Brazil advances digital currency with asset-freeze capability

Brazilian banks last week successfully completed pilot transfers using Drex, the country’s central bank digital currency (CBDC).

A central bank digital currency (CBDC) is a digital currency issued and governed by a central bank. Drex, a digital Brazilian real issued and controlled directly by the Central Bank of Brazil, is expected to be rolled out to the public next year. 

Critics of CBDC have expressed concern that such currency, at the very least, would lack the anonymity of cash, a fact confirmed by Federal Reserve Chairman Jerome Powell. But it could also open the door for authorities to control the funds of private citizens, a possibility already put forth by International Monetary Fund (IMF) Deputy Managing Director Bo Li in April.

Caixa Econômica Federal and Banco do Brasil announced last week that they had successfully completed the last of three test Drex transfers to each other throughout the month of August.

In July a developer discovered that Drex has been designed with a hidden feature that allows the central bank to freeze taxpayers’ funds and adjust balances. 

Iora Labs Founder Pedro Magalhaes found the feature by reverse engineering the CBDC’s source code after examining API documents the central bank had posted to GitHub. Magalhaes told Decrypt that the Central Bank of Brazil was not very responsive to his inquiry about the feature.

“They tend to keep things closed off and usually don’t communicate with non-bankers," he said. “Honestly, they don’t even need to care about public opinion.”

Brazilian journalist Vini Barbosa said the Central Bank of Brazil confirmed Magalhaes’ finding.

“The Central Bank confirmed its plans to keep the functions that allow the monetary authority and authorized entities to freeze user accounts, decrease targeted addresses balances, arrest, and mint new units of the digital currency (CBDC),” he tweeted, adding that freezing funds is legal under Brazilian law.

“The ability to 'freeze or arrest amounts' held in [this system] is protected by current legislation in Brazil, according to the Central Bank," Barbosa continued.

Brazil is not the only country developing a CBDC.

Earlier this year the Bank of Israel, the Central Bank of Norway and Sveriges Riksbank — Sweden’s central bank — announced the completion of Project Icebreaker, an initiative they began last year to create and test how CBDCs can be used for cross-border and cross-currency payments. The central banks were assisted by Swiss tech firm BIS Innovation Hub Nordic Centre. 

“Project Icebreaker is unique in its proposition. It first allows central banks to have almost full autonomy in designing a domestic retail CBDC. Then it provides a model for that same CBDC to be used for international payments,” explained BIS Innovation Hub Innovation Head Cecilia Skingsley.

In February, the Reserve Bank of Australia announced its selection of 14 use cases for CBDC testing. The central bank will explore how a CBDC can be used for offline payments, nature-based asset trading, corporate bond and tokenized foreign exchange settlement, CBDC custodial models and high-quality liquid assets securities trading, as well as other use cases.

The Bank of Japan began testing its own CBDC in April after completing its proof-of-concept. Since October the Japanese Credit Bureau (JCB) has been building its own digital currency to simulate how people would be able to pay at restaurants with CBDC using credit cards. The company said that while it is currently using touch payments, JCB is working on providing mobile solutions for CBDC where users can pay via mobile app and even QR codes. 

The European Central Bank has partnered with 30 Spanish banks to develop a CBDC prototype and has already selected five corporations — including Amazon — to participate in trials.

One country, however, is experiencing unexpected difficulty in rolling out a CBDC.

Nigerians have taken to the streets in protest to demand a return to cash after the government began forcing its CBDC on citizens. 

The country’s central bank debuted Africa’s first CBDC in late 2021 but the digital currency was given a cold reception as less than 0.5% of Nigerians used it. To try coaxing citizens into adopting CBDC the Nigerian government removed restrictions that required bank accounts to use CBDC. When that failed, the government offered discounts on cab fares if riders used CBDC to pay.

When neither of those worked the Nigerian government launched a war on cash and restricted cash withdrawals to 100,000 naira ($225) per week for individuals and 500,000 naira ($1,123) for businesses. At the same time, the government also decided to redesign the currency, which limited banks’ cash reserves while they waited for the newly designed currency.

Nigerians have reportedly erupted in protest over the cash restrictions, but the government is doubling down. Central Bank of Nigeria Governor Godwin Emefiele said, “The destination, as far as I am concerned, is to achieve a 100% cashless economy in Nigeria.”