How did Brazil, a country that until recently was heavily dependent on cash, reach a point where its politicians are now considering eliminating it altogether? One of the answers is a three-letter word that is now ubiquitous across the country: Pix.
It is interesting to watch the starkly different approaches being taken by governments around the world when it comes to managing the role of cash in today’s rapidly digitising economies. The government of Sweden, one of the world’s most cashless economies, has passed legislation to protect access to cash while neighbouring Norway is considering strengthening the right to use cash in retail settings, after cash usage in both countries has dropped to an alarming low.
Slovakia’s government has enshrined the right to pay in cash in the national constitution. Other governments, including Switzerland’s and Austria’s, could end up doing the same. In the US, the state of Florida has passed legislation seeking to prohibit the use of a federally sanctioned central bank digital currency as money. Italy’s Meloni government has raised the ceiling for cash payments to €5,000, from €2,000, despite sharp criticism from the Bank of Italy and the European Commission. Austria refuses to place any ceiling at all.
Other governments, like the UK’s, are happy to stand by and watch as cash dies a slow, quiet death at the hands of the banks, tech giants, fintechs, big box retailers and payment processors. In Australia, the big banks are withdrawing cash services from many of their branches and imposing all sorts of restrictions on cash withdrawals without even a whimper of complaint from the government or regulators. As in the UK, a public backlash is brewing.
Calling for an End to Cash
In Ukraine, one of Europe’s most cash-dependent economies, the Zelensky government has unveiled plans to eliminate physical money altogether, as part of a hare-brained scheme to stamp out rampant corruption. Zelensky is reportedly “very determined” to move Ukraine, a country still suffering from waves of rolling power blackouts and internet outages, towards a cashless economy as swiftly as possible. And he apparently has the full support of Australia’s richest man.
Latin America’s largest economy, Brazil, may be on a similar path, albeit with probably greater likelihood of actually reaching the destination. Last week, it was revealed that the country’s Chamber of Deputies is mulling a number of legislative proposals calling for an end to the printing, minting and circulation of physical notes and coins. According to Brazilian online newspaper R7 Notícias, three of the bills in question call for all financial transactions to be exclusively digital as demand for physical currency dwindles.
The first proposal, presented way back in 2016 by deputy Gilberto Nascimento of the Social Democratic Party, seeks to eliminate the use of coins and cash bills completely. All financial transactions, it says, should be carried out virtually, through applications and electronic platforms. The bill is under consideration by the Constitution, Justice and Citizenship Committee.
The second proposal, tabled by Paulo Ramos in 2020, a former deputy of the Democratic Labour Party, prescribes a more incremental approach. First, the three largest denomination bills (R$50, R$100 and R$200) should be abolished, and then over the next two years the remaining banknotes and coins should be gradually phased out, This project has been under discussion in the Finance and Taxation Committee since last year.
The third proposal, also from 2020, is under the purview of the Economic Development Commission. Proposed by Reginaldo Lopes, the current leader of the governing PT caucus in the Chamber of Deputies, recommends setting a “deadline for the elimination of all production, circulation and use of cash and that all financial transactions after that date take place only through the digital realm.”
The Power of Pix
Although all three of the proposals were presented by current or former members of Brazilian President Luiz Inácio Lula da Silva’s Workers’ Party or its current coalition partners, it is not clear, at least to me, what Lula’s government’s actual position is on the question of cash’s future.
Nonetheless, one can’t help wondering: how did Brazil, an emerging market economy that, like most countries in Latin America, was heavily dependent on cash until just three years ago, reach a point where the amount of cash in circulation is steadily falling and at least three legislative committees are considering proposals to eliminate cash altogether in the not-too-distant-future? One of the answers to that question is a three-letter word that has become ubiquitous throughout Brazil: Pix.
