Weekly Updates

Some quick comments about Pix statistics for Q4/2022

Since before Pix launched, we've been bidding on how fast Pix adoption would roll out in Brazil. So far, we haven't been too far off — although seeing our wildly optimistic scenario playing out in real life can be quite overwhelming. In two and a half years, Pix reached the mark of 3 billion transactions and 260 billion dollars per month, and 137.5 million users.

Now, we'll take you through how we've been reading those numbers compared to other payment methods in Brazil.

Overview

Brazil has been rapidly digitalizing its economy, with digital payments trending upwards across the board. Both the number and the volume of transfers through Pix, Bill Payments (Boleto), and the card rails have been increasing over the past four years. Meanwhile, cash withdrawals have been trending downwards, along with slower and more expensive forms of digital payments, like DOC, TED, and direct debit.

However, even the rails that kept growing saw a slowdown over the last three years. All except one: Pix.

Source: https://www.bcb.gov.br/estatisticas/spbadendos

Since Q1/2022, Pix's exponential growth made the rail surpass every other payment method in Brazil regarding the number of transactions.

Source: https://www.bcb.gov.br/estatisticas/spbadendos

That doesn't necessarily mean Pix will be the death of the card rails. Nor will a bigger, fundamental shift in all purchase habits in Brazil happen anytime soon without proper market development. Those numbers do highlight, though, the enormous potential of Pix, to the point that every payment company in Brazil should be working on how they will incorporate Pix-based innovation into their roadmaps moving forward.

Opportunities on the horizon

A) Opportunity in P2M

The number of Pix transactions surpassed those of all other payment methods in Brazil a year ago. However, the Pix Statistics website allows segmenting the number of transactions by nature of payer and payee. Comparing the number of card transactions with Pix transactions in P2M scenarios, we can see that Pix still has miles to go to reach credit and debit card penetration in person-to-merchant payments.

Source: https://www.bcb.gov.br/estatisticas/spbadendos and https://www.bcb.gov.br/estabilidadefinanceira/estatisticaspix.

Note: BCB only has segmented data of transactions that go through SPI, which represents about 0.85 of all Pix transactions. For that reason, an approximation was made by multiplying the number of P2B transactions by 1.15

It is not surprising that Pix gained traction first in P2P transactions. That is exactly what happened in India when UPI first went live. The experience for P2P in the Pix rail by default is excellent, and it's free for individual accounts to send and receive money. In P2M use cases lie the biggest opportunities to build solutions on top of Pix and create products customers and merchants could love.

B) Opportunity in B2B

In terms of transaction volume, Q4/2022 was the first time Pix surpassed Bill Payments (Boleto), and it's still behind transfers between accounts from the same bank (Closed Loops) and TEDs (Brazil's first RTGS payment rail, created in 2002).

Source: https://www.bcb.gov.br/estatisticas/spbadendos

Although Pix holds the post of highest frequency rail, TED and book transfers are still moving considerably more money. One possible factor driving this trend is that TED and book transfers are primary instruments to operate financial investment transactions, and Pix is not — yet. Another possible explanation is that B2B payments still rely heavily on TED and still lack a proper interface to make the switch. Book transfers may also encompass many debt repayments and in-company transfers.

Regulation and Cryptocurrency

Last December, Nicholas Weaver published an interesting article, Death of Cryptocurrency, that proposed regulating cryptocurrencies as securities in the US. The article also includes a comprehensive review of cryptocurrency issues and why it is not possible to fix many of them.

On February 16th, SEC charged the Terra cryptocurrency controllers for securities fraud. Terra is a stablecoin that crashed with an estimated USD 60 billion loss for their investors. This goes along the line Nicholas proposes, as the current regulation already encompasses crypto coins and the missing part is enforcement from the regulators.

More recently, multiple cryptocurrency sites celebrated that a South Korean court ruled that Luna is not a security. Luna is the token linked to the Terra cryptocurrency. From a translation of a South Korean news site, this decision was taken in the context of a lawsuit against Terra’s Co-CEO. The lawsuit asked for the Co-CEO to be held accountable for Terra’s crash under the Capital Markets Act (equivalent to the SEC regulation), which would make it possible to seize assets to reduce the damage caused by the Terra crash. This decision was taken to South Korea’s supreme court, which has not issued a final decision on whether Luna is to be considered a security or not.

It is good to see more legal and regulatory action such as the SEC lawsuit and South Korea taking the decision to the Supreme Court, especially after so much damage was caused by selling highly speculative and unsecured assets as a sound investment. Regulation for cryptocurrency and tokens is an important discussion that has mostly been ignored in the past years. Cryptocurrencies have shown many signals of market failure, from Terra’s alleged fraud in the SEC lawsuit to the FTX collapse. This kind of occurrence shows the need for regulation to prevent more financial damage, and securities regulation is a good match for cryptocurrencies. Apart from tackling the market failure itself, regulating cryptocurrencies also has the additional benefit of reducing their criminal uses, such as payment of ransomware.

Buying a car with Brazil’s CBDC

The Brazilian Central Bank (Bacen) published an Instagram reel showcasing their soon-to-be-launched Central Bank Digital Currency (CDBC).

In one of the use cases of smart contracts, they mention that a person could buy a car and condition the payment to the completion of the car property transfer, which sounds interesting.

In this reel, Bacen focuses on the transaction's happy path, which tends to work for cryptocurrencies most of the time. Buyer and seller activate the smart contract, the payment money is held in the smart contract (like in an escrow account), and after the seller transfers the car property to the buyer, the contract makes the payment to the seller.

Examples like this do not clarify what should happen in failure cases. Let's focus on these three possible failures:

The seller does not transfer the car
The seller transfers to another person
The API to verify the car was transferred changes during the selling process, making it impossible for the contract to confirm that the vehicle was transferred.

Cases 1 and 2 can be solved by adding a timeout to the transaction to return the money to the original account if the car property transfer doesn't happen within ten days. But solving case 3 programmatically is far from trivial. If the money is returned to the buyer, the seller may have already transferred the car property and can end up at a loss. If the money is sent to the seller, they may not have transferred the car property, and the buyer can end up at a loss.

On the other hand, the third issue would be easily solved outside the “code is law” world with a proper mediator. Buyer and seller could honor the contract, or they could sue the other to have it enforced. Even in a more digital yet reasonable world of an automated escrow account, an engineer of the organization holding the escrow account could change the car property verifier according to the new API and re-trigger the process, moving the money to whoever should receive it.

This type of dilemma derives directly from the Halting Problem, proved by Alan Turing in 1937. According to the Halting Problem, verifying whether an algorithm will stop running for all the possible inputs it can have is impossible. In practice, that means it is impossible to write bug-free code. So smart contracts will always have bugs, like any other code. Bottom line? Smart contracts do not help us with new solutions to our pains and present additional risks to an already convoluted process.

Pix statistics, Brazil's CBDC, and Regulation of Cryptocurrencies