Exciting conversation with Pedro Magalhães, who examined the public code of the future Brazilian CBDC in detail

von | 20. Aug 2023

Not too long ago, we reported that the Brazilian programmer Pedro Magalhães took a closer look at the code of the upcoming digital central bank currency, Real Digital, now called Drex. The results are alarming and provhurride fertile ground for control and arbitrariness. 
Pedro is my guest today for our conversation, and he has exciting news to share.

Gregor, LegitimCrypto: Pedro, it is a particular pleasure for me to be able to have this conversation with you today. Brazil is quite far away for our German-speaking readers, mostly from Germany, Austria, and Switzerland, and we don’t get very many reports from Brazil. Perhaps you could tell us a little about where you live in Brazil. What’s the weather like? What are the people like – just, what’s it like there?

Pedro, Iora Labs: Thank you for the invitation, I’m so glad to be here. I live in Rio de Janeiro, a place where greenery intertwines with buildings and nature blends with Portuguese architecture. Here, birds come in a variety of colors, including blue, green, yellow, some with large beaks, others small, some are noisy, and others mimic different animals. The beach water is cold, but the heat is intense. It’s a combination of exotic sensations that only those who have experienced it can explain. Today it is cold and the temperature is 23 degrees Celsius.
Brazil is a vast country. To give you an idea, the northern part of Brazil is closer to Canada than it is to the southern part of Brazil.

Gregor, LegitimCrypto: That seems to be a very interesting contrast.You’re a programmer and have a company for, let’s say generally, blockchain development. I’d like to delve into your company later on. Was this always your desire, or as a child did you want to become and do something completely different?

Pedro, Iora Labs: I have always been interested in technology. In Brazil, I had limited resources and access during my childhood, but my father could buy a computer as an investment, it was an AMD 486. It was enough for me to start interacting with the machine and understand its operations. I knew what I wanted from a young age.

Gregor, LegitimCrypto: When comparing the performance of the AMD 486 with today’s models, it’s almost surprising that one could do anything with it at all. But it’s also been a while, I think the series originates from the 90s.

Pedro, Iora Labs: Yes, I used to play with and build IoT devices using Raspberry Pi. It’s a small device that has thousands more processes compared to the AMD 486. I love to see how rapidly technology has advanced

Gregor, LegitimCrypto: What fascinates you about it? Blockchain technology is still quite young. Did the topic immediately interest you – or how did you get into it? Sometimes we have key experiences, perhaps you had one as well. Often they are associated with the country where we grow up.

Pedro, Iora Labs: Yes, in Brazil we have limited ways to access external resources. Brazil is closed from a financial point of view but open to the world in terms of information. So it was not difficult to understand the logic of Bitcoin and have access to a global decentralized financial system. To have an idea, Brazilians could not have access to other currencies like the dollar or euro, only in recent years this has been possible thanks to a small economic opening.

Gregor, LegitimCrypto: Is the trend towards opening up being continued, or is it already going in the other direction? The reports I at least get about Brazil are not very clear and definitive, hence the question to you as an ‚insider‘.

Pedro, Iora Labs: The trend towards economic opening in Brazil is indeed continuing, albeit with some challenges. Historically, our economy has been largely protective of our local market. We’ve traditionally focused on exporting to neighbors like Argentina, Uruguay and Paraguay and in recent times, China has emerged as a primary buyer for Brazilian goods. We’re now witnessing a significant influx of Chinese companies in Brazil, spanning industries from automobiles to high-end technological processes.

Gregor, LegitimCrypto: Very interesting! Do you see in what you do only a way to earn good money, or are there also societal reasons or motivations. I suppose it will be the latter, otherwise you probably wouldn’t have dealt with the code of the Drex – CBDC.

Pedro, Iora Labs: What has always motivated me is the philosophy of decentralization, to eliminate intermediaries and connect directly with people.

