Brazil’s Central Bank has unveiled its plan to create a digital version of its currency, known as the digital real. While the project has sparked some concern within the community due to features allowing for token confiscation, it is still seen as a progressive and open initiative.
The Central Bank of Brazil, also known as Banco Central do Brasil, recently released a test version of the digital real on Github and invited developers to test and provide feedback. A blockchain developer named Pedro Magalhães analyzed the digital real’s ERC20 smart contract, built in Solidity, and discovered that it includes functions that grant the central bank the ability to freeze accounts, modify account balances, and send or destroy tokens without requiring access to the private key.
Initially, it was uncertain if these functions were solely intended for the test version. However, the Central Bank has since confirmed that these features will remain in the final version. This decision stems from Brazilian law, which grants the courts the authority to seize assets in the country’s financial system. Thus, the inclusion of such functions is essential for a digital currency.
While these functions may make the digital real less appealing to the crypto community, it is essential to note that private stablecoins, like Tether and USDC, also have similar mechanisms.
Compared to the strategies adopted by other central banks, the Brazilian project stands out as more progressive, pragmatic, and realistic. Unlike central banks such as the People’s Bank of China or the European Central Bank (ECB), which aim to supplant cryptocurrencies with in-house-developed digital currencies, Brazil’s Central Bank embraces a hybrid approach. It considers its digital real as part of the crypto ecosystem, rather than attempting to replace it entirely.
The Central Bank has chosen Hyperledger Besu, a product from the Hyperledger family, as the foundation for its digital currency platform. Besu is a customized Ethereum client that operates on both public and private networks, implementing the Ethereum Virtual Machine (EVM). The planned platform’s topology, outlined on Github, relies on the QBFT consensus algorithm, a variant of Proof of Authority recommended by Hyperledger for private networks. Initially, the central bank will operate nodes and validators, but there is potential for other financial institutions to integrate into the system later.
Hyperledger Besu’s compatibility with Ethereum allows the central bank to leverage the existing infrastructure and smart contracts developed by the Ethereum community, such as ERC20 tokens, NFTs, and DeFis (Decentralized Finance applications). This decision avoids the need to create everything from scratch, as pursued by China and possibly the ECB.
Governor Roberto Campos Neto envisions the platform serving a broader purpose than just digital payments. He envisions a more efficient and inclusive financial system that can engage with other financial systems globally through smart contracts. Tokenized assets and smart contracts could significantly expedite real estate and vehicle purchases, both domestically and internationally.
Campos Neto’s vision extends to integrating the central bank’s digital currency with decentralized finance (DeFi) applications on blockchains like Ethereum, Solana, or Polkadot. This compatibility would enable Brazilians to use the digital real to access DeFi assets, marking their entry into the DeFi market.
Despite the progressive approach, the Central Bank must retain some control over the digital real, as is typical for a central bank. However, by prioritizing compatibility with established open blockchains, Brazil’s Central Bank aligns its digital currency with the ideals of the crypto world to the extent that an institution of its nature can.
Above all, the Central Bank recognizes that a Central Bank Digital Currency (CBDC) should not merely mimic the traditional real, dollar, or euro in digital form. Instead, it should serve as a platform for tokens and smart contracts, harnessing the power of existing network effects to drive its success.