🇧🇷BCR #96: Brazil's crypto law is official - what comes next?
Plus: B3 postpones its bitcoin futures launch; CPI investigating crypto pyramids is formalized
🔥 Quick shout out to our partners at the BlockchainSP Festival and Digital Finance Brasil. These events will take place June 20-23 at the University of São Paulo and bring together crypto and TradFi professionals, students, hackers and investors from all walks
Welcome to 🇧🇷Brazil Crypto Report for the week of June 12-16, 2023. It was another important week for crypto in the country as we’ll soon see.
I’ll be at the BlockchainSP and Digital Finance Brazil events this week so hope to see some of you all in person.
Let’s kick this thing off
🚨Lula government signs decree formalizing Brazil’s crypto law
The Executive Branch issued a long-awaited decree formalizing Brazil’s crypto law, which was passed last December. The decree names the Central Bank and CVM (Brazil’s securities regulator) as regulators of the industry.
Notably, the decree gives the Central Bank authority over virtual asset service providers (VASPs) and the CVM authority over cryptos that have characteristics of securities. This clearly defined division of responsibility is a massive leap forward given the roadblocks we are seeing in the US and elsewhere, where crypto regulation is being throttled in part due to agency turf wars.
QR Asset’s Alexandre Ludolf explained:
"This distinction is not just a technicality, but a fundamental step towards the growth of our digital asset industry, giving the Central Bank the power to regulate all assets that are not digital securities (VMDs). This move creates an environment less complex and more conducive to innovation.”
The Central Bank now has 180 days to develop a regulatory framework and rules governing crypto companies in the Brazil market, and it will be tasked with supervising these entities.
The decree was formally published in the Official Gazette and was signed by President Luiz Inácio Lula da Silva, Minster of Finance Fernando Haddad and Central Bank President Roberto Campos Neto.
Industry reaction is positive
The decree isn’t huge news in the sense that the market has been expecting it for some time. However, for the local industry, in particular members of the ABCripto trade group, the decree represents an important formality, as now the process of creating a regulatory, supervision and licensing regime for VASPs begins.
Nicole Dyskant, an attorney specializing in digital assets, told Valor:
"The publication of the Decree prior to the entry into force of the Law certainly demonstrates the Government's commitment to the subject. The industry is celebrating. The BC — which had already been talking to the market — should also soon publish a draft rule for public hearing"
Rodrigo Caldas de Carvalho Borges, a partner at Carvalho Borges Araújo Advogados, added:
"Now with the regulatory discussion concentrated in the BC, my expectation is that we have technical debates and that the BC plays a fundamental role in development via regulation, as it has done in the means of payment sector."
Binance, which despite its troubles in other jurisdictions is still by far the largest exchange by volume in Brazil, also issued a statement saying it was encouraged by the development:
“Binance unequivocally supports the need for industry regulation that provides security for users, while enabling industry innovation and sustainable growth for the benefit of society.”
What happens next?
Clearly this decree will have more of an immediate impact on the crypto legal community than the crypto end user. However, the law’s amplification of penalties for crimes involving digital assets (4-8 years of imprisonment) should have a dampening effect on crypto pyramid schemes and golpes.
Mirella Andreola, an attorney with Ax Associates, told InfoMoney:
“It is expected that not only cases of pyramids, but all fraudulent activities involving cryptos will be less common when a specific rule is created to punish such criminal activity.”
The Central Bank has already been talking to market participants about the forthcoming rulemaking process and is expected to soon set a date for a public hearing and a consultation process to formally commence.
The focus then will be on creating a structure for issuing licenses to operators. The list of requirements and risk controls that operators will likely need to implement includes KYC, transaction reporting, cybersecurity and data protection, procedures to ensure proper price formation and avoid manipulation, and potentially asset segregation. (Valor)
In the meantime, VASPs currently operating in Brazil will have a grey area to navigate, given that the law is now officially implemented but many specific rules are absent. It could take as many as 12 months for these rules to be fully formalized - six months to create the rules and then another likely six month grace period for exchanges to come into compliance and submit license applications.
However, it seems unlikely that companies operating in the space will suffer any form of sanction or reprimand given the late issuance of the decree.
✋Not so fast
Valor reported that all crypto trading platforms, whether foreign or domestic, will need to obtain a second license from the CVM to operate as an over-the-counter broker or a stock exchange. This is a license that only the B3 Exchange, CSD and BBCE (Balcão Brasileiro de Comercialização de Energia) currently hold.
This license will be required to offer secondary market trading of crypto tokens that are considered securities - a question that continues to become murkier for non-bitcoin cryptocurrencies.
Brazil a world leader on crypto?
The devil is always in the details with these types of things, but Brazil clearly has an opportunity to become a global leader on the question of digital assets regulation.
Ripio’s Henrique Teixeira commented:
"This is a step forward that Brazil is making and that has not yet been reached by many other countries. In Brazil we have the advantage of having a regulatory system being built on the basis of dialogue between government agencies and local companies.”
Given the whirlwind of regulatory and enforcement developments elsewhere in the world (more on that below), the decree provides a path forward and a degree of much-needed regulatory stability and clarity. Hashdex head of legal Julia Castelo Branco Rocha said in a statement:
"The expectation now is for the publication of specific rules by BACEN, which should protect investors and the market without impeding innovation and technology development."
Rodrigo Batista, CEO of the exchange Digitra, highlighted the contrast between Brazil and other jurisdictions:
“Today the different countries of the world have different approaches. United States, for example, is suing local cryptocurrency companies. Fortