Why Brazil’s crypto framework matters

In the wake of the collapse of crypto exchange FTX, along with the disappearance of at least US$1bn in customer funds, Brazil's approval of a regulatory framework for crypto assets has been well received by the market.

The bill was approved by congress earlier this month and is expected to be signed by President Jair Bolsonaro or president-elect Luiz Inácio Lula da Silva when he takes office on January 1. Once it's signed into law, companies will have 180 days to adapt to the new rules.

Chile and Uruguay are debating similar bills.

“The approval is a milestone for the Brazilian crypto economy. The sector gains further strength and legal security, attracting investments, creating new jobs and developing new technologies,” Renata Mancini, CCO of the NovaDAX exchange and president of Brazilian cryptocurrency association ABCripto, tells BNamericas.

The legislation is aimed at regulating services and preventing embezzlement and money laundering involving virtual assets. It establishes embezzlement of virtual assets as a crime punishable with up to six years in prison.

It also creates a license for the operation of “virtual service providers” for market exchanges and other intermediary companies that trade in crypto assets.

Among the points yet to be defined in the framework is who will regulate the sector. Mancini believes it will be overseen by the central bank and market watchdog CVM.

“The norm will give autonomy to the executive branch to regulate – and there will probably be a decree passing this responsibility on to the central bank, which is the body best prepared to do it,” said Giancarllo Melito, a partner in the means of payment and fintech area at law firm Barcellos Tucunduva Advogados (BTLAW).

The cryptocurrency and blockchain committee of the digital economy chamber, camara-e.net, said that the law provides greater legal security for the development of the sector, both for users and the institutions that participate in the industry.

“This important stage of the debate on the crypto and blockchain industry has been completed, but it is necessary to await the next steps and the course of the proposal until signed by the president,” the chamber said in a statement.

Asset segregation

During the debates on the bill, the clause that stated that the assets of virtual asset service providers must be separate from the assets of investors was rejected by lawmakers.

The so-called "asset segregation" provision guarantees greater protection of clients' funds, according to experts.

“Certainly, the most controversial point in the text of the bill was regarding so-called asset segregation, which is a device that guarantees investors that their assets, even in custody at a brokerage or exchange firm, are their property and, thus, in the event of something like bankruptcy, they will be returned to the investor/owner and cannot be used to pay any creditors,” said Lorena Borges Botelho, partner in the corporate, contracts and innovation practice at law firm Peck Advogados.

Despite the rejection of this part of the bill, it is possible that asset segregation could be included in future regulations.

“ABCripto understands that this [asset segregation] is a healthy and preventive measure, widely used in other types of markets, such as finance and real estate, and it would be good for the crypto economy, increasing the health of the sector for all its participants," said Mancini.

FTX aftermath

On Monday, FTX founder Sam Bankman-Fried was arrested in the Bahamas at the behest of US prosecutors. The crypto mogul is now expected to be extradited to the US to face charges of wire fraud.

According to Mancini, Brazilian clients who invested in FTX were also impacted by the trader's failure, although to a much lesser extent than investors elsewhere.

“That is why the approved bill is so important. We need to bring protection to Brazilian customers and investors,” she said.

The collapse of FTX not only resulted in the disappearance of an estimated US$1bn-US$2bn that belonged to customers, but also triggered a new crisis of confidence in virtual currencies.

“In a regulated market, everyone operates according to the same rules. We have reasonable and appropriate conditions so that companies can offer products and services more widely, at the same time that the sector develops naturally,” she said.

MercadoLibre's digital bank and fintech Mercado Pago, which recently started offering cryptocurrencies among its services, is betting on growth in the number of users.

The fintech launched a digital media campaign in which it claims that operating with cryptocurrency is safe and easy.

“The campaign reinforces Mercado Pago's purpose of popularizing topics related to finance, so that Brazilians have the knowledge to make decisions about the best financial services depending on their needs and expectations,” said Ignacio Estivariz, senior director of digital banking at Mercado Pago.

“It’s already possible to carry out transactions simply and securely. The user can buy, sell or stock bitcoin, ethereum and the stablecoin Pax Dollar, from 1 real [US$0.20] through the Mercado Pago app.”

The crypto market has been growning rapidly in Brazil. In October, Binance, the world's largest crypto exchange in terms of business volume, opened two offices in Brazil. At the time, Binance said Brazil was one of its top 10 markets globally and was the largest in Latin America.

In the first nine months of this year, the country moved around 89bn reais in crypto ass, according to Mancini.

She also said that 10.6mn Brazilians carried out at least one transaction with virtual assets in 2021. She added that Brazil generated 10,000 jobs related to crypto assets last year and collected taxes estimated at between 314mn reais and 561mn reais.