Meeting

C. Peter McColough Series on International Economics With Roberto Campos Neto

Monday, April 15, 2024
REUTERS/Ueslei Marcelino
Speaker

Governor, Central Bank of Brazil

Presider

Senior Fellow, Foreign Policy Institute, Johns Hopkins University’s School of Advanced International Studies (SAIS)

Roberto Campos Neto discusses Brazil Central Bank’s priorities for the digital agenda in 2024, and prospects for Brazil’s economy.

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

LIPSKY: So welcome, everyone. Welcome to today’s Council on Foreign Relations meeting with Brazil’s Central Bank governor, Roberto Campos Neto. Now, this meeting is part of the C. Peter McColough Series on International Economics. I’m John Lipsky, senior fellow at the Foreign Policy Institute at Johns Hopkins University’s School of Advanced International Studies, SAIS, and I’ll be presiding at today’s session.

We’re joined today by CFR members attending here in person, as you can see, but also virtually via Zoom. So we will have time—the governor is going to make some remarks, then we will have time—he and I will have some discussion, as is typical in this format, and then we will take questions from the floor and also from participants on Zoom.

And before I—before I invite the governor to join us, two things. First, I’m told by Council staff that as near as they can tell this is the first visit of a Brazilian Central Bank governor to the Council on Foreign Relations. So I’d say—(applause)—so the moment is historic. Thank you. Second, you will find, of course, a biography of the—of the governor’s—perhaps you’ve hopefully already read it; very impressive, and I assume all correct. My name is there; it’s not all correct. (Laughter.) I was not the first deputy—(laughs)—managing director of the IMF from 2006 to 2020. It stopped after my five-year term in 2011, so just to clarify that.

Now, I don’t want to embarrass the governor before we call him up here, but I’m going to risk it by showing—in case you didn’t know, here is LatinFinance naming the governor the Central Bank Governor of the Year at the time of the annual meetings last year. And it contains such reference as citing his adroit management of monetary policy to bring down inflation as a main reason why his performance was by far the best of any central bank governor in Latin America and the Caribbean. (Applause.) And this—and this in a period in which the challenges for central bank governors have not been—have not been trivial.

Now, proceeding, by the way, this session is on the record. And this—when we come to Q&A, keep that in mind.

Now I’m going to invite the governor here. He’s got a presentation to share about—that I think you’re going to find of great interest, and then we’ll have a discussion. Governor, welcome. (Applause.) Now history will be made. (Laughs.)

CAMPOS NETO: My mic—my mic is working here, right?

Actually, I was told to talk about innovation, so some of you, like Harry (sp), will be kind of bored. But I can answer your questions after that. (Laughter.)

And we have—we’ve done an extensive agenda of innovation. It’s in the fifth year now, going to the sixth year. And it’s amazing the things that the central bank had been—had been doing in the past and what we have been able to add on the top of it.

But the first thing that we did when we were thinking about what would be the financial intermediation of the future was really ask the question: What is it going to look like? And we had in mind that it would be much more digital, but we don’t know by—we didn’t know by how. We had in mind that you’d have more and more digital property and digital assets, but we really didn’t know how that would evolve. And we knew that the only way to include people—to be inclusive and sustainable was to add more technology. A lot of the lower population—population of lower income were not included because they had such a small ticket and such a small participation that without technology we wouldn’t be able to include them. So the idea is we wanted to have something that was competitive, generated competition, lowered the barrier of entry for smaller banks and smaller companies, that was inclusive and sustainable.

So the first thing that we asked ourselves is, you know, we are in this digital world transformation, and in reality people are looking for representation—digital representation of an asset of some form. And basically, what we have seen—what we see happening is people get an asset, put any encryption around it, and then put on a—on some kind of platform, blockchain platform or ledger, and that has become much more efficient. And we have a lot of things that tells us that this is more efficient.

And so the real question was not whether crypto is good or bad or we believe in crypto; it was more thinking that are we moving to a tokenized economy. That was the main question. And the answer is yes, we think we are moving to a tokenized economy. It’s happening—it’s actually happening in some parts faster than we expected and some other parts are happening slower.

So I would go to this graph. This is probably a summary of everything that we are doing in five years, so you can get five years in one graph here. The idea is how can I make that change. The first thing we needed to know—we needed to do is we needed to have this real of payments or any kind of real in which actually people were engaged and people would be able to see the advantage—that their life’s becoming easier, the cost of transaction is becoming lower and more efficient. And at the time, we were looking at the kinds of payments and exchange of values that were happening, and we look a lot at gamers. Gamers, you know, are doing a lot of transactions through kind of blockchain format, and there was a lot of monetization of scores in gaming.

And all the surveys that we looked at that said what are you looking in a—in a payments system, and there was always five things that happen. They want it to be fast, cheap, transparent, secure, and open. This is, basically, what people are looking at. So we said we need to start our—you know, our journey engaging people, and then we developed Pix, which an instant payment that has reached wide—very wide usage. We just broke record three days ago; we did 201 million transactions in one day. If you look at the bankerized population of Brazil, it is around 103, 104 million, so it’s more than one transaction per person per day. So if you compare with UPI of India, for example, and you—and we look at per capita, it’s between three and four times more—and it’s a much newer system. So it’s really had a very wide usage.

But the biggest thing when constructing the Pix which I think was not there in some of these other things is how can we integrate Pix to this idea of tokenization. Well, it needed to be programmable. That was the main thing. So if you look at UPI or if you look at some of the white papers that I’ve seen for systems in other places, they are non-programmable. And what’s the problem of having instant payment that is non-programmable? That’s a big problem because if you have a digital currency you’re not going to be able to interact the digital currency with the instant payment in a very efficient way. Plus, when you have a programmable real you can add new features. And actually, when we started doing Pix, we knew how it would start but we didn’t know how it would end. And we keep adding new features into Pix, and you can solve a lot of the day-to-day problems just by understanding how programmable it can be. So that was the first part.

The second part was, OK—and I would refer back to a presentation that I did in 2019, and people actually thought it was a joke. I had this question saying what is the fastest way to transfer 1 million pound(s) from São Paulo to London. And one of the—it was a multiple-choice question, and one of the answers was by plane. (Laughter.) So people thought that it was a joke. That was actually the fastest way to transfer the money, right? So we had at the time Swift, which was T+2. And so when we look at what we have done—our environment, our, you know, ecosystem—we haven’t been able to evolve a lot on transferring cross-border. You have some systems now that are working well. There was a system called Nexus that is linking India to Singapore and some other places, and it’s working well. But we don’t have a wide system of cross-border transfer. And actually, if we did have, it would make a lot of things much easier. You would lose the friction in trade and we would actually solve a lot of the problems that we’re having today.

I still see a lot of debates on what is the currency of the future—whether the dollar will prevail, the renminbi will prevail. Well, guess what? If you have an instant payment system globally that settles instantly, then the currency doesn’t matter anymore, right? It’s the digital token that matters. So when you talk about—when you talk about this, we’re going to the debates that we had at the BIS. And the debates were, OK, this is very difficult to do; why? And we had three problems to solve.

The first one is we needed a system. And when you talked about the system, the thing is you need to have a system that worked well and it was very scalable. You would need a system that would do well not only between DLT to DLT, but also to centralized systems to DLT. And we could, at the time—that was two years ago. At that time you had good systems from DLT to DLT, but if you were to transfer DLT to centralized systems, because you have a recursive effect on the DLT platform to expose all the nodes, it would become not—it would not become scalable. So, OK, that was a big problem. We had the technology, but we couldn’t link systems of different characteristics. Well, that was solved. Now you have these systems that people call containers which basically can link anything, and it’s just as fast, and it’s just as scalable.

The second problem was, OK, now we have the system, it’s very easy to do a digital transfer, but we need to do the settlement. So we didn’t know how to do the settlement. And so it so happens that we now have a solution for that, too. You can have the liquidity token pools. So the central banks who have tokens that were deposit in some kind of pool, and we can do instant settlement even during the weekend. So that is now possible too.

But then came the third problem, which we haven’t solved, which in the beginning for us was—we considered to be the easiest and now we realize it’s the most difficult, which is the governance. So, for example, when you look at the AML and everything that relates to know your client and so on and so forth, every country has a different way of seeing it. Now, if you’re going to have a system that links everybody instantly, it’s very difficult for us to have monitoring of what, you know, happens in every point of the transaction. So that’s one dimension of the governance problems.

The second one is taxes. So, depending on the country, you pay taxes depending on whether you are foreign or you’re a citizen, depending on if you’re a company or you’re a person. So different countries have different tax regulations. And when we connect the system, the system won’t be able to interpret that because it’s very fast. It’s instant, and you have millions and billions of transaction.

And the third part, which became obvious when you started the conversation, is what we call the liquidity gates. So would you be—if you are a government, would you be comfortable with a citizen of your country saying: You know what, I think I want to get all of my money out of this bank and I just want to buy a CD from a foreign bank, and I just want to move all my liquidity there? What happens if the system has the ability of moving huge pools of liquidity instantly? So that was the third problem.

So we are working on the governance. This is part of the work that we are doing in the G-20.

OK. So I talked about the Pix. I talk about internationalization of the currency. But then probably the biggest, the most important bloc of these four is the open finance one, because now we have a real and we are trying to internationalize the real. But for this real to actually have advantage for people you need to have a place in which you can compare data from your bank accounts, from the products that you consume—the financial products. And the idea here is that you want to have an environment in which you can have instant comparability and portability. So you don’t want to have one app of every bank in your cell anymore; you want to have access to some kind of marketplace, and you can migrate all your data to that marketplace, and you can do instant comparability and portability of products. That would reduce a lot the cost of entry. And also, you’re going to have better products more tailor-made for you.

And then the end, the last—the last part of it is the Drex, which is the digital currency, which in our case—and there’s a long explanation, a long process, but when we had the debate on the digital currencies mostly the problem around building digital currencies, what happens when you have digital currency that influences the asset liability aspect of the balance sheet of the central bank? That’s a problem, right? And at the end, if I have that, nothing guarantees me that as people exchange more and more I won’t be eroding the ability of banks to do credit. So that needed to be fixed. And we had endless—we had endless debates at the BIS on how to fix that and a lot of ideas came around.

One was we want to limit the ability in which people can exchange money. And I thought at that time this idea is not so good because imagine if I tell you that it’s—the value can be converted back at any time at par? Obviously, it becomes a game theory thing, and you can go there if you’re informed, and you can exchange more. And at the end, imagining myself going to Congress, explaining, congresspeople, that the people who had the information had exchanged all the money first, and now they have a money that trades at premium? Impossible to explain that.

Then people said, but we can do negative interest rate on that so that we can equate demand and supply. And immediately my head was like, imagine calibrating interest rate every day to make demand equal to—I mean, this is impossible.

So that question was not answered, and it’s still not answered. In Europe, for example, you have a limited amount of money that you can transfer. And we thought at the time there is a much easier way to solve this problem: What if the money, the digital money, is a token deposit, so the banks who block a deposit issue a token on that? If I do that, then the banks don’t get disintermediated. And it has a lot of dimensions of facilities that the other proposal doesn’t have. I will concentrate on three here.

First one, the complexity of building regulation around a new digital money is very difficult, but if it’s just the tokenized deposits it inherits all the regulation from deposits. And this is already done, so we don’t need to go to Congress and pass different laws, and that becomes very easy.

The second aspect of it is once insert the tokenization concept into the balance sheet of the banks, they become much more efficient because they will start looking at asset liabilities on a token basis, not on an account base. And there has been many pilots that have shown that this increases efficiency in asset management, in risk management, in funding, in management of collateral, and so on and so forth.

And the third dimension, which is particularly important in Brazil, is that we have this huge friction of contracts and registration. So if you buy an apartment in the U.S., you probably have experienced the fact that you have to have escrow account, and then you have to have a lawyer on one side and a lawyer on the other side. Sometimes—and that actually happened to me—you need to have an agent that controls the escrow account. In Brazil, if you buy a property you need to register, and it’s very expensive. Depending on the value of the property, it can go, you know, as a very relevant percentage. And if you have everything controlled on a DLT platform, the only thing you need to have your contract and registration is a printer at home, because everything is there and it’s very transparent. Also, if you want to use your asset against a loan, the divisibility is immediately transparent. You can control the divisibility and you can see everything in a much more transparent way. So you have a lot of improvement in the friction that we have today in doing business. So that’s the last part of it.

So we close this idea with something that I have extensive real. I can internationalize the real. I can have it in a way that people start thinking about banking in these marketplaces of finance and style of marketplace of finance. And then the two things that we still have not solved, which is how can I use all the data that are produced to actually make people’s life better. So that comes the idea of inserting blocs of artificial intelligence into the process, into the marketplace, and this is something that we are examining now. And the second part, which is—we haven’t solved, is we haven’t solved the data monetization. Today, we produce a lot of data. If we think in a way of savings, you almost, like, have a savings account, the data that you produce all—you know, all throughout your life, but you’re never able to monetize there. So the idea is how the marketplace can actually collect data in a way in which you can exchange that for tokens.

So I gave a pretty good picture. I only had fifteen minutes. I want to pass through the main concepts, so I have talked about that.

So this is a little bit the difference between Pix, what happened to Pix, and other countries. And you can see here how intensive the adoption of Pix was compared to other places. We can see the growth. We can see that we have been going to higher tickets, to smaller tickets, so more and more people are using on their daily lives. I like the graph on the right, which basically shows that as we introduce Pix you had millions and millions of banks—bank accounts that are opened, which means that the Pix actually bankerize people. Today, you can have, you know, people asking for money on the streets and accepting Pix in Brazil, and it happens quite often, actually.

And we have all the collateral things. So a lot of people send Pix of one cent to each other because they want to make sure they read the message, right? (Laughter.) And so we had this boyfriend/girlfriend effect. You know, each one would send—you know, would send a Pix of a very low value, because you know that when someone is sending money to you, you want to know, you know? You want to know. (Laughs.) So we have these externalities.

So we have 71.5 million new users included with Pix. I don’t have time to go to all the functionalities, but you know, because the system is programmable you can do a lot of things. Now we’re going to a phase of installing the automatic Pix, which is basically, if you have, like, a Netflix or Spotify kind of bills that you have to pay every month, you can program everything in Pix. We want to eventually do the reverse, which is the blocking of the transaction, because then Pix would be able to do the same function as a credit card does today but with much less friction so we can do that also on the platform. I already talked about the internationalization. And I will—oh, these are interesting numbers. We had more than 68 billion API calls. That’s people actually calling a bank to get information into another bank. So today in Brazil, even though we don’t have those marketplaces of finance yet, what you can do is you can call a bank and ask for transfer information and you can compare the information on the platform of a third bank. So you can do that already. Actually, there’s a challenge of having homogenous data but we are working on that. We’re also extending that concept to capital markets so CVMs working on what we call the open capital markets. I already talked about the Drex a lot. This is how Drex would look into the balance sheet. It’s pretty basic, like I said; it’s a bank that blocks a deposit, issues a token on the deposit. It’s a wholesale operation but it’s also a retail operation because people can use it on a daily basis and you can clear everything in the same platform that today we clear deposits. So it’s pretty easy.

This is the schedule. And I will try to focus on this. This is what a marketplace would look like. So you would have one app; you’d go to your app and you have Bank A, B, and C, and imagine you want to, you know, pay something on the street, so you press Pix. You can choose whether you want to do debit or credit. If you want to do debit, it shows the balance of your banks. If you want to do credit, it’s going to show you the credit line that you have in every bank, and the banks will compete for that transaction online, and you have a lot of recursive algos that will do that. If you have equity and you have the—(inaudible)—of Bank A, all of a sudden you can get a message from Bank B saying: You know what? I can do cheaper for you. And you can transfer just by pressing the button. So that’s instant comparability and portability. You can switch between the digital money and the physical money there. You have the open financing, which you can arrange the way you want to see data. And today, when you talk to investment bankers, they sell this product to clients called cash management; so, basically, here you can do cash management for anybody for free because it’s done digitally.

