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Brazil is on the verge of becoming the first Latin American country to adopt a framework for crypto-assets, setting the bar for other countries in the region to follow.
At the end of November, Brazil’s Chamber of Deputies approved a bill that lays out a framework for virtual assets.
The bill defines virtual assets, requires crypto exchanges and other service providers to register before starting to operate in the country, and lays out general guidelines for the provision of crypto-related activities.
Crypto-assets that are securities will be supervised by Brazil’s Securities and Exchange Commission (CMV), while another regulator, which has yet to be named but is generally expected to be the central bank, will oversee crypto exchanges and other service providers.
Should the bill be signed into law, Brazil would become the first country in Latin America to adopt a legal directive for virtual assets and its experience “may serve as a model for other jurisdictions in the region that have been considering this approach”, Paulo Brancher, partner at Mattos Filho with expertise in crypto markets, told VIXIO.
“Brazil introducing this bill can set the ball rolling for the wider region to follow suit,” said Bryan Hernandez, president and co-founder of the blockchain-based investment platform called Structure.
If this bill does get passed, “I have no doubt that it will spur neighbouring countries into action to introduce similar regulatory frameworks”, Hernandez added.
‘A step in the right direction’
In addition to providing definitions and a registration requirement, the bill lays down principles and general guidelines that should be considered by crypto service providers when doing business in Brazil.
These include principles such as good governance practices, data protection and prevention of money laundering.
“It’s certainly a step in the right direction as far as mitigating potential risks,” said Hernandez.
However, Brancher noted that the real impact of the crypto framework is expected to unfold once the central bank lays out specific rules for the industry.
Regulatory aspects such as the authorisation process and withdrawals, transfer of control, mergers, incorporations, statutory bodies and administrators, supervision of activities, and defining situations in which the activities will be subject to foreign exchange regulation, have yet to be determined by the regulatory body.
“As these regulatory aspects will be further provided in the regulation, the provision of services involving virtual assets should not be affected, from a regulatory perspective, immediately after the bill is approved but will depend on the enactment of rules by the regulatory authority,” Brancher explained.
Dispute over segregation of assets
One of the main issues that spurred lengthy disputes between policymakers was the provision regarding the segregation of assets.
In April, the Senate approved the bill with language requiring crypto service providers to segregate their assets from the assets of their clients.
Such a provision would have been particularly useful in light of this year’s turmoil in the crypto markets and the recent collapse of FTX, which was largely the result of the company improperly transferring around $10bn in customer funds to its hedge fund Alameda Research.
However, the Chamber of Deputies decided to drop the requirement, arguing that it could be an obstacle to innovation and competition. Lawmakers added that the central bank may later revisit the matter and issue regulations as it sees fit.
“In the midst of the FTX fallout, institutional and retail investors alike are understandably concerned about the misuse of customer funds,” Hernandez said, adding that this “will have to be addressed down the line in order to rebuild trust in centralised entities”.
High adoption, FTX fallout prompt legislative action
The bill had been seven years in the making before Congress agreed on the final version on November 30.
During this time, the use of cryptocurrencies in Brazil has been growing rapidly, both as an investment asset and as a means of payment.
Crypto proponents say it can ease many of the pain points in traditional finance in the region, including costly remittances and financial inclusion, while it can serve as a store of value in the face of skyrocketing inflation.
Meanwhile, large market players, such as neobank Nubank and e-commerce giant Mercado Libre, have announced the launch of their own digital token in Brazil.
“Brazil is a hub for crypto innovation that has already embraced cutting-edge initiatives, such as Nubank and the Mercado coin,” according to Hernandez, who believes regulation “would only accelerate this trend”.
“If passed, this bill would give more crypto projects the green light to set up shop in Brazil, but this time with clearer regulatory guidance — which will enable more businesses to integrate cryptocurrencies, particularly bitcoin, as a payment method,” he added.
The bill is now in the hands of outgoing President Jair Bolsonaro, who has until December 21 to sign the bill into law or veto it.
According to Cointelegraph, the bill has the backing of both the current government and the new government to be formed by President-elect Luiz Inácio Lula da Silva.