Gregor, LegitimCrypto: I’ll interrupt you briefly here. I find it very interesting. You live in a country far removed from Europe, yet I hear the same statement from you as from all previous interlocutors. I think this clearly demonstrates the real benefit of Bitcoin. But please continue – I interrupted you.

Pedro, Iora Labs: Exactly! live in a country where the state controls everything, drains resources from society, and favors economic classes linked to the state at the expense of taxpayers. It’s hard to see that taxes are used exclusively for politicians and their families, while you see poor children on the streets, slums, extreme violence every day. Money has become something very relative from my point of view.

Gregor, LegitimCrypto: The social imbalance is certainly not easy to witness every day. The trend towards more inequality is clearly felt in most EU countries. In many areas it’s not yet so obvious, but countries like Brazil can clearly show us where the journey can lead if no countermeasures are taken – even though the past is very different. In this context of the social imbalance in Brazil:How do you view Bitcoin and what role can or could it play for Brazilians?

Pedro, Iora Labs: Bitcoin could return power to the people, where it truly belongs. Although they constantly say that power emanates from the people, this logic no longer exists. State authorities and employees scoff at the people daily.

Gregor, LegitimCrypto: Yes, the difference between what is said and written and how it looks in reality.
Can the Lightning Network help support the spread of Bitcoin? Perhaps you can explain to our readers, who have never heard of the Lightning Network, what it is.

Pedro, Iora Labs: Think of it as a network of faster payment channels that allow for rapid, low-cost Bitcoin transactions. It works by opening up private payment channels between parties, allowing them to make numerous transactions without committing all of them to the Bitcoin blockchain. This means Bitcoin can be sent and received almost instantly and with minimal fees, which can be particularly useful in everyday transactions, making Bitcoin more accessible and practical to use for everyone.

Gregor, LegitimCrypto: What are the regulations for cryptos and specifically for Bitcoin in Brazil? Is it encouraged or discouraged?

Pedro, Iora Labs: In my opinion, there’s more of a bankers lobby pressure to attract foreign investments to Brazil. Without regulation, banks and investment funds couldn’t make any moves to combat the growth of cryptocurrencies in Brazil. The volume and adoption of crypto here is surreal. Between 2022 and 2023 alone, Brazil saw a movement of 21.9 billion dollars in cryptocurrencies. The volume and adoption rate of crypto here is astounding. It’s worth noting that Brazil is on the verge of regulating Bitcoin as a payment method. However, there’s anticipation around the Central Bank Digital Currency (CBDC) in Brazil, primarily seen as a way to monitor tax obligations when, for any reason, people need to convert Bitcoin into Real, our fiat currency.

Gregor, LegitimCrypto: In Europe, we are still far from such large volumes that we could perceive them as astounding.

Around the world, we see the development of CBDCs. So too in Brazil with the Real Digital, now Drex. I’m interested in your assessment of the base blockchain Ethereum for the Drex. Ethereum is based in Switzerland and some question its true decentralization. Wouldn’t the Brazilian state put itself into a certain dependency on Ethereum, which isn’t entirely neutral?

Pedro, Iora Labs: They’ve used Hyperledger Besu technology, which allows for a more complex consensus than Proof of Authority, delegating nodes to certain servers without the need for gas. It’s a blockchain without miners and with delegated verifiers. In a way, the use of this technology is independent of the Ethereum Foundation. 

Gregor, LegitimCrypto: Ethereum essentially provides the highway on which a CBDC, like the Drex, can ‚drive‘.We recently had an article about the interconnection of private companies with their services and state tasks and sovereignties. It was about the blockchain surveillance companies, whose ‚opinions‘ on user behavior can lead to legal consequences in some cases.

With politicians and their motivations, you can never be so sure. Money and power are definitely part of it. And sometimes I have the feeling that they are more than naive, thinking of statements by German politicians – not only German politicians. Sometimes I also wonder how much of it is just show. But back to our topic: How far has the development of the Drex progressed?