I already talked about artificial intelligence. I think—I think, for now, that’s it. I wanted to give you a clear picture. Thank you. (Applause.)

LIPSKY: OK.

CAMPOS NETO: So you can ask questions about anything.

LIPSKY: (Laughs.) Well, first, we’re going to—I want to ask a few clarifying things about this and then we’ll move on. I’ll bet there are lots of questions about all kinds of things. Thanks very much.

Does everybody got all that clear? (Laughter.) Heads aren’t spinning yet?

Let me ask just a few clarifying questions, because it’s really impressive.

Pix is phone-based essentially, or computer-based? How do you access if you’re the individual?

CAMPOS NETO: Yeah, Pix was programmed in the central bank but we have a standardization in which every bank offers in the platform, by obligation, so when you enter in the app of your bank, there’s going to be a function called Pix and then you can make the transfer. And by construction, Pix is free for everybody, so the banks cannot charge for Pix. They can charge for companies but they cannot charge for individuals.

LIPSKY: But it has to be—it’s through banks.

CAMPOS NETO: It’s through banks.

LIPSKY: Only through banks. It’s not like Alipay.

CAMPOS NETO: No, no, no. It’s through banks. Yeah.

LIPSKY: It’s a completely bank-based system.

CAMPOS NETO: Well, you always have to move the money from one account to the other. So all the systems out there have to have an account of exit and an account that is recipient of the money. Pix is the same.

LIPSKY: So to use the system you have to have an account in a bank.

CAMPOS NETO: That’s why I showed the graph of people—there were more than 12 million bank accounts are open because of that.

LIPSKY: And is that system—well, you just said it. It’s expanding. It really wasn’t necessarily designed to be, like in India or like in Kenya, a very—an extremely simple system. What you’ve described is something that will become very sophisticated, right?

CAMPOS NETO: Yeah, I think India had a different purpose—first, India did it much before we did, and then they had a different purpose. They wanted—the system was designed because they wanted to digitalize government services. They wanted to have a digital ID.

LIPSKY: Exactly.

CAMPOS NETO: So the focus of the system was not being programmable or interacting with tokens. It was more, I want to make sure that people have cheaper access to government services through a platform. Our design was completely different. Our design was looking at the digitalization of the financial intermediation.

LIPSKY: But you say it’s going to be, it already has been and will be useful in terms of financial inclusion?

CAMPOS NETO: Yes. Yes.

LIPSKY: And you expect it to be quite broad?

CAMPOS NETO: Yes. And we are seeing that because you have a lot of different businesses that only exist because of Pix. I can give you many examples. Like during the pandemic, people were manufacturing masks at home and the unit value of a mask is very low so if you had to pay for the transfer, you wouldn’t be able to do that. But because Pix is free for everybody, we had a lot of people who lived off producing things of very small value. So a lot of new business models came around.

LIPSKY: Then on the internationalization, part of the problem, of course, is essentially know your customer, anti-money laundering, financial stability—is that still a work in progress?

CAMPOS NETO: Yeah, so it’s a very good question. We are trying to see if we can make that a deliverable in the G-20. I have—I’m working on that with the president of the central bank of Italy, Draghi. And the idea that we had was: Why don’t we have a general taxonomy for international transfers? So you’re going to have, you know, a group of regulation that you must be—you must conform to that if you want to participate in the group of banks or countries that will join the project. And the idea is talking to different countries and see if we can get, like, you know, fifteen or twenty countries with this common taxonomy; I think the others will join.

The more—the more complex things—when I talk to countries—is when they need to change the tax system, because changing tax system requires sending a bill to congress and some countries said I really want to join the project, but—to change the tax system. But I think if this system becomes global, all the countries will want to change their laws to be able to be included in that, because the efficiency you get from that is huge.

LIPSKY: Yeah. But it’s not going to happen tomorrow.

CAMPOS NETO: It’s not going to happen tomorrow.

LIPSKY: But now your digital currency, Drex, is that offered—is that a project of the central bank? And if so, if the digital currency is going to be a central bank digital currency, how does the public access it? Again, through banks like Pix?

CAMPOS NETO: Yes. You can access through banks. It is a project of the central bank but this is the project that the banks are participating the most, because for the banks it is very interesting to be able to issue tokens based on deposits. So I would say a huge part of this project is actually funded by banks. What we do is we set up these standards and we tell banks, this is the way we think it should work. And we guarantee them money in the same way that we guarantee the deposits, and today we have, in the central bank, a layer of settlement for deposits; we just build a digital layer on top of that to settle the digital deposits. So it’s very easy compared to what would look like to create a digital currency from zero.

LIPSKY: Yeah. But in simple terms, the public will not have a bank account at the central bank.

CAMPOS NETO: No, no, no, no, no.

LIPSKY: Again, this is all—

CAMPOS NETO: This is very important, very clear. There is not going to be a bank account in the central bank. There is not going to be a privacy issue because the currency is nothing but a tokenized deposit, so it’s based on a deposit that people already have in the bank.

LIPSKY: And when you talk about tokenization—that means that the transactions will be transacting tokens, whereas the underlying deposit remains stable?

CAMPOS NETO: Yeah, exactly. It will be transacted on a DLT platform. We chose one that’s called Hyperledger Besu. I can go on a little bit more explaining how the nodes work and the oracle, but I think it will be highly technical.

LIPSKY: Yeah.

CAMPOS NETO: If you want, I can do that. And also, we can explain how we’re going to have different layers so that you protect privacy when you do the transactions. But that would be more technical. But I can do that, if you want to.

LIPSKY: Well, I think a question here is, this sounds—this is a very sophisticated system that you’re headed for. Is it going to be too hard for the average citizen to understand and use—

CAMPOS NETO: No.

LIPSKY: —or can it be designed in a way that it will—the efficiencies will actually benefit the average user?

CAMPOS NETO: So the idea is that the journey for the person who uses it is very easy, just like Pix. So Pix is a very easy journey. You go into there, and the way Pix was constructed was that, if you have a cell phone and you want to transfer money to someone, you need a key. But if that key is in your cell phone, in your agenda, either because it’s an ID number or because the cell phone of anybody, what the system does is just compares the agenda of your phone to a center of data that we have in the central bank, and when we have a match, it automatically identifies that that person has that key, and it makes it very easy for you because you don’t want to type a lot of numbers in Pix. You just go there and you press Pix, and eventually you’re going to be able to get from your agenda if that is a key or not, and then you just press transfer and you go.

But the idea was to make it as user friendly as possible; the same with Drex, so we’re going to be able to go there and get a token from the bank in the system. I showed an idea of how you can just turn one to the other. And I think in the beginning, people would like to use the Drex to pay for things that you have to do, contracts or registration because it becomes costless, it becomes much more transparent, and it’s very safe because it’s there on a platform, you bought that asset, and so on and so forth.

I always use the example, also, of used cars. So in Brazil, this is a very common example used in Brazil. So you buy a used car from that store on the corner, and you don’t really trust the guy, so you don’t want to send him money before getting the papers signed. The guy doesn’t want to sign the paper before seeing the money in his account, so we have this problem. This is all solved at zero cost.

LIPSKY: That’s quite the—

CAMPOS NETO: Plus there is one thing—imagine you bought a piece of your estate, and you want to get money out of your estate, you can do auctions on the marketplace, you can do auctions based on your collateral, and the other banks will be able to bid for that collateral in exchange for a transaction.

LIPSKY: It’s at this point that heads start spinning, I think, in our audience—(laughter)—but let’s adventure into economic policy and its link to this, which is you’re the head of the central bank of a country that traditionally had an underdeveloped financial system, underbanked population, and now what you are proposing and starting to develop is something that is as sophisticated as exists anywhere in the world.

CAMPOS NETO: OK, yeah.

LIPSKY: What are the—what do you see as the economic policy benefits of this development?

CAMPOS NETO: So it’s the—

LIPSKY: What is the incentive? Why are you doing this?

CAMPOS NETO: It’s a very important question. I would say we are underbanked, for sure. I am not so sure that we are less developed because countries that have very high inflation, what happens through time is the banks develop a lot of mechanisms to protect people from inflation.

LIPSKY: You’re right, yeah.

CAMPOS NETO: So when you think about a Brazilian bank for a long time now, it has been much more technical in terms of the way you transfer money, you see your accounts, than for example banks in other places like the West. And that’s out of a necessity of protecting people from inflation. So that’s one thing.

Now what we are trying to do is we are trying to make sure that we have—we looked at the future of financial intermediation, and we understand that everything in credit and banking is about asymmetry of information. So if I have less information about you, I’ll probably have to charge you more for products or lending, and so what the technology does is it’s able to reduce the asymmetric information to an extent that, one, the products and the interactions become cheaper, more efficient and faster, and also you can include more people because I cannot have—I cannot afford to have someone looking at the credit of someone who has very little ticket. But if it’s all digital, then the cost of serving clients becomes very low, and so that’s why we have an inclusion. It’s about the cost of services for our client. When you are able to lower there, you can include more people and still be profitable.

LIPSKY: Can I venture one more step, which is this sounds like a system that will make markets much richer, much more profound—not just financial markets, but other transactions as you’ve described. Is this one way that financial policy can improve productivity in Brazil’s economy—

CAMPOS NETO: Yes.

LIPSKY: —or is that claiming too much?

CAMPOS NETO: No, that’s a very good question. The other day someone asked me, you know, what is the effect of Pix and everything that you are doing in terms of growth and productivity, and we haven’t thought about that because we were so busy trying to develop the other blocks, we haven’t thought about that yet.

LIPSKY: (Laughs.)

CAMPOS NETO: But I’m sure that it’s very positive because when you think that 12 million bank accounts were created, we have more than one billion new business—one million new businesses just created out of that, and when you look at the friction of transferring money, the cost has reduced so much, I think that has created a lot of efficiency. We don’t know—we haven’t measured—but we think this is just the beginning, because we still have to pick—so when you look at, for example, the open finance, and you see that you have the potential for these marketplaces of finance, I think the efficiency that you can get into the economies is very big, but we haven’t measured.

LIPSKY: And you need to take care for financial stability issues.

CAMPOS NETO: Yes, of course.

LIPSKY: But I know you’ve thought of that.

Well, as you can tell, this is very interesting. We could go on, but now it’s time to turn to the audience, and the governor has very magnanimously said he would—you can ask him anything about anything.

CAMPOS NETO: You control the questions—

LIPSKY: Exactly.

CAMPOS NETO: —and I control the answers. (Laughs.)

LIPSKY: He controls the answers. OK, here—right here in front, let’s just start.

Q: Donna Honeyhood (ph) on NWI (ph). Governor Campos, lovely to see you again.

Now moving from digital payments to the Brazilian real itself. Brazil is right now benefitting from commodity prices going up, obviously also as an oil exporter, and of course, as award-winning central banker, your policies—the BCB’s policies have kept nominal and real rates high in Brazil.

CAMPOS NETO: Uh-huh.

Q: Given all of these fundamentals, what exactly explains why the real is relatively weak?

CAMPOS NETO: Well, it’s relatively weak on the very short term. If you look at the more medium term, real is performing equal or better than its peers. And I think it has to do with the fact that now we are repricing fiscal equilibrium globally. And the problem when you are repricing that is that something that people didn’t pay attention before, which was the fiscal element, now is the focus of the debate.

I was in the—in the earlier debate—Harry (sp) was there—and I think just about everybody mentioned the word fiscal or some kind of development regarding the fiscal. So the problem right now is that what we’re seeing is the fiscal is going to come into play again, and this is the reality in the U.S., in Europe, in Japan, and in most emerging market countries.

And Brazil has a high debt and is dealing with a plan that tries to convey to people that we are serious about the fiscal path that we are creating. But because our fiscal numbers, especially when you look at the debt to GDP, are a bit—are higher, I think, when fiscal comes into play, it becomes more fragile. But I think that a lot of it is short-term movement. It has to do with, also, the markets. It has to do with the fact that Brazil is more liquid, and we had the repricing of the FX play globally, and when that happens, Brazil has a bit of a higher beta because it’s more liquid, so we are seeing some of that, too.

But I would say that, when you look at the trade balance, Brazil is definitely stronger than it was in the past. So we have been able to—in terms of food production, have been able to increase the production with the same land usage, which means that you see a lot of increasing productivity in the agriculture sector.

In the oil part, we are becoming more and more active, and becoming a bigger play globally. And in the mining part, also Brazil plays a very important part. So I think that when we add all that up, we see that we have a trade balance that, today—in the past, when it was 30 billion (dollars), it was, like, considered very good. Now if you say it’s going to be 80 billion (dollars) people say, oh, it could be better. So we are changing the level in that sense. I think that overall makes the currency more stable, but yes, now we are going through this phase of repricing of assets, and I think Brazil is suffering a little bit because of the fiscal dimension of the problem.

LIPSKY: Thank you. There in the back.

Q: Thank you, Governor—very interesting remarks. I’m Paul Skoczylas from the World Free Programme, just speaking on my own behalf.

I want to ask you a little bit on the de-dollarization and the idea of BRICS currencies. You mentioned it in your presentation, but in your opinion, do you think this will take hold over time, and also, in your opinion, from the perspective of Brazil or a country like that, what’s driving the desire for de-dollarization in your opinion? Thank you.

CAMPOS NETO: To be honest with you, I think this issue is less interesting than it seems because if you believe that we are moving to a system of transfers and payments that can be instant amongst different countries, the currency itself loses value because one of the things that—like when you talk to economists, one of the things about having a common area, or having a single currency or common currency is because you reduce a lot of friction in trade, and you improve the relationship when you exchange values or assets in these companies—in these countries.

Now, if you believe that everything is going to be about—this bigger part of it is going to be electronic, is going to be electronically transferred to a platform and it is going to be in a format of tokens, the currency itself doesn’t matter too much anymore because you’re going to have immediate convertibility of other currencies. So I think that issue becomes less interest than, actually, people make it. That’s my personal opinion.

LIPSKY: Right here? Yeah. Gentleman.

Q: Mike Derham, Novam Portam. Also a SAIS grad, so glad you are up there. (Laughter.)

You talked about the internationalization of Pix and the work that you are doing with the governor of the Bank of Italy. I’m curious if you would talk about kind of that further down the road, but if you go to Punta del Este or to Argentina at this point, you can pay with Pix—

CAMPOS NETO: Yeah.

Q: —in a lot of places. How is that—from a—both your relationship with your counterparts at BCRA or in Uruguay or elsewhere, and also on AML, how are you guy addressing that, that you are not having those leakages?

CAMPOS NETO: OK, so what we have today is people can pay Pix in different places, even in Paris people can pay Pix. But those are companies that are actually acting as intermediary, so if you have a bank account in Brazil, you can do Pix, and they transfer the money, and they take the certain risk against payment. This has happened in many countries already.

Now we have—what we have done in the case of Latin America is we said we’re going to open the source of Pix for any central bank that wants to come here and copy. So last year we had this period of time in which you had visit of many central banks, and we can open the coding and everything for anybody, and a lot of countries in Latin America said, you know, we actually want to adopt Pix. And we are in conversation with many countries, and they are very interested.

But if they don’t want to adopt Pix, and they want to adopt another payment system, we are also working on a solution to connect those because, you know, maybe they can have a different idea that works better for them, and we can connect them, because at the end, the solution to connect the systems—again, if you solve the governance issue, I think we can advance on those very fast.

LIPSKY: We have a question from online.

OPERATOR: We’ll take our next question from Arturo Porzecanski.

Q: Good afternoon, and thank you. The ink on the fiscal rule is barely dry, and it seems like the Lula administration is already seeking to change it, to loosen it. To what extent could this affect the path of monetary policy?

LIPSKY: (Laughs.)

CAMPOS NETO: Well, the hard questions begin to come. (Laughter.) So Arturo, the central banks, they try to refrain from commenting on fiscal policy as much as we can, but obviously there was an effect, I think, and I think it’s becoming clear, and even in the West, we’ve seen comments from the central banker in regards to that. This obviously makes our job a lot more difficult if there is a perception that there is no fiscal anchor because the fiscal anchor and the monetary anchor, they have to work together. So whenever you have a change in the government that makes the fiscal anchor less transparent or less believable, it means that you have to pay with higher costs on the other side. So the cost of the monetary policy becomes higher.

