A blockchain developer recently made a concerning discovery regarding the Brazilian central bank-backed digital currency (CBDC). The code of the CBDC pilot revealed a feature that would grant the government the authority to freeze or drain user accounts as they see fit.
Pedro Magalhaes, the founder of Iora Labs, a Web3 consulting company, brought attention to this issue by sharing his findings on social media. He had reverse-engineered the code behind the CBDC pilot, uncovering a functionality that could potentially freeze funds and adjust balances.
The Brazilian central bank had previously published the source code of the CBDC pilot project on Github, emphasizing its intended use in a test environment with the possibility of future changes.
Upon verification, journalist Vini Barbosa confirmed Magalhaes’ findings with the central bank. Surprisingly, the central bank expressed its plans to retain the functions that would allow the monetary authority and authorized entities to freeze user accounts, change targeted addresses balances, and even mint new units of the national digital currency.
The central bank justified the inclusion of this feature, citing Brazilian legislation that grants courts the power to freeze or arrest amounts held in the National Financial System (SFN). As a result, these functionalities must be replicated on the Real Digital platform to comply with the law.
Initially, the developer assumed that this function might only apply to certain scenarios, such as decentralized finance (DeFi) or centralized finance (CeFi) operations, where freezing balances could be required to complete smart contract operations. However, the central bank’s response clarified that they could use this feature whenever necessary.
Magalhaes expressed concern over the excessive control this could give to the monetary authority and warned that reporting such issues on social media might be the only recourse for citizens. Given Brazil’s historical context, people’s fear of potential misuse of this power is understandable, especially after President Fernando Collor de Mello froze the finances of all Brazilians for over a year shortly after his election in 1990.
Privacy advocates have been warning against the implementation of central bank digital currencies (CBDCs), fearing that they could lead to unprecedented control over people’s finances. The worry is that CBDCs might be exploited as mass surveillance tools, allowing governments to have extensive control over their citizens.