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(Kitco News) - As opponents to central bank digital currencies (CBDC) warn that digital fiat would give governments a greater degree of control over people’s lives, a blockchain developer in Brazil who claims to have reverse-engineered the source code for the country’s pilot CBDC said he discovered functions within the code that would allow a central authority to freeze funds or reduce balances.
The Central Bank of Brazil (BC) posted the source code for the digital Brazilian real pilot project on Thursday to allow for a public audit and said the pilot is intended to be used in a test environment and the “presented architecture” may be subject to additional changes.
According to Pedro Magalhães, a blockchain developer and founder of tech consulting firm Iora Labs, he reverse-engineered the code “with the intention of exploring possible vulnerabilities for purely educational purposes,” and discovered some functions within the contract that he thought should be brought to the public’s attention.
The most concerning functions include a disableAccount function that disables an account authorized to transfer tokens; an enableAccount function that enables a previously disabled account for token transfers; the ability to increase or decrease the frozen balance of a wallet address; the ability to pause token transfers for a specific wallet; and the ability to transfer tokens from one wallet to another and burn them.
The main concern with these functions is that they can be executed by any entity that receives authorization from the BC, which means a centralized entity will be able to control and manipulate the tokens held by private citizens.
According to a report from Porto do Bitcoin, the BC has confirmed that the source code contains these functions, saying, “BC and institutions already have similar functionalities in the current environment of systems such as SPB and Pix, their use being governed by law and regulation.”
While there is a precedent for such functions in current payment systems, Magalhães said that the issue with the code for the digital real is that it lacks specificity about the circumstances under which the tokens can be frozen and who holds the power to execute them.
“One thing is to agree with an operation and execute a DeFi operation that involves different blockchains,” Magalhães said in an interview with Cointelegraph. “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. These aspects should always be exposed in the smart contracts publicly and discussed with the population, which hasn’t been done yet.”
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| Brazil's CBDC pilot participants include Visa, Microsoft and Santander |
Concerns related to the level of control that CBDCs give governments and central banks over the finances of the general public have long been a point of contention in the debate around digital fiat.
Magalhães addressed this concern in a LinkedIn post on Monday, saying, “I understand people's concern about the centralization of power and possible government abuses. For this, I use Bitcoin stored in a cold wallet.”
He went on to describe some of the beneficial uses of a digital real, including the ability to more easily track the taxes paid by Brazilian citizens, the ability to fight corruption; a greater level of transparency in how the money allocated for parliamentary amendments is spent; the ability to audit how much tax revenue is allocated to civil servants; open-source smart contracts that digitize inflation and deflation policies; and a greater opportunity for small entrepreneurs to compete with large institutions.
While these benefits help support the creation of a digital real to increase efficiency and upgrade the country’s financial infrastructure, they don’t address the underlying concern that governments will have a greater degree of control over the finances of Brazilians.
And with the latest report from the Bank for International Settlements indicating that 93% of the world’s central banks are working on CBDCs, this issue is likely to remain at the forefront of public discourse on the topic as a future with digital fiat grows increasingly likely by the day.
