According to Pedro Magalhães, a blockchain developer who claims to have decoded Brazil’s CBDC pilot, the code contains the ability to freeze or reduce funds.
Specifically, Magalhães discovered code that would allow accounts to be frozen or emptied at will. See below for all the details.
What does Brazil’s CBDC pilot contain? The developer’s comments
As anticipated, a blockchain expert recently revealed risky features in the code of the Brazilian central bank’s (CBDC) pilot digital currency.
Specifically, the expert decoded the source code of the Brazilian CBDC and discovered the possibility of freezing or reducing funds.
However, he pointed out that there could be situations where these functions could be beneficial. As a reminder, the source code of the Brazilian CBDC pilot project was published on the GitHub portal on 6 July by the Brazilian central bank.
It was then clarified that the pilot project is intended only for use in a test environment and that the architecture presented may undergo further modifications.
Pedro Magalhães, a blockchain developer and founder of Iora Labs, later said he performed a reverse analysis of the Brazilian CBDC’s open source code, revealing functions within the code.
These functions include locking and unlocking accounts, changing balances, transferring currency between addresses, and creating or destroying digital currency from a specific address.
Magalhães also stated that Brazil’s central bank will likely maintain these functions for secured loans and other financial transactions based on decentralized finance (DeFi) protocols.
Concerns and benefits regarding the impact of a CBDC
However, he pointed out the lack of specificity in the code regarding the circumstances under which tokens can be frozen and, more importantly, who holds the power to execute them, as stated:
“It is one thing to agree to a trade and execute a DeFi trade involving several blockchains; another completely different thing is an institution that has the ability to freeze the balance of its own accord, which is precisely how they developed smart contracts. These aspects should always be publicly exposed in smart contracts and discussed with the population, which has not yet been done.”
Not surprisingly, part of the cryptocurrency community is concerned about the impact of a CBDC on financial freedom and privacy.
Pedro Magalhães, in a post dated 10 July, argued that although such concerns are understandable, a CBDC could offer some benefits.
Indeed, he explained that taxes would be easily traceable, allowing the public to check how tax funds are allocated and monitor purchases made by the state via blockchain, increasing transparency in parliamentary amendments.
In July 2022, Fabio Araujo, an economist at Brazil’s central bank, also pointed out that digital real could reduce queues at bank counters and provide a more secure and reliable environment for business innovation.
The digital real’s pilot is said to be running on Hyperledger Besu, an Ethereum Virtual Machine (EVM)-compatible blockchain that is privately managed.
Because it is not public like Bitcoin or Ethereum mainnets, it will require central bank approval, Magalhães said on 7 July.
Human Rights Foundation launches a tracker of central bank digital currency (CBDC)
Recently, the Human Rights Foundation (HRF), a non-profit organization, unveiled its central bank digital currency (CBDC) tracker during the Oslo Freedom Forum.
Specifically, the online tracker provides educational materials and a guideline and is expected to be fully operational by the end of the year. The tracker was developed following an eight-month fellowship announced by HRF in January.
The fellows include Nick Anthony, policy analyst at the Cato Institute; Janine Romer, researcher; and Matthew Mezinskis, podcaster. It is worth mentioning that the Cato Institute is known to be an opponent of CBDCs.
Alex Gladstein, chief strategy officer of HRF, explained in the tracker’s promotional video that it will be an online resource that will monitor the progress of CBDCs around the world, particularly in authoritarian countries, highlighting possible violations of civil liberties and related risks.
Because a CBDC is a central bank responsibility, it creates a direct link between citizens and the financial institution, which raises many concerns about human rights in the adoption of CBDCs, as outlined by the CBDC tracker on the HRF website.
According to the CBDC Tracker, an independent open source website, most central banks globally are still in the research phase of CBDCs, but so far only three CBDCs have actually been launched.
These include the Sand Dollar of the Bahamas, Jam-Dex in Jamaica and eNaira in Nigeria. The website also lists 14 pilot projects, including the Chinese digital yuan. According to the HRF, the digital yuan has already reached a user base of 300 million.
