Brazilian CBDC Could Freeze Assets

A blockchain developer who claims to have reverse-engineered the source code of Brazil’s central bank digital currency (CBDC) has discovered functions in the code that would allow a central authority to freeze funds or reduce balances.

Pedro Magalhães, the blockchain developer, said that the functions could be beneficial in some situations, such as for secured loans and other financial operations based on decentralized finance (DeFi) protocols. However, he also expressed concern that the code lacks specificity about the circumstances under which the tokens can be frozen and, above all, who holds the power to execute them.

“One thing is to agree with an operation and execute a DeFi operation that involves different blockchains; another completely different thing is an institution having the ability to freeze the balance on its initiative, and that’s precisely how they’ve developed the smart contracts,” Magalhães said.

Magalhães also pointed out that the digital real pilot is reportedly running on Hyperledger Besu, a privately operated Ethereum Virtual Machine (EVM)-compatible blockchain. This means that users will need the central bank’s approval to become a node, which could give the central bank more control over the network.

Despite these concerns, Magalhães said that there are potential benefits to a CBDC. For example, taxes could be more easily traceable, enabling the public to inspect which resources tax funds are allocated to. Additionally, the digital real could help to halt bank runs and provide entrepreneurs with a more safe and reliable environment to innovate.