The source code of the Brazilian Central Bank Digital Currency (CBDC) currently in testing has undergone analysis by blockchain developer Pedro Magalhães, revealing potential privacy issues. Brazil has been working on developing its CBDC, with plans to launch the digital Real in 2024.
The introduction of the CBDC aims to provide retail payment support for users, with funds being backed by their bank accounts. However, the government has clarified that the CBDC will not interfere with existing payment methods such as Pix, commonly used in Brazil.
The decision to move forward with the CBDC project was made by the Brazilian government to explore new avenues for technological advancement. Additionally, the digital Real has the potential to lower the cost of credit and customer-facing financial products, enabling banks to reach a broader customer base. This initiative could open doors for new service providers and fintech companies, democratizing market access and offering innovative services.
Despite the positive intentions behind the CBDC, concerns have been raised regarding the code that could grant the government direct access to users' wallets, potentially compromising privacy. Critics argue that government-backed digital currencies, like CBDCs, erode the decentralization and anonymity benefits of cryptocurrencies, transforming them into a mere reflection of bank balances.
Digital currencies, in this context, may be subject to practices such as fractional lending without providing significant incentives for consumers to adopt them. Nevertheless, given blockchain's "paper trail", an overreaching government might be interested in a technology that maintains a permanent and unalterable record of financial transactions.
Pedro conducted a review of the source code for the digital Real and shared his findings on LinkedIn. Magalhães discovered intriguing functions within the code that would enable the government to freeze or unfreeze accounts, create, burn, and transfer CBDC tokens on behalf of users.
While these functions could potentially assist banks in offering loans and tracking financial crimes, there are also more troubling possibilities. The Brazilian government has yet to comment on these concerns raised by Magalhães and the implications of the identified code.