front end”), a spectacular success in terms of acceptance. The next step, the “back end”, is the digital real, which will circulate pari passu to the real bills.

The problem is that deploying the digital real is incredibly challenging. The digital real, if implemented as in the preliminary discussions of CBDCs in the rest of the world, will encourage depositors to withdraw from banks to their digital wallets.

After all, a BC digital currency is less risky, cheaper and more utilitarian than a bank account deposit. The loss of deposits will cause an immediate and forced reduction of bank loans, causing a highly recessive transitory effect.

Could be worse. In a paper published at the Mont Pelerin Society conference this month, economist Fernando Ulrich argues that the digital real will mean “monetary absolutism”, allowing expiration dates for your money, locks, negative interest rates, state oversight of all transactions , and other violations.

It is possible that the democratic process will impede the advance of the state digital real, but private payment technology will not stop evolving. If the BC tries to block its advance through coercion and fails to improve its currency and payments services, the real could be “disrupted” for obsolescence.