That being said, the market had a much worse number for the fiscal than actually what was the new target that was adopted. But I have been saying for a long time, and I continue to say that, that the idea is not to change the targets and to make sure that you do the most you can in terms of effort to achieve this target. And if you, for some reason, have to make a detour on that, it’s very important to communicate well because if people lose trust on the fiscal anchor, then the monetary anchor is affected, and we have seen that repeatedly in our history.

LIPSKY: Right here in front.

Q: Hi. Vanessa Gomes for Standard Chartered. And, Governor, it’s truly remarkable the work you have done in Brazil.

CAMPOS NETO: Thank you.

Q: And as a Brazilian citizen, I’m really proud.

But I just would like to make a question on Pix again. It’s really phenomenal, the adherence of the system in Brazil, and how easy, and how it has reduced friction. But what about the risks associated with crime and frauds that have been growing a lot associated to that? So how is the central bank looking at those risks, mitigating, and working with other banks in this issue? Thank you.

CAMPOS NETO: That’s a very good question. At the end, when you think about the system that is traceable and that is digital, and it is account based, the result from that should be that the fraud diminishes, not increases, and sometimes you see that the number—the fraud has increased, but you don’t take into consideration that you had a lot of other kinds of transactions that are not taking place any more. And on those, you had a much higher rate of fraud.

But if you think, in a perfect system in which you have no fake bank accounts, you have no—what you call passage bank accounts, so if you are able to know your client and make sure that every account actually belongs to the person, that actually is a real person, and responds for it, then the crime goes almost to zero because that would mean if I have to do a fraud on Pix on you, I had to transfer money from your account to mine, and people know that the account is mine. They will know my address, my phone number, and I will be caught immediately.

So what we need to work right now is to make sure that these fake accounts don’t exist, so what we are doing is increasing the surveillance on the banks to make sure that the system in which people open accounts are safer than what they are now because if you think, in a perfect world, if we eliminated these transactions, these passage accounts, then the fraud will go to zero because I’m not going to steal money from you and transfer it to my own account because people will know it’s me. So this is what we are working now. But I think at the end the system is safer than the one that we had before.

LIPSKY: Here.

Q: Name is Hari Huram (ph).

Governor, one somewhat emotional issue right now in global markets is the U.S.-led proposal to, in some intelligent fashion, securitize income on Russian assets which have been frozen to pay for Ukraine reconstruction. Now, I don’t know—I don’t have any comment on the morality or the nobleness of the project. The question, basically, is very simple. You, as a big central bank with a large foreign exchange reserve, what would your advice be to the advanced economies about the pros and cons of doing this?

CAMPOS NETO: That is a very tricky question and it involves external politics. But I would say that, for countries that have high reserves and invest the reserves abroad in different places, like in accounts in BIS, and so on and so forth, I think the moral hazard that can be created by that I think far, far exceed the benefits from actually using that to serve as a policy sign.

So I would—I would think that people need to understand that the whole system is based on the trust that once you accumulate reserve and you invest abroad, you can get your money when you needed to. So I’m not suggesting anything. I’m just saying, as a central banker who has reserves invested in different places, I worry that you can break this trust link, and then the whole financial system is based on how you accumulate assets and where you deposit your assets. So I think it’s a dangerous proposition.

LIPSKY: Yes, in the back there.

Q: Thank you very much. My name is Rory MacFarquhar. I’m from an investment fund called Gemsstock.

Your term is coming to a close. Could you comment on the succession process and the degree to which you are expecting continuity or change, both on the monetary policy side and on the whole digital agenda that you’ve laid out today?

CAMPOS NETO: OK, good question. So I fought a lot for the operational autonomy of the central bank. It was a very hard fight. We had to go to congress. It was difficult in congress; it was difficult in the senate. Then it was judicialized, so we had to go to the supreme court, and I had to talk to people in the supreme court. And it was a very, very difficult fight. But we were able to get it, and what it says there is that it is the prerogative of the president to choose the directors, changing two every year, and to choose the president of the central bank.

So I have decided that because of that—and that doesn’t make sense to me—to try to interfere in the process or to say whether the candidate A or B or C is better—I think, you know, what the law says is it’s the prerogative of the president, and he will have the liberty to do that, and also pay the price if the option is not good. And, you know, this is how the system works. And I fought for this very much.

But I have to say that the central bank is highly technical and a lot of the work is done by the technical teams. And the agenda of innovation was there when I got there. It was created by Ilan, which was my predecessor, which was an excellent president of the central bank, left the bar very high for me and, you know, what I tried—and the passage between Ilan and myself was very smooth. We worked together for like a month, a month and a half. And I think the best thing I can do right now is to do the same—so try not to interfere. I understand that this is a prerogative of the government, and regardless of who is chosen, I will try to make a smooth transaction, work with him, and again, I don’t see a lot of changes because I think the central bank is very technical, the central bank has a clear mandate. I think the autonomy of the central bank gives power to someone who sits in the chair to be independent of the government, and I hope that this will continue.

LIPSKY: Thanks. We have another online question.

OPERATOR: We’ll take our next question from Seema Mody. Ms. Mody, please accept the unmute now prompt.

