Developer Reveals Code in Brazil’s CBDC Pilot Allowing Funds to be Frozen or Reduced

A blockchain developer claims to have reverse-engineered the source code of Brazil’s pilot central bank digital currency (CBDC) and discovered functions within the code that would enable a central authority to freeze funds or reduce balances. While the discovery has raised concerns, the developer argues that there could be potential benefits to such functions in certain situations.

The source code of the Real Digital pilot project was made available on the GitHub portal by Brazil’s leading bank on July 6. It was clarified at the time that the pilot project was solely intended for testing purposes, and the architecture presented could undergo further changes.

Pedro Magalhães, a blockchain developer and founder of tech consulting firm Iora Labs, claimed to have successfully reverse-engineered the open-source code of Banco Central do Brazil’s Digital Real later that day. He revealed various functions, including the ability to freeze and unfreeze accounts, adjust balances, transfer Real Digital between addresses, and create or burn Real Digital from specific addresses.

Magalhães said that the central bank will likely maintain these functions for secure loan operations and other financial activities conducted on decentralized finance protocols. However, he expressed concern over the lack of specificity in the code regarding the circumstances under which tokens can be frozen and, most importantly, who possesses the power to execute such actions.

He emphasized the need for these aspects to be publicly exposed in the smart contracts and discussed with the population, which has not been done thus far. Many individuals in the cryptocurrency community worry that a CBDC could infringe upon financial freedom and encroach on privacy.

In a subsequent post on July 10, Magalhães acknowledged the understandable concerns of the Brazilian people regarding a CBDC but also highlighted potential benefits. He explained that a CBDC could make taxes more traceable, allowing the public to inspect the allocation of tax funds and scrutinize on-chain purchases made by the state, thereby enhancing transparency in parliamentary amendments.

Fabio Araujo, an economist at the Central Bank of Brazil, previously stated in July 2022 that the Digital Real has the potential to prevent bank runs and provide entrepreneurs with a safer and more reliable environment for innovation.

Reportedly, the Digital Real pilot is running on Hyperledger Besu, a privately operated Ethereum Virtual Machine (EVM)-compatible blockchain. As it is not permissionless like the Bitcoin or Ethereum mainnets, users would require approval from the central bank to become a node, as mentioned by Magalhães on July 7.

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