Pedro, Iora Labs: Yes, it’s the same in Brazil. In fact, sometimes the interests of public and private sectors tread a fine line.
The development of the Digital Real is progressing swiftly. They are in a hurry with it; if they take too long, Brazilians will have already jumped ship. They are planning to launch their initial version by 2024, which will be primarily focused on facilitating transactions between the Central Banks and both private and public banks in Brazil. The final stage will introduce the ‚Tokenized Real‘, intended for domestic transactions. However, there is no set timeline yet for its launch.

Gregor, LegitimCrypto: So, step by step. Let’s dive a bit into the basics. As a first question, I would like to know what smart contracts are.

Pedro, Iora Labs: Regarding smart contracts, they’re similar to normal contracts where we specify the conditions and requirements for an event to occur. Imagine it like an employment contract, where you’re required to work a certain number of hours to receive a specific salary. If you’ve worked the hours, you get your salary, almost automatically, because that’s what the employment contract stipulates. That’s essentially how smart contracts work, but they use algorithms to automatically execute ‚if this, then that‘. That’s why it’s called programmable money, because you can program almost any ‚if this, then that‘ scenarios. It’s all about logic.

Gregor, LegitimCrypto: A good example and I really like that you used the word ‚programmable‘, because that is one of the basics of a CBDC.You’ve examined the code of the Real Digital very closely. I’d like to briefly go through all the functions you’ve listed and what they could potentially mean.

Pedro, Iora Labs: I couldn’t examine it too closely because a significant portion of the code is concealed. I could simply recreate them using just a few files and the available public documentation. If what I’ve discovered is already startling, one can only imagine what’s hidden in the rest of the code.

One of my daily tasks is to evaluate if a cryptocurrency might be a scam. That’s how I stumbled upon the smart contracts of the CBDC. 

Based on our reverse engineering, which provided the Application Binary Interface (ABI) from the Central Bank, we have identified these main functionalities:

Transfer any value or digital assets from any origin and any destination: This means the Central Bank can allow any amount of digital assets or values to be transferred from one account to any other account, irrespective of their origin or destination. This could potentially mean that the central bank has the power to control any transactions and redirect funds.

Gregor, LegitimCrypto: A dream for the central bank in terms of control and power. The next point was:

Pedro, Iora Labs: Create new tokens unlimited, specify any account to receive: This signifies that the central bank has the power to create an unlimited number of tokens or digital currency and assign these to any account. This might lead to a situation of unchecked creation of digital currency, raising questions about its value and stability.

Gregor, LegitimCrypto: If I understand you correctly, this can obscure the entire money supply, as no one knows the exact numbers. The National Bank can create money without loans or other mechanisms.

Pedro, Iora Labs: Yes, The ability for the Bacen to create an unlimited number of tokens and allocate them to any account without checks or balances essentially grants them unparalleled monetary power. 

The next point was ‚Burn any tokens, assets for any account‘: This function gives the authority the power to destroy or ‚burn‘ any digital assets or tokens from any account. This could mean that assets could potentially be wiped out from an account, possibly without the consent or knowledge of the account holder.

Gregor, LegitimCrypto: It’s practically the other side of the point before. Not creating money out of nothing, but making it ’simply‘ disappear. Sounds directly like a magic show – and we all know that the basis of such shows are tricks. Only with CBDCs, the tricks turn into real consequences for the users. What was the next point, Pedro?

Pedro, Iora Labs: ​​​​​​You’re right. By removing funds from the digital ecosystem, the central bank can influence liquidity, potentially causing deflationary pressures. This ability, when combined with the power to create tokens, gives the central bank unparalleled control over both inflationary and deflationary pressures.

The next point is: Freeze any partial balance of any account: This function gives the ability to freeze any part of the balance in any account. This suggests a high level of control by the central authority over individual accounts, potentially infringing on financial freedom.

Gregor, LegitimCrypto:​​​​​​​ This reminds me of the somewhat arbitrary account freezes that occur again and again and where the legal process was not really adhered to. I also see the next point very critically:Delegate roles for anyone to do these functions. 

