Financial privacy and decentralized transactions at risk

By Tiago Piassum and Cristiano Oliveira

Digital payment methods have profoundly transformed the way we interact with money. Transactions that once depended on physical banknotes or lengthy processes can now be completed with just a few clicks, instantly and efficiently. This transformation has brought convenience and security to millions, especially in countries like Brazil, where solutions such as PIX have revolutionized daily financial life. However, these advances come with significant challenges, with the loss of privacy being one of the most concerning. Unlike cash, which guarantees total anonymity, digital transactions leave traces, exposing financial information that was previously restricted to the parties involved.

Physical money has unique characteristics that make it indispensable for individual freedom. In a transaction made with banknotes or coins, only those involved in the operation know what was purchased and the amount exchanged. There are no digital records or financial histories accessible to third parties. This neutrality is one of cash’s greatest qualities, allowing individuals to make purchases, donations, or negotiations without fear of external judgment or potential privacy violations. More importantly, cash does not discriminate or impose restrictions on how or where it can be used, functioning as a universal instrument that ensures individual autonomy. Ultimately, it symbolizes a form of freedom that goes beyond finance.

However, with the rapid advance of digitalization, this scenario is changing fast. The emergence of central bank digital currencies (CBDCs) marks a new era of payment systems, promising efficiency and modernity but also raising serious concerns about privacy and financial freedom. In Brazil, the prototype of this technology, named Drex, is already under development, following a global trend. Although CBDCs use blockchain technology, which is known for its transparency and security, they operate under a centralized model. In this system, all transactions are recorded immutably, with direct access by financial authorities. The declared objective is to improve control, traceability, and efficiency in transactions. However, the cost of this control is high, especially when analyzing its implications for individual rights.

The inherent centralization of CBDCs brings risks that cannot be ignored. While physical cash guarantees anonymity, transactions carried out with centralized digital currencies are completely transparent to the authority managing them. In extreme cases, governments or institutions could block individuals' access to their funds or restrict how money can be spent. The idea that someone could be prevented from using their own money for a specific good or service based on a central authority’s decision raises a critical question: Are we willing to sacrifice individual autonomy in the name of digital efficiency? Financial privacy is not a privilege but an essential freedom for any society that values individual rights.

This is where decentralized alternatives come in, such as decentralized finance (DeFi) networks, peer-to-peer (P2P) transactions, and stablecoins. These solutions offer a different vision for the financial future, prioritizing privacy and autonomy in a decentralized environment. Stablecoins are private digital currencies—classified as cryptocurrencies—whose value is pegged to stable assets such as fiat currencies (dollar, euro) or baskets of assets. This feature eliminates the volatility common in other cryptocurrencies, making them a more reliable alternative for transactions and store of value.

Recently, the Central Bank of Brazil proposed a change to Resolution No. 277 that threatens to undermine the potential of stablecoins and decentralized finance. The proposal seeks to classify stablecoin transactions as foreign exchange operations, limiting them to authorized institutions such as banks and brokers. In practice, this means that stablecoin transactions conducted via decentralized or peer-to-peer protocols would be considered illegal.

By criminalizing decentralized transactions, the regulation disregards technological advances that could benefit millions of people. Instead of fostering an environment of innovation, it restricts the adoption of financial solutions that promote inclusion and efficiency. While it is undeniable that the crypto market needs oversight to prevent abuses and fraud, imposing limits that distort the essential functioning of these technologies could stifle their adoption and compromise their contribution to a more inclusive and less centralized economy.

The debate on digital currencies—whether CBDCs or stablecoins—is, at its core, a discussion about fundamental choices. If we want to preserve financial autonomy and privacy, it is essential to find a balance between regulation and innovation, allowing decentralized technologies to thrive without sacrificing the fundamental rights that define a free society.

CEO of Rivool Finance
Head of Research at Rivool Finance