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Brazil’s Crypto Regulation Is Headed For a Turn

Caught in between the fire of Partido Popular (PP) salvation riffles is the crypto asset legal framework signed by Bolsonaro shortly before leaving office. Brazilian Central Bank and Brazilian Securities Exchange Commission contest for the Market Xerif role

Crypto regulation in Brazil

The market ruminates in anticipation as the government finalizes a decree introducing changes to the law, set to enter into force in June 2023.

A stable legal grounding might be all the crypto market needs to flourish in Brazil but the drastic change in the country’s government hails more instability for the already volatile market.

Having problems accepting the new independence of the Brazilian Central Bank (BCB) and at arms with many of the laws signed by former president Jair Bolsonaro, Lula da Silva’s government is struggling to give the country the stability it promised.

Brazil’s authorities changing views on crypto

Brazilian authorities first expressed their views on cryptocurrencies in 2014, during Dilma Rousseff’s government, Lula’s political mentee. At the time, the BCB issued a statement warning investors that the market was unregulated and unsupervised, discouraging investment.

But as the market matured, other government agencies issued norms to guide Brazilians’ cryptocurrency investments. In 2017, the Brazilian Securities Exchange Commission (CVM) ruled that some security tokens released during Initial Coin Offerings (ICOs) might be considered investment vehicles similar to securities, and started scrutinizing all ICOs happening in Brazil. In 2018, the CVM established guidelines for investment funds wishing to add cryptocurrencies to their portfolios.

In 2019, the Brazilian Federal Reserve Services (RFB) issued IN 1888, dictating tax reporting norms for crypto investors in Brazil.

Tax changes introduced with  IN 1888:

•Crypto assets worth $5 million reais or over have to be reported to the RFB;

•Capital gains deriving from the sale of crypto assets exceeding $30 million reais have to be reported. According to the law on capital gains, this means that a progressive tax applies. It starts at 15% for sums of $35 million reais and increases up to 22.5% for gains of $ 30 billion reais.

Through these years, there were several laws about crypto being discussed, some aimed at forbidding or even criminalizing crypto, while others intended at regulating the market and protecting investors. But, according to Roberto Dagnoni, a top executive at Mercado Bitcoin, they had been “kind of dormant”.

The new old crypto assets framework

The collapse of FTX triggered Brazilian Congress to make “the law prioritized”, and the crypto asset framework swiftly became law in November. Signed in December 2022 by the then president Jair Bolsonaro, it is set to come into force in June 2023.

However, at the last minute, some key aspects were left out. One of the most criticized absences was asset segregation measures, which would prohibit service providers from using customers’ assets as their own, meaning they wouldn’t be able to act like a bank or commit the type of fraud Sam Bankman-Fried did. As Julia Franco, partner at Cescon Barrieu put it, “In the case of asset segregation, this should be in the law.”

In its current form, the law introduces the definition of virtual assets and virtual assets providers in the law, changes the penal code and money-laundry law to encompass crimes in the provision of virtual assets services, and also determines the role of a “market xerif” to regulate the market.

Julien Dutra, director of Government Relations at 2TM Group, Bitcoin Market’s holding company, put the law into a culture-appropriate football analogy by saying

"This law outlines the four lines of the field and determines the appointment of a referee to this game. That is, it marks the appointment of a regulator for this market. In addition, it points out the definitions of digital items, what the activities of trading in digital assets are, and establishes the guiding principles of the activity. This, for sure, can greatly expand the crypto market in Brazil.”

Law 14.478/22, Crypto asset legal framework:

Virtual assets: the digital representation of value that can be traded or transferred by electronic means and used to make payments or for investment purposes.

Virtual asset providers: any legal entity that performs, on behalf of a third party, at least one of the services:

•The exchange between virtual assets and domestic or foreign currencies;

•Exchange between one or more virtual assets;

•Transfer of virtual assets; Custody or administration of the assets or of instruments that enable control over them;

•Participation in financial services and provision of services related to the offer by an issuer or sale of virtual assets.”

Law 14.478 - Key points of the legal framework:

-Cryptocurrencies are now accepted as a means of payment In Brazil;

-Introduces in the penal code the crime of fraud in the provision of services relating to virtual assets, susceptible to a 4 to 8 years prison sentence;

-Updates the current money laundry legislation by obliging operators of digital assets to report suspicious transactions to the COAF (Financial Activities Control Council.);

-Appoints a xerif on whose hands the job of regulating this and other security issues will fall.

Possible changes to the framework

When Lula left office in 2011, the Central Bank of Brazil (BCB) was not independent, the government had a say over its policies, but that changed in 2021. Under the presidency of Roberto Campos Neto, who has been conducting the country at a fast pace toward money digitalization, the BCB sets its interest rates, a matter Lula expected to have control of. The president has openly criticized the new power dynamic of the two institutions going so far as suggesting that, when Campos Netos terminates his presidency, the independence of the BCB will be reaccessed.

Struggling on several fronts, the new government is also reviewing and resetting laws approved by Bolsonaro. The cryptocurrency legal framework, signed just before the far-right former president left office, became part of the contested territory.

A group consisting of the teams of Gabriel Galípolo, executive secretary of the Ministry of Finance, and Marcos Pinto, secretary of economic reforms, with the technical support of the Central Bank and the Securities and Exchange Commission, is preparing a decree that will be regulating the crypto asset framework. The decree, which according to local news, introduces alterations to the law, was supposed to arrive at the Office of the President in early February but so far nothing.

Still to be determined, the role of xerif is expected to be shared between the Central Bank and the CVM. The question now is how power between them will be distributed. While the CBB is independent, the CVM is an arm of the Ministry of Finance and is therefore under government control.

To increase investor protection, sources said the group is also looking at ways to make asset segregation part of the law.

No final stance

The change of government change from far-right to left complicates the already unstable Brazilian economy, torn by inflation peaks, primary product dependency, and external vulnerability to the price of the dollar.

Cryptocurrencies have been helping Brazilians escape the country’s economy, a reason why market experts were so receptive to the law. Karen Duque, head of Public Policy of BitsoBrazil, regarded it as “the beginning of a new phase for the crypto economy in Brazil and Latin America".

However, no new chapter can be written until the new framework enters into force. If the law falls on the list of priorities, or if it gets caught in bureaucratic battles between the CVM and the CBB, then it is again the same old story of a country too riddled in power plays to play the game that matters - making the cryptocurrency blossom by assuring investor safety.