Pedro, Iora Labs: With this system in place, the central authority can delegate the power to any person or entity to carry out these functions. It’s worth noting that Central Banks currently have the legal ability to freeze balances. However, with the new system, they will be able to do this instantly. This development might raise concerns regarding who is granted such powers and the potential for misuse or abuse.

Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​​​​​​​​For me, the question arises of how easy it could be to gain such rights through a hacking attack. After all, at least in my imagination, there must be an access where one person grants these rights to another, many still secured, over the fact that several people have to agree, but in the end it is human-based.

Pedro, Iora Labs: Indeed, Gregor, the concern you raise about the potential vulnerability of human-based systems is valid. However, it’s essential to emphasize that blockchain technology, which underpins these systems, is inherently more secure than many of the traditional ones we currently employ. They’ve inherited the data encryption structure initially used in Bitcoin and subsequently in Ethereum. This cryptography foundation provides an added layer of security and reduces the chances of unauthorized access, even in scenarios where humans grant rights or permissions.

Gregor, LegitimCrypto:​​​​​​​ For me, the question always remains as to how the laws and regulations were made that dictate who ultimately has ‚legal‘ access.

Let’s move on to the last point now: Activate and deactivate any account for any wallet address.

Pedro, Iora Labs: This function means the central bank can activate or deactivate any account tied to any wallet address. This means the central bank has the power to effectively shut down any account at its discretion, potentially without due process.

Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​​​​​​​​I thank you very much for these explanations and I believe that some readers are slowly becoming aware of what we are dealing with when it comes to these seemingly harmless digital central bank monies. This again raises the question of security, that not just anyone who has certain rights can deactivate accounts. And even if it’s done by the National Bank, it remains an incredible monopoly of power they gain through this. It will probably be difficult to reactivate an account.
On a different topic: ​​​​​​​You own a company and one of the focuses is the development of Web3 applications. Can you briefly tell us what Web3 is and how you see your role with the company’s focus on it?

Pedro, Iora Labs: Iora Labs is a company focused on peer-to-peer infrastructure, the development and analysis of smart contracts, and the development of decentralized applications.
Web3 is a space where users can connect through a peer-to-peer network with minimal or no intermediaries. It allows people from all around the world to connect without the need for official identification provided by authorities. Essentially, it’s about fostering pure connections without assigning labels to individuals. It’s an old-fashioned approach to making friends, conducting business, and earning money, but within a modern framework.

Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​​​​​​​​How did the name Iora Labs come about? Is there a story behind it?

Pedro, Iora Labs: Yes, it’s related to „ora“ in Latin, which means „time“. The „i“ stands for international, so „Iora“. The initial concept was a LatAm blockchain designed to offer services from LatAm developers and connect them to markets outside, like Europe. However, I later abandoned the idea of creating a new blockchain, choosing instead to adopt Bitcoin and continue providing services on web3.

Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​Our world has become small in many aspects. This is also evident in our interview, despite the physical distance between us. The same goes for payments with e.g. Bitcoin, where distance plays no role. Therefore, perhaps your offers from Iora Labs could also be interesting for Legitim readers. What do you think?

Pedro, Iora Labs: Absolutely, if anyone is interested in understanding more about web3, cryptocurrencies, and exploring how they could potentially transform a traditional business into a web3 space, I can certainly help provide these solutions.

Gregor, LegitimCrypto:​​​​​​​ That sounds interesting. Bringing a traditional business into the Web3 space. Can you describe that in more detail?

Pedro, Iora Labs: The process begins with understanding the client’s business model thoroughly. Based on that, we strategize a roadmap to integrate their operations with Web3. This involves developing suitable smart contracts tailored to their unique requirements. After migrating their operations to the Web3 environment, rigorous testing ensues. We ensure that the integration is not only smooth but also secure, making necessary security enhancements. Finally, once everything is set up and validated, traditional companies can operate seamlessly in the Web3 space. As for communication, it can be both in writing and through video calls. In today’s digital age, geographical boundaries have blurred, and global collaboration is easier than ever.

Gregor, LegitimCrypto: Oh yes, you are absolutely right.​​​​​​​

Pedro, Iora Labs: ​​​​​​​Throughout this journey, all our interactions, be it updates, clarifications, or brainstorming sessions, are conducted via emails and video conferences. This ensures a clear line of communication, making the process transparent and effective. Remember, in today’s interconnected world, global collaborations are not only feasible but also highly efficient.

Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​In which languages is this possible and would it be possible to pay in Bitcoin? Otherwise, the ‚bank way‘ consumes a lot of money in fees.

Pedro, Iora Labs: Of course! Bitcoin will always be our top priority. I primarily operate in Portuguese,  Spanish and English.

Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​What other services do you offer?

Pedro, Iora Labs: Well, Gregor, I appreciate the question. Iora Labs prides itself on offering a comprehensive suite of services specifically designed for the blockchain landscape. Let me break them down for you:

  • Bespoke Blockchain Solutions: We’re not just about creating blockchain systems. It’s about understanding what our clients want and need. We take their vision, create a clear roadmap, and then bring it to life.
  • Collaborative Innovation: From the moment we first discuss an idea with our clients to its final implementation, we’re there every step of the way. The aim is to truly understand what they want to achieve and then use the best tools available to make it happen.
  • Migration Expertise: Transitioning to blockchain can be challenging for many businesses. We make that process easier by creating systems that can be easily integrated with what they already have. The idea is to make the change smooth and beneficial.
  • End-to-End Web Development: Our expertise doesn’t stop at blockchain. With skills in both front-end and back-end web development, we ensure that the solutions we provide are user-friendly and robust.
  • Smart Contract Development: In the world of blockchain, smart contracts are essential. We ensure that these contracts, which carry out transactions on their own, work seamlessly.

Gregor, LegitimCrypto:​​​​​​​ That was a long list, you really offer quite a lot.​​​​​​​

You are active on social media, and we will attach the links to our conversation – and you mentioned a free weekly newsletter during our preliminary discussion. Can you tell us more about it and how one can sign up for it? Is it in English?

Pedro, Iora Labs: ​​​​​​​Yes, its in english. For anyone interested in receiving news related to blockchain in the Latin space, please follow my LinkedIn profile page. We’ve established a weekly newsletter section.

​​​​​​​​​​​​​​Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​You can find the link below our conversation.​​​​​​​For the Legitim community, you’ve offered us a discount when using one of your paid services. Can you elaborate on this, or what do we need to do to take advantage of the discount?

Pedro, Iora Labs: Indeed, Gregor. As a gesture of appreciation for the Legitim community, we’re offering a special 10% discount on our services. To avail of this discount, when reaching out to us through our official website’s contact form, simply mention that you found us through LegitimCrypto. Our team will ensure the discount is applied to your service package. We’re excited to collaborate with members of the Legitim community and help them explore the potential of blockchain technology!

​​​​​​​​​​​​​​​​​​​​​​​​​Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​That sounds very good and with your research on the Drex, we also know about your competence in this area. I would like to ask you at the end of our conversation, what do you wish from our readers?

Pedro, Iora Labs: Gregor, firstly, I genuinely hope that your readers take away the immense potential and transformative power of blockchain technology. It’s not just about digital currencies; it’s about reshaping industries and creating trust in a decentralized manner. Secondly, I encourage them to stay curious and informed. ​​​​​​​

The landscape is evolving rapidly, and being informed allows one to harness opportunities and mitigate challenges. Lastly, I invite them to engage with us, ask questions, share perspectives, and even challenge us. It’s through these collective conversations that we can truly push the boundaries of what’s possible in this domain.

Thank you for giving me the platform to share, and to your readers. It was a pleasure to be here.

​​​​​​​​​​​​​​​​​​​​​​​​​Gregor, LegitimCrypto:​​​​​​​ ​​​​​​​Talking with you was a pleasure, and I’m very glad to have been able to learn new information and different perspectives from you.

Related Links from Pedro:

Recommended Articles (in German):

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