Looks like we’re having technical difficulties with that line. We’ll take the next question from Professor Okome.

Q: Thank you very much.

I am wondering the extent to which there is interaction between Brazil and the BRICS countries in terms of coordination of these innovations.

Then I also wonder, if one were on the streets of Brazil, and I asked a banker and a businessperson and just an ordinary person on the street how are these innovations working out, what would they say?

CAMPOS NETO: OK. So the first part of the question was regarding BRICS, and BRICS has new members, and we’ve had a couple of meetings with the new members, and we are talking about doing systems and transferring money.

Obviously when you have countries that are sanctioning within a group, it makes some of the process much more difficult than it used to be in the past. I know we’re trying to see given the limitations what we can do.

And regarding asking people on the streets, I think people would tell you that Pix has actually opened a lot of doors for them, and I get that a lot. So I will give you an example. There is a small city—I’ve given this example before—it’s a small city called Tatarugaozim (ph), which is a very small city in a small state. And they didn’t have bank account, they didn’t have bank branches, and they didn’t have ATMs; they had nothing. So the way people pay their bills is someone would go there in the city in the beginning of the day, get the bills, and go to a different city to pay the bills. They were charged for that.

And the whole city now works on Pix, and I got a video from a woman that lives in the city saying that she created this small business, and the business was only able to be created because of Pix. And now that Pix has, you know, different business—you have people selling things, and so you can actually see how a simple thing that was created by the central bank—which by the way costed like $3 million—can change, you know, the life of people around, and how it can—you include new people, new business. And so I think the reaction from people would be very positive.

LIPSKY: One more. In the back there? Time for one more.

Q: Thank you. Drazhu Giacomeri (ph), Deutsche Bank.

This have been very unusual time for monetary policy. (Laughs.) Inflation accelerates into the cycle, labor markets get tighter, et cetera. And historically, Brazilian central banks had to hike rates when current account deficits worldwide and interest rates in the West would go up, right? So, historically, you had to defend the currency.

But as you said, the balance of payments in Brazil is great. The situation is quite solid. But still, the market’s pricing out all your easing, hmm? So the question is, then, do you see fiscal deficits as the new current account deficits of the past?

CAMPOS NETO: OK, so the first part of the question is on the repricing, and when you look at what’s happening in the U.S., for some period of time people were thinking that the rate cuts would start in March, and when that disappoints, basically, you had that exact of a window moving through time, which means that you actually changed the window but it didn’t change the terminal rate, and to a point more recently, in which that data now disappoints and that not only people changed the window but now you have an effect on the terminal rate. When it started to have an effect on the terminal rate in the U.S., you basically had an effect on terminal rate of many countries. It’s not by coincidence that last time I saw the pricing of cuts in many different countries, all of them had the same, which is exactly the one in the U.S., which is a hundred base. Now it has changed, but that was like two weeks ago.

And so it means that, to some extent, a lot of the expectations in terms of world terminal rates are connected. That goes back into the argument of, you know, what is the effect of the monetary policy in the U.S. to other countries.

But I think a lot of this cycle—obviously, you’re not going to change completely, but the cycle has changed to some extent. Some of these economies have become less sensitive what happens in new rates in the U.S., but obviously you had a huge repricing, and that has an effect.

I think the thing to watch here—which I think probably will become the next big issue—is I think we are in for debates on the global debt, and the fact that you are now postponing the cycle, but you also have a higher terminal rate I think will make people talk about that.

So if you look at the biggest blocs of advanced economies—just look at U.S., Europe, and Japan—just one example. The total debt of these three blocs—sovereign debt is a very—is a huge proportion of the total debt out there. If you look at the fact that they used to pay close to 1 percent to roll over the debt and now it’s going to 3 (percent)—that’s three times more. So on the biggest debt on the planet you have a cost of serving the debt that went—that just upped three times, three fold. Plus on the top of that, you increased the debt of this bloc by 25 percent of GDP. So I think the next topic that we will be talking in a while, it’s not about the window of inflation. I think that was a topic that—and we talked about that last year when nobody was talking about that, and we mentioned that we didn’t see the disinflation process as smooth as some other people said.

But now I think you’ve passed that. I think now you are pricing, to some extent, that the cycle will delay a little bit. But now the next issue is what happens to the total debt, and it’s funny because you look around, and the fiscal is becoming much less and less coordinated with the monetary. And it’s funny because when we got into the pandemic, it was very easy to coordinate, right? You increased spending and you slashed rates. So on the way in it was very easy to coordinate.

Guess what? On the way out, it has been very difficult to coordinate, and there is nothing more permanent than a temporary program of expenditure. (Laughter.) That’s—that was—I stole from Milton Friedman. (Laughter.)

But you see that in many different places, and I think this will become an issue, so I think that’s for me the most important point.

LIPSKY: Well, on that cheery note—(laughter)—I think it’s—we’ve come to the end of this session. I think it has been a terrific session; very, very stimulating in so many ways. There’s still lots of topics we could talk about, so I would end by saying, number one, I hope that you will return and become not only the first governor of the central bank of Brazil to speak at The Council, but the first to do it twice.

CAMPOS NETO: Thank you so much.

LIPSKY: Secondly, thanks for joining the meeting. (Applause).

CAMPOS NETO: Thanks, John. (Applause.)

LIPSKY: I suspect everybody can see why you were named Central Banker of the Year.

CAMPOS NETO: Oh, thank you. (Applause.)

LIPSKY: Thanks for coming.

(END)

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