Visa working with Brazil's farmers to cultivate uses for CBDC

Bloomberg

As central banks seek tangible uses for central bank digital currencies, Visa and a group of partners have developed a mechanism that uses a CBDC to connect cash-strapped small businesses with a wider range of funding options.  

Visa worked with Microsoft, the farming crypto technology firm Agrotoken and software developer Sinqia to develop a financing prototype that uses the Real Digital, Brazil's CBDC, for blockchain-powered financial services. Dozens of countries are developing CBDCs or considering whether to digitize their currency, and card companies like Visa and Mastercard seek ways to work with governments to play a role in CBDC development. Brazil's central bank chose Visa and its partners as part of a government initiative to locate new blockchain use cases. 

An initial test involves Brazil's farmers, which are often remote and struggle to obtain low-cost capital. Visa contends CBDCs and related technology can democratize financing for these farms, and demonstrate how digital assets such as CBDCs can improve access to financial services for small businesses and other underserved users globally. 

"This use case can be quite rich, but we also want to demonstrate that this can have a number of different uses," said Catherine Gu, global head of CBDC for Visa. 

The problem Visa's project is trying to solve is the difficulty that local farmers, which are usually small businesses, have in negotiating contracts. Because of a lack of investors or financing partners, the farmers have to use factoring, or a traditional financing method in which the farmer sells future crops at a discount to get funds to buy supplies and pay salaries. By adding more potential sources of funding, the farmers, in theory, could get better terms through competition. 

"Agricultural businesses have a lot of volatility. They don't know what their crops are going to be six months down the road. Financing for these small farmers can be limited," Gu said. "They can get more advantageous terms by working with a larger set of investors." 

There are more than 6 million small farms in Brazil, according to the government's agricultural census in 2021, with soybeans being the major crop for export. Local farms have become increasingly reliant on private sources of funding, according to the Global Agriculture Technology Initiative, which adds that Brazil's farms are a prime market for fintechs due to a need for diverse funding sources. 

Visa's project uses programmable finance, which refers to triggers such as smart contracts that execute financial transactions based on pre-set rules or criteria. The prototype includes an auction process that enables global investors to access a blockchain to bid on capital contracts for local Brazilian farmers. Visa used internal technology called its Universal Payments Channel, which connects Brazil's Real CBDC and other CBDCs, stablecoins or tokenized traditional currencies from other countries. Brazil's Real CBDC acts as an intermediary that enables all parties to transact in a currency of their choice. The farmers tokenize financing contracts through Agrotoken. 

Visa's broader work on CBDCs includes a partnership with Consensys, a New York-based blockchain company, to build an infrastructure that companies and government organizations can use to build services on top of CBDCs, or that access CBDCs as part of a broader payments workflow. 

Tokenization of funding requests, coupled with smart contracts, can help to open up global financing for farmers, according to Nilesh Vaidya, executive vice president and global industry head of banking for Capgemini. 

"The technology for tokenization and smart contracts already exists. Innovation in the Visa solution is building the first mile and last mile connection," Vaidya said, adding tokenization of agro commodities and the global reach of Visa and Microsoft is a "potent receipt to level the playing field for small businesses." 

In an earlier interview, Gu said that as CBDCs develop, it has become clear that commercial banks — not central banks — will provide access to consumers and businesses. Visa's role in this case is that of an onramp for digital assets, enabling interoperability among different countries. Mastercard has done similar work with Consensys in support of CBDCs in the Bahamas and other early markets.  

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"We want to demonstrate that you can open up market access through CBDCs and distributed ledger technology," Gu said. "Opening access to new markets is crucial." 

Other efforts to connect different CBDCs, or to connect CBDCs with other currency types, include Ripple's recent work with Montenegro's central bank to use open source development and blockchain technology to provide a digital rail for cross-border transactions. And the Federal Reserve Bank of New York and the Monetary Authority of Singapore last week provided an update on Project Ubin, which is designed to connect different CBDCs. The New York Fed/MAS project found that payments can be safely executed across multiple ledgers without the need for a central clearing authority or a shared central network, and that settlement in near real-time is possible. The New York Fed's MAS project does not take a position on whether the U.S. should approve a digital dollar. 

While the New York Fed project is focused on a wholesale CBDC — or the use of a digital currency for large transfers — projects such as Ripple's and Visa's can also enable progress for consumer-oriented CBDCs by broadening access.

"The experiments in Brazil and Montenegro further pave the path to the retail CBDC,"  Vaidya said.