Launched by the Central Bank of Brazil in November 2020, Pix is, in the central bank’s own words, “an instant payment scheme that enables its users — people, companies and governmental entities — to send or receive payment transfers in few seconds at any time, including non-business days.” Carrying zero fees for individual customers and low costs for businesses (at least for now), the instant payment scheme has been an instant success. From El País (translated by yours truly):
The word Pix is one of the most spoken words by Brazilians, whether rich or poor, urban dweller or villager, with or without a phone line or electricity. They have embraced the instant payment system … so enthusiastically that it has become the most commonly used form of payment, ahead of (cash), credit and debit cards.* On a Thursday in April it clocked 120 million transactions in 24 hours.
It is used for everything. To pay the plumber, pay for lunch, drinks in the street bars, the electricity bill, a family vacation or buy jewellery on Instagram from indigenous artisans. As proof of its prevelance, in São Paulo, where cash is on its way to becoming a rarity, there are many homeless people who write down their Pix code on a cardboard for anyone who wants to give them a few real. Small entrepreneurs and micro-entrepreneurs are delighted; so too are the banks, because what they lose in commissions they gain in new customers.
Pix, as El País notes, was born during the COVID-19 pandemic, though it was designed, developed and piloted in the preceding years. The rate of uptake has been nothing short of blistering, with Pix now boasting 146 million users, 134 million of them individuals (roughly two thirds of the population) and 12 million, companies.
But that still means that around a third of Brazilians are not using it. Many of them will still be using cash, whose future seems somewhat less bright. Between 2013 and 2022, the total amount of cash withdrawn from branches and ATMs annually more than halved, from BRL 4.8 trillion to BRL 2.1 trillion.
“Brazilians are adopting digital payments faster than anyone else,” trumpeted an article by the World Economic Forum last year. There are plenty of reasons for this, including an almost three-fold increase in the number of authorised financial institutions in the country since 2020. These newly created FinTech companies, together with Central Bank-led initiatives such as Pix, are “providing access to bank accounts for the first time to millions of people,” the WEF report notes.
Pix has its drawbacks, however, particularly when it comes to security:
[C]riminals have managed to take advantage of it. Cell phone theft has increased in some large cities and the police point out that the real target is not the device itself but the possibility of using it to empty bank accounts via Pix.
The central bank has apparently tightened Pix’s security in recent months. One would certainly hope so, given that one of the most frequent arguments for replacing cash with digital money alternatives is to help reduce crime, rather than making it easier and a lot more lucrative. In August 2021 UOL reported an explosion in the incidence of “express kidnappings” in Sao Paulo following the launch of the instant payments solution. In March of this year, the global tech blog Rest of World published an article on a worrying new trend sweeping many of Brazil’s cities — “Tinder robberies”:
João Eleutério da Silva, a 51-year-old man from São Paulo, has changed his dating habits on Tinder over the past year and a half. He’s afraid of becoming another victim of the recent spate of kidnappings, money transfer scams, and even homicides — all of which start by luring men like him on dating apps. So, when his Tinder match, a woman decades younger than him, showed intense interest but refused to meet in public, he became suspicious. “The offer [of company] was too easy,” da Silva told Rest of World. “I didn’t feel safe and ended up not following up with the conversation.”
His behavior is not unwarranted: Police statistics show that nine out of 10 kidnappings in São Paulo in the past year have occurred after a date was arranged through Tinder and similar apps. According to Eduardo Bernardo Pereira, a police officer from the São Paulo anti-kidnapping division, men like da Silva — ranging from 30 to 65 years old — are the main targets. The fear over what have become known as “Tinder robberies” has left thousands of Brazilians on dating apps to devise their own safety measures…
The rise in scams has coincided with the widespread adoption of two forms of technology: dating apps and mobile payment. A combination of recent factors has made men particularly vulnerable to this form of scam in Brazil. Criminals use fake dating app profiles to lure unsuspecting targets to a private place with ease, and then take their money using PIX — an instant QR payment method used by 67% of Brazilians. Criminals have found they can use PIX to extract large quantities of cash from the victims they scam using apps like Tinder…
For many Brazilians, the popular PIX app is a fast and efficient mode of payment. It is this very efficiency and ease of use that have made it the perfect tool for these sorts of scams. Though the Central Bank of Brazil categorically states each transaction is completely traceable, authorities still need additional corroborating evidence — say, CCTV footage — to be able to confirm that any given transaction was the result of coercion. This is why Tinder scammers are not only adamant about meeting potential victims in quiet and secluded areas, but also take extra precautions, such as using bank accounts that don’t belong to them, to quickly distribute the money and make traceability even harder, Fabio Assolini, head of research at Kaspersky Latin America, a cybersecurity company, told Rest of World.
Although the almost 10% fall in circulation of notes and coins over the past three years almost perfectly coincides with the launch of Pix, the Central Bank of Brazil does not attribute the drop in cash use to the roll out of the instant payments system, arguing that it will take more time “to clearly map out” the evolution of its impacts. The economist Luis Oreiro begs to differ, telling R7 Notícias:
There is no need for banknotes. Nowadays, most transactions are done electronically, either through debit and credit cards or through Pix. I imagine that the reduction in the volume of banknotes was due to Pix, which is an electronic transfer system.
Oreiro believes that the decline of cash use is likely to further accelerate following the upcoming launch of Brazil’s central bank digital currency, which was officially given a name by the central bank earlier this month: Drex. Here’s an excerpt of the official English-language press release:
Drex arrives to make life easier for Brazilians. With a new logo, the Brazilian digital currency project (CBDC), created and operated by Banco Central do Brasil (BCB), has been renamed “Drex”. Previously referred to as Real Digital, it will provide a secure and regulated environment for developing new businesses and more democratic access to the benefits of the economy’s digitalization, both for individuals and entrepreneurs.
The logo, developed by the BCB, is a combination of letters that forms a word with a strong and modern sound: “d” and “r” allude to the Real Digital; “e” stands for electronic, and “x” conveys the idea of modernity and connection, as well as the Distributed Ledger Technology (DLT) that underpins Drex.
Drex’s visual concept fits into the context of the modernization agenda carried out by the BCB (Agenda BC#) and uses graphic and typographical elements that refer to the digital universe.
The CBDC is currently in the pilot phase, the final stage of the development process, and according to R7 is expected to go live in late 2024. In July, a blockchain developer claimed to have reverse-engineered Brazil’s pilot CBDC, reports the German financial journalist Norbert Häring:
In Brazil, after the source code of the planned Real Digi (NC: recently renamed Drex) was published, the Portal do Bitcoin found that it contains features that allow any entity authorised by the central bank to freeze, confiscate, or move funds belonging to any “owner.” I put “owner” in quotation marks because in this system, you have limited control over your assets if they are managed in these ledgers.
According to a report by the news portal tkp.at, the Brazilian central bank has confirmed the functions and reassuringly announced that not all functions of the test version would be included in the final version. But why test such functions if you don’t want to use them? Even if they should not be included in the code at the first release of the CBDC, for fear of protests, they could be added later at any time.
Interestingly, according to the Atlantic Council’s global CBDC tracker, one of the go-to resources for keeping tabs on CBDC trends and developments, Brazil’s CBDC program is not even at the pilot stage, which would suggest that the tracker needs to do some catching up.
Even more interesting, of the 21 countries that have reached the pilot stage of development according to the CBDC tracker (22 if you include Brazil), eight of them (nine if you include Brazil) are BRICS members. They include, of course, China, which has been working on a digital yuan since 2014 and is closer than any G20 economy to launching a full-fledged CBDC. The other BRICS members that are also piloting CBDCs are Brazil, India, Russia, South Africa, Saudi Arabia, Iran, the United Arab Emirates.
In other words, the BRICS economies — with the two obvious exceptions of Argentina and Ethiopia — are leagues ahead of most economies in the so-called Collective west when it comes to developing CBDCs. In fact, the only “Western” central banks that have so far reached the pilot stage of CBDC development are the Reserve Bank of Australia and Sweden’s Riksbank.