Brazilian Central Bank unveils advanced trial version of the digital real with controversial token confiscation features

Brazilian Central Bank unveils advanced trial version of the digital real with controversial token confiscation features

The Brazilian central bank recently released a test version of its planned digital real. This release caused a stir in the crypto scene as the digital real includes features that allow the central bank to confiscate tokens. However, despite these controversies, the project is considered extremely progressive and open.

Banco Central do Brasil has published the test kit for the digital currency on the Github platform and called on developers to troubleshoot. A blockchain developer named Pedro Magalhães has reconstructed the ERC20 smart contract that is supposed to create the digital real in Solidity. He discovered that the smart contract contains functions that allow the central bank to freeze accounts, change account balances and send or destroy tokens without access to the private key.

It was initially unclear whether these functions were just part of the test kit. However, the central bank has now confirmed that it will retain these functions in the final version. She justifies this by saying that courts in Brazil have the ability to confiscate assets in the national financial system. Therefore, it is a legal requirement that the central bank must integrate such a function into the digital currency.

This feature is of course problematic for the crypto scene, but private stablecoins such as Tether or USDC also contain similar functions. Compared to the plans of other central banks, the Brazilian project still appears progressive and realistic. While other central banks dream of displacing cryptocurrencies with their own digital currency, Banco Central do Brasil is committed to coexistence between traditional currencies and cryptocurrencies. It sees its digital currency more as part of the crypto world.

The central bank uses the Hyperledger Besu platform for its project, which is fully compatible with Ethereum. Smart contracts that run on Ethereum also work on Besu. This allows the central bank to utilize the developer time already invested in Ethereum instead of developing everything themselves.

The planned platform is based on the QBFT consensus algorithm, a variant of Proof of Authority. QBFT depends to some extent on the reputation of selected nodes and is already used by some blockchains such as Binance Chain BNB. So far, only the central bank will operate nodes and validators, but there is the possibility of integrating banks and other financial institutions later.

The President of the Central Bank of Brazil, Roberto Campois Neto, has made it clear that his main goal is not just digital payments. Rather, it is about creating a more efficient and inclusive financial system that can communicate with other financial systems in Brazil and worldwide through smart contracts. For example, tokenized assets and smart contracts are intended to accelerate real estate and car purchases.

The Brazilian central bank is also seeking compatibility with decentralized finance (DeFi) on blockchains such as Ethereum, Solana and Polkadot. Their goal is for Brazilians to use the central bank digital currency to buy decentralized assets through DeFi apps. In doing so, she wants to make it easier for Brazilians to enter the DeFi market.

It is important to note that a central bank cannot completely relinquish its control function. However, the Brazilian central bank is trying to match the ideals of the crypto world as much as possible. By relying on maximum compatibility with common open blockchains, it tries to make optimal use of existing network effects.

The Brazilian central bank is taking a leadership role in recognizing that a central bank digital currency should not simply be a digital variant of traditional currencies. Rather, she sees the digital real as a platform for tokens or smart contracts. This means she is several years ahead of her colleagues in Frankfurt, who are still making plans.