Representation of cryptocurrencies
Representation of cryptocurrencies are seen in this illustration photo taken in Krakow, Poland on September 28, 2021. Photo: Jakub Porzycki/NurPhoto/Shutterstock

What may change with the regulation of crypto assets in Brazil

The numbers around cryptocurrencies in Brazil are indeed superlative. In 2021, investors moved BRL 200.7 billion through these assets, more than double the previous year, according to the country's federal revenue service. Learn about the main implications of the two bills currently under discussion in the Brazilian Congress:

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The dizzying growth of bitcoin’s market value, starting in 2017, and the profusion of new blockchain-based businesses, including illegal ones, caught the attention of Brazilian investors. Now, in the wake of the crypto-asset boom – and the scams involving this type of digital asset – the Brazilian Congress is rushing to regulate the sector.

In the Brazilian Securities and Exchange Commission (CVM) definition, crypto-assets are virtual assets protected by cryptography, present exclusively in digital records, whose operations are executed and stored in a computer network. Bitcoin and NFTs fall under the concept and are perhaps the most popular types at the moment.

There are two bills (and their annexes) currently under discussion in the Brazilian Congress: one by federal deputy Aureo Ribeiro (PL 2060/19) and another by senator Flávio Arns. In late February, the Senate Committee on Economic Affairs (CAE) accepted suggestions that changed three matters in Arns’ bill. If lawmakers do not submit any appeal to vote on the bill in plenary, the text will go straight to Brazil‘s Chamber of Deputies. In other words, things can happen very quickly in the coming weeks.

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In 2021, investors moved BRL 200.7 billion through these assets, more than double the previous year (BRL 91.4 billion), according to the country’s federal revenue service.

A study by TripleA in partnership with Binance, one of the largest cryptocurrency exchanges worldwide, revealed that about 10 million Brazilians already invest in this category of crypto-assets — again, more than double the base of individuals with trading accounts on B3, the Brazilian stock exchange.

The popularity of crypto, driven by the high valuation of cryptocurrencies and the NFTs hype in recent years, combined with uncritical coverage by the specialized press and word of mouth, also increased the volume and the concern around scams and misuse cases involving crypto assets.

“The bill brings several robust legal mechanisms to prevent and fight the fraudulent use of crypto assets,” explained Senator Flávio Arns in an interview with LABS.

The bill under discussion in the Senate submits businessmen and companies that trade such assets to protection laws against money laundering, crimes against the financial system, and consumer protection. According to the bill, individuals and companies would also have to identify and report suspicious operations to the country’s Financial Activities Control Council (Coaf). In addition, companies in the sector (mainly exchanges) would be considered financial institutions, having to undergo some adjustments.

Brazil has one of the safest and most regulated financial systems in the world, and it is very common for regulatory bodies to monitor the performance and evolution of new products or models before evolving into regulation,” explains José Luiz Rodrigues, lawyer and partner at the JL Rodrigues & Consultores Associados office.

The new laws, explains Rodrigues, aim to guarantee security to all those involved: “With a regulation set, investors will be able to understand if a crypto transaction is legal or not, that is, if it follows the requirements of security defined by regulators. In addition, institutions that operate crypto assets will be subject to sanctions, which ends up helping to inhibit improper practices.”

The rules proposed by Congress will add to and extend those already in force. The lawyer cites, as an example, the Normative Instruction 1.888/2019 from the federal revenue service, which established that investors have to declare crypto assets in their income tax declaration. In 2021, the scope of the obligation was expanded to encompass NFTs as well.

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What really changes with crypto-asset regulation

At first, however, the new law, if and when approved, will not change much in the lives of investors and companies that already operate in Brazil because, “in general, such companies already adopt governance, compliance and transparency guidelines proposed in the project,” explains Senator Arns.

The change will come in a second moment, with the regulation by the Executive power. It will be when definitions such as the authorization procedure for new companies in the segment and the requirements to be adopted for the continuity of the operations of the existing ones will be defined in greater detail. Existent companies would have a grace period of at least six months to carry out the regulatory adjustments.

As expected, entities such as the Central Bank, the federal revenue service, and the CVM would be the ones in charge of the sector’s supervision. Arns said that in meetings and public hearings, these organizations have assured that they are prepared to fulfill the demand.

The regulation, recalls Arns, will have to pay attention to atypical but possible scenarios, such as trading outside regulated exchanges and carried out by trading without representation in Brazil. According to the senator, both cases are not directly addressed by the bill, which deals with more general and broader issues.

Through the project, he continues, “the Executive can create a simplified procedure for licensing operations with crypto assets, which can be applied to investors outside the brokerage system. It would also be up to the Executive to provide for the cases in which activities or operations on virtual assets will be included in the foreign exchange market, in compliance with the regulation of Brazilian capital abroad and foreign capital in the country.”

“Cryptocurrencies are becoming popular as assets with infinite profitability, which is not true, and people fall into traps because they believe that their money can yield extraordinary results”, highlights Rodrigues. The remedy brought by regulation, in this case, is indirect. With it, investors will have more guarantees and parameters to verify the suitability of institutions that offer investment opportunities in crypto-assets.

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Regulation versus banning

Despite the high volumes of crypto assets traded and the large number of people interested in this type of business in Brazil, the topic is not unanimous globally. More than 50 countries, including China, have banned cryptocurrencies from their economies. So why does Brazil choose for regulation?

Arns understands the matter as inevitable: “The State aiming to ban the use of virtual assets is impractical since decentralized registration technology and the use of crypto-assets around the world are inexorable phenomena, which only tend to grow and develop.”

In this context, its role would be to “adapt and help to develop [this market] most efficiently and productively,” especially as it is “an interesting alternative to the conventional financial and monetary system.”

Rodrigues cites political-economic differences to explain the direction of each country in the regulation-banning dilemma: “China’s ban involves a matter of restricting competition — typical of that country’s political regime — to the digital yuan. What guides the agenda of regulators in Brazil is the market. Given the evolution of this market and the intense volume of transactions, the solution is regulation.”

Translated by Fabiane Ziolla Menezes