Brazil’s Central Bank is abandoning the blockchain component of Drex, its ambitious central bank digital currency project. The surprise decision was announced at the Blockchain Rio conference in Rio de Janeiro last week, marking a significant course correct for the Hyperledger Besu-based project that was once heralded as the vehicle for tokenizing the country’s financial system. In comments to Valor, Drex coordinator Fabio Araujo confirmed that the project’s blockchain component would be discontinued due to scaling and privacy challenges. The project will instead narrow its focus to streamlining collateral management and reconciling liens for credit guarantees in an attempt to ship a product to the public by mid-2026. Araujo didn’t rule out the use of blockchain for the project at a future date should use cases develop that require the decentralized technology. Drex’s Ambitious Origins Drex, originally known as the Digital Real, has been under development since 2021 when the first research and working groups were commissioned. The concept was inspired by a 2020 paper authored by Swiss academic Fabian Schar exploring the application of blockchain and smart contract-based financial markets outside of niche decentralized finance environments. The project’s original vision was a two-tiered structure that sought to fuse together both wholesale and retail CBDC concepts. The first monetary layer was to be a wholesale environment exclusively for transactions among authorized participants - specifically regulated financial institutions running nodes on the Central Bank-controlled network. The second would be tokenized bank deposits issued by regulated institutions to end customers. MORE FOR YOU The final product was to be an environment that would enable the unlocking of new products and services via smart contracts and tokenized assets across Brazil’s financial system. Built on Hyperledger Besu, this environment would be Ethereum Virtual Machine-compatible, opening the door for decentralized finance primitives like Aave or Uniswap to be run inside its regulated confines. During a 2024 interview with the Brazil Crypto Report podcast, Araujo explained that Drex was to be: “not just a digital currency but an entire ecosystem of services built around programmable digital money and tokenized assets.” Drex would then be layered onto other innovations pioneered by Brazil’s Central Bank, such as the Pix instant payment system, to create a “super app” that would provide a consolidated view of users financial lives - including bank deposits, property holdings and other assets. “Drex Trilemma” Too Much to Overcome Amid much fanfare, the first phase of the Drex pilot, was launched in March 2023 with 14 consortia runnings nodes, with an other two joining in the ensuing months. Members of these consortia included the largest financial institutions in the country, such as Itau, BTG Pactual, Santander and Bradesco, along with major technology vendors like Microsoft, AWS and Google. Preliminary use cases focused on tokenizing government debt, and would eventually include trade finance, interbank settlement, tokenization of receivables and more. But the project soon ran into the so-called “Drex Trilemma” - solving for privacy, scalability and programmability within a decentralized, albeit permissioned, environment. Specifically, the challenge at hand was to ensure a sufficient level of privacy so as to comply with Brazil’s data protection laws, while simultaneously giving the Central Bank’s supervisory node full visibility - all without breaking composability Several solutions were tested, including Rayls, developed by infrastructure firm Parfin, Anonymous Zether developed by JPMorgan and Consensys, and EY’s Starlight. While some of these solutions met minimum requirements in testing, they proved too costly and time-consuming, noted Gustavo Cunha - a former Brazilian banking executive and host of the Fintrender podcast, in his newsletter. Phase 1 of the pilot concluded with a report articulating that the project would need a “major adaptation” in order to ultimately become core infrastructure. Phase 2 of the pilot commenced earlier this year and continued testing for privacy, but even with “good privacy solutions,” Araujo explained, the team concluded they weren’t robust enough to deploy in production without further testing. Other factors appear to have played a role in the bank deciding to pull blockchain plug, Cunha notes. These include a massive hack in July that saw $200 million siphoned out of Central Bank reserve accounts, a changeover in the bank’s presidency from Roberto Campos Neto (who had been the champion of the project) to Gabriel Galipolo, and the United States’ example of opting not to create its own network but rather to open the door for the private sector. "The decision likely stemmed from a combination of factors: the change in the BCB’s presidency, internal discussions following the recent massive hack, the potential costs of running and maintaining such a network, and even the example of the United States, which chose not to create its own network and instead provide the legal framework for the private sector to accelerate tokenization." Messaging Shift The Central Bank has been slowly walking back the CBDC messaging on Drex since Galipolo took over the institution’s presidency at the beginning of 2025. The objective has been to reposition the project as an underlying piece of financial infrastructure that will help to unlock credit, rather than a complicated blockchain system. Galípolo underscored this change in his opening keynote at Blockchain Rio last week. He emphasized that Drex should be seen as a technology-agnostic financial infrastructure project, not as a blockchain-first initiative. “Why am I not talking about DLT? Because we are increasingly gaining clarity and moving toward the idea that technology has to be agnostic. We want to solve a problem. What is the problem we need to solve? And what is the available and most suitable technology to solve this problem?” Galípolo also went to length to emphasize that Drex differs drastically from textbook CBDC models that replace commercial bank deposits with central bank liabilities. Rather, he said, Drex is designed to complement Brazil’s existing monetary framework with the purpose of facilitating the flow of credit - a challenge in Brazil’s high-cost lending environment. “Drex is increasingly a solution, regardless of the technology used, that aims to facilitate asset collateralization for credit and transactions with less friction through the tokenization of smart contract assets." Industry Reaction Given the project’s challenges and the change in messaging, the move to ditch blockchain was met with mixed reactions. Regina Pedrosa, executive director of ABToken, told BlockNews she viewed the announcement with “concern and surprise” and hoped it might be reconsidered with a new network “already considering the pillars of privacy, interoperability, and standardization.” Others weren’t so charitable. One industry executive speaking on background said the project effectively sent the country’s banking industry on a wild goose chase. “This proof-of-concept was not free. Several deals were made. The Central Bank drained the attention of the market, forced banks into compulsory participation, and the banks paid the bill millions in investment…Brazil has lost years.” The executive accused the Drex team of naively assuming that it could tackle some of the thorniest problems in blockchain. “If Ethereum, with a decade of research, countless ZK teams, and billions in incentives, hasn’t fully solved the balance between strong privacy and regulatory compliance, it’s unrealistic to think a central bank pilot — with a narrow vendor pool and a closed network — would magically crack it in a couple of years.” Marcos Sarres, CEO of GoLedger, argued that the real problem wasn’t blockchain per se but the choice of Besu. He suggested that privacy-focused alternatives like Hyperledger Fabric might have met Drex’s needs better. Public Sector Catalyst The Drex pivot raises big questions about the role of blockchain as a viability technology for state-backed financial infrastructure, particularly as sentiment out of the United States towards CBDCs under the Trump Administration is far from positive. Still, there are positive externalities to the Drex blockchain experiment that we’re just beginning to understand. Cunha, in his newsletter, argued that the Central Bank has been the driving force pushing the country’s banking sector to explore the technology - an exercise that should yield fruit in the coming years. “Without the [Central Bank’s] push for this agenda in recent years, Brazil would be far behind in this discussion. It was the Central Bank's proactive stance that put tokenization on the financial sector's radar and encouraged banks, fintechs, and startups to invest time and resources in this field.”