Dev alleges Brazil's CBDC pilot has code that can block or restrict funds

By: Mark Jessy

July 11, 2023 7:24 AM

According to blockchain developer Pedro Magalhaes, who claims to have debugged Brazil's pilot CBDC, there is code that may be used to arbitrarily freeze or drain user accounts.

The source code for Brazil's pilot central bank digital currency has been reverse-engineered, according to a blockchain developer, who claims to have found functionalities in the code that would let a central authority freeze funds or lower balances. 

He has since suggested, however, that such functions may be useful in some scenarios.

Brazil's top bank shared the source code for the Real Digital pilot project on the GitHub→ platform on July 6. At the time, it was stated→ that the Real Digital pilot project is only designed for usage in a test setting and that the "presented architecture" may be subject to further alterations.

Later that day, Pedro Magalhaes, a blockchain developer and the founder of tech consulting business Iora Labs, claimed to have been able to "reverse engineer" the open source code of the Banco Central do Brazil's Digital Real, disclosing functions in the code.

Among the features was the capacity to freeze and unfreeze accounts, increase and reduce balances, shift Real Digital from one address to another, and produce or burn Real Digital from a specific address.

According to Magalhaes, Brazil's central bank would "probably" keep these functions for secured credit activities and other financial activities that can be carried out via decentralized finance protocols.

The issue, according to Magalhes, is that the code is vague about the circumstances under which the tokens can be frozen and, more importantly, who has the authority to execute them:

"It's one thing to agree on and carry out a DeFi operation involving multiple blockchains; it's quite another to have an institution with the ability to halt the balance on its own initiative, which is exactly how they've designed the smart contracts."

The public disclosure of these aspects in smart contracts and public discussion of them with the general public are always necessary, but they haven't been done yet, he continued.

Many people in the bitcoin industry are concerned that a CBDC will restrict their financial independence and violate their privacy.

Magalhaes stated in a July 10 post→ that while the Brazilian people's reservations over a CBDC are valid, it may potentially offer some "benefits."

In addition to examining purchases made by the state on-chain and enhancing openness in parliamentary changes, he added that taxes will be more easily traceable, allowing the public to examine whose resources tax money are allocated to.

In July 2022, Fabio Araujo, an economist at the Central Bank of Brazil, indicated that the Digital Real had the ability to end bank runs and to offer businesses a more secure and stable environment in which they could grow.

The Digital Real pilot is said→ to be running on Hyperledger Besu, a blockchain that is compatible with the Ethereum Virtual Machine (EVM).

Users will require authorization from the central bank before joining as a node, unlike Bitcoin and Ethereum's mainnets, Magalhaes said→ on July 7.