A blockchain developer claims to have uncovered functions in the source code of Brazil’s pilot central bank digital currency (CBDC) that grant a central authority the ability to freeze funds or reduce balances.

While the discovery has sparked concerns about financial freedom and privacy, some argue that such functions could serve specific purposes in decentralized finance (DeFi) operations.

After reverse-engineering the open-source code of Banco Central do Brazil’s digital real, Pedro Magalhães, a blockchain developer and founder of Iora Labs, revealed several functions that include freezing and unfreezing accounts, manipulating balances, transferring currency, and creating or burning digital real.

Magalhães suggested that these functions might be used for secured loans and DeFi protocols. However, he emphasized the lack of clarity regarding the circumstances under which these functions can be executed and who holds the power to do so.

Magalhães expressed concern about the absence of public disclosure and discussion surrounding the code’s specifics.

He stressed the importance of exposing such aspects in smart contracts publicly and engaging with the population. Transparency is crucial when considering the authority to freeze balances, as it significantly impacts financial freedom and individual privacy.

Benefits and Concerns of a CBDC: While there are concerns within the cryptocurrency community about a CBDC’s potential infringement on financial freedom and privacy, Magalhães acknowledged that it could offer certain benefits.

For example, a digital currency would enable better traceability of taxes, allowing the public to monitor the allocation of tax funds and scrutinize state purchases recorded on the blockchain. Additionally, transparency in parliamentary amendments could be strengthened through on-chain visibility.

The digital real pilot project is reportedly utilizing Hyperledger Besu, a privately operated Ethereum Virtual Machine (EVM)-compatible blockchain.

Unlike permissionless networks like Bitcoin or Ethereum, users need approval from the central bank to become a node. This approach aims to create a more controlled and regulated environment for the CBDC pilot.

Fabio Araujo, an economist at the Brazilian central bank, highlighted the potential of the digital real to prevent bank runs and provide a safe environment for entrepreneurial innovation.

However, striking the right balance between innovation and security remains a critical consideration in the development and deployment of CBDCs.