🇧🇷 Brazil Crypto Report #3: Binance Woes Spill Over into Brazil, ETF Fever + A Look Inside the Mercado Bitcoin Empire
Welcome to the Brazil Crypto Report for the week of July 12-16, 2021. We’re synthesizing the key crypto happenings in the southern hemisphere’s largest country.
We’re still nursing our wounds over Brazil’s loss to Argentina in the Copa America final. But if we’re being brutally honest here we have to admit that being a Brazil football fan over the last decade hasn’t been a very enviable task, so we’re not terribly shocked by the outcome. Still, the championship trophy and other memorabilia from the match being minted as NFTs is a pretty cool development.
Elsewhere this week, we’re touching on Binance news, a smattering of new crypto ETF approvals, new research into cryptocurrency scams in Brazil and a deeper look at Mercado Bitcoin’s growing footprint.
The meta-thesis for this publication is that Brazil, with a population of 214 million and a US$1.8tn economy, is the most overlooked crypto market in the world. The objective is to highlight the important news and provide useful context for the estrangeiro (foreigner) English-speaking audience.
If that’s something you’re interested in, then hit subscribe if you haven’t done so already and read on👇
Brazilian Portuguese Lesson of the Week
How to pronounce “criptomoeda'‘
Criptomoeda is the Portuguese word for ‘cryptocurrency’ (cripto = crypto; moeda = coin) and it’s fairly simple for the English speaker to pronounce without sounding like a total gringo.
The Portuguese ‘r’ is pronounced the same as in English, with the caveat that one must touch the tongue to the roof of the mouth when enunciating, creating almost a soft ‘d’ sound. ‘I’ is pronounced as a long ‘e’ in English (ie, bee), and the ‘e’ in moeda has the soft ‘e’ sound in English (ie, egg).
When we put it all together we get: k-DEEP-toe mo-EH-duh
Binance Brasil Director Steps Down after Six Months on the Job
Ricardo da Ros, country manager for Binance Brasil, announced on Linkedin this week that he is stepping down just six months after assuming the role. His stated reason was a “misalignment” between his personal values and the job’s expectations.
Prior to joining Binance Brasil in January 2021, Da Ros had worked for two years to build out the Brazilian operations of the Argentine crypto exchange Ripio.
It’s unclear exactly where the tensions arose here, but it’s fair to presume this is another manifestation of Binance’s ongoing cat and mouse game with authorities around the globe. We do know that Binance has been under some level of scrutiny in Brazil. ABCripto, a group of Brazilian brokerage firms, filed a complaint against the exchange earlier this year alleging that it was selling cryptocurrency derivative products without proper approval.
Binance is the world’s largest cryptocurrency exchange by volume and the largest in Brazil since it entered the country in 2019. It has come under significant regulatory scrutiny recently in the US, Canada, Japan, Singapore, Thailand, Italy, Hong Kong and even the Cayman Islands. It’s hard to imagine Da Ros’s departure not being another instance of this trend as the walls appear to be closing in.
QR Capital and Hashdex Ether ETFs Approved on B3 Stock Exchange
The approvals come a month after Latin America’s first bitcoin ETF, also a product of QR Capital, began trading on Brazil’s B3 stock exchange. With the announcement of Hashdex’s green bitcoin ETF (more on that below), there are now a total of five total crypto ETFs either trading or approved for trading on the B3.
The approval comes at a moment when the price of ETH has been sagging, down to under US$2,000 this week from an all time high of ~US$4,300 just a couple months back. ETH, however, has proven to be a resilient asset over the years and is widely viewed as the natural progression past bitcoin on the typical investor risk curve.
Once live, QETH1 and EETHE11, as the QR Capital and Hashdex funds are respectively known, will be the first ether ETFs in Brazil and among the first in the world. Several similar products were approved and began trading in Canada earlier this year.
Via these funds, retail Brazilian investors will be able to gain exposure to the second largest cryptocurrency by market cap.
No confirmed launched dates have been given, but their respective approvals by the CVM ensure that they will be listed sometime in the near future, possibly in early August.
Hashdex Plans Carbon-Offsetting Bitcoin ETF
Hashdex, the Brazilian asset manager, will launch a bitcoin ETF on the B3 exchange that seeks to neutralize carbon emissions. This news comes amid an onslaught of broader narrative problems surrounding bitcoin’s energy intensive proof-of-work mining process.
The ETF will use a slice of the one percent management fee to purchase carbon credits to offset emissions generated by bitcoin mining.
The fund will be formally listed on B3 in early August.
XP Investimentos, Itaú BBA and Banco Genial will administer the product, according to CoinDesk.
“We understand that bitcoin can contribute incentivizing clean energy usage around the world. We want to anticipate this movement and offer the investor a product that stimulates the sustainability potential of this asset,” said Roberta Antunes, Chief of Growth at Hashdex.
Hashdex will rely on the Crypto Carbon Ratings Institute to track the bitcoin network’s energy consumption and help calculate the carbon offsets pledged.
In related news, the Hashdex Nasdaq Crypto ETF ranked as the second most preferred asset amongst investor in June, according to CoinTelegraph Brasil. The HASH11 ETF, comprised of a basket of cryptocurrencies, began trading in April of this year on the B3.
CVM Study Highlights Prevalence of Cryptocurrency Scams in Brazil
Cryptocurrencies are the most common vehicle used by scam operators across the country, according to a new report by CVM - Brazil’s securities regulator.
The report surveyed victims in an attempt to discern which populations are most susceptible and how the scammers operate. Cryptocurrencies were specifically cited by 43% of respondents, significantly higher than other vehicles like foreign exchange (30%), binary options (17%) and equities (15%).
The study also found that 91% of scam victims were men, 38% had some higher education and 37% were between 30 and 39 years of age. 23% of victims reported investing between R$10,000 and R$50,000 (US$2,000 to US$10,000) in these schemes.
As we touched on in last week’s newsletter with the arrest of the Bitcoin King, scams and pyramid schemes are a widespread problem that aren’t germane to just cryptocurrency. But the fact that nearly half of the CVM survey’s respondents reported being entangled in a cryptocurrency scam is pretty bad optics. There’s still a lot of work to be done on this front to build trust among the public and authorities.
In-Depth: Inside Mercado Bitcoin’s Growing Empire
Last week we touched on Mercado Bitcoin’s massive $200m Series B from the Softbank Latin America Fund. Adding on some additional color here to help drive home the importance of this raise.
The Block’s Ryan Weeks had a nice write up earlier this week about the unicorn crypto exchange, which is now valued at $2.1bn, and its broader ambitions. The full article is behind a paywall but worth a read if you have access (and potentially worth a subscription if you don’t!)
In the piece, Fabrício Tota, director at Mercado Bitcoin, explained that the exchange’s current focus is on providing attractive investment opportunities for Brazilians, with longer term ambitions of providing financial services to unbanked populations and “sound money” alternatives in a country that’s had its share of hyperinflation problems over the years.
Because traditional markets in Brazil are far less accessible to common folk than in the United States and other Western countries, there is a big gap to be filled when it comes to providing these opportunities. Tota explained:
“In terms of investment, we are more than two years behind when you talk about traditional markets. We have only a little bit more than three million people investing on the stock exchange — it’s ridiculous in a country of more than two hundred million people,” he explains. “So with crypto we are closer to the U.S. than we are in terms of the stock market.”
Objectives such as reaching the unbanked, while noble, are less of an immediate priority for the company in part because of the success that fintechs and digital challenger banks like Nubank, which now has 40 million customers, have had penetrating that market.
The $200m raise which will go toward hiring more staff, building more infrastructure, acquiring other companies, expanding into other Latam markets like Chile, Mexico, Argentina and Colombia (where it will compete against the likes of Bitso, Ripio, Binance, etc)
It will also pursue other lines of business including crypto asset investment funds and tokenization - which is the digital fractionalization of real world assets using blockchain technology (a process that - at least in theory - allows for illiquid or large assets to be made available to a broader universe of investors).
Mercado Bitcoin and Grupo 2TM co-founder Gustavo Chamati explained the thinking as follows in an interview with Valor Investe (my translation…original quote in Portuguese):
“Bitcoin is a catalyst, but as we have added more currencies and products in the pool of investments it is becoming less relevant. We want to be the vector of transformation and prepare the market for an expansion in Brazil which has yet to begin”
What most observers may not realize is that Mercado Bitcoin is just the tip of the iceberg in the 2TM Group empire. 2TM is a holding company that owns the exchange and nine other companies. Among these are a tokenization firm (MB Digital Assets), an asset manager, a custodian (Bitrust), a digital bank, a crowdfunding platform and Blockchain Academy, which focuses on education initiatives. The company is also launching MezaPro, a service aimed at high net worth clients and institutional investors.
The playbook here isn’t terribly different from what we’ve seen amongst the major exchanges in Europe, Asia and North America like Coinbase, Gemini, Binance, etc. The exchange brings in the lion’s share of the revenue in the form of trading and/or token listing fees. Those proceeds, in turn, subsidize longer term projects aimed at generating future revenue stream and - in the case of Blockchain Academy - onboarding new customers and investors.
Chamati added that while the current plan is to focus on growing and scaling the business, an IPO could be in the works should conditions warrant":
“Given the velocity at which this market has moved, it might make sense to talk about this in the near future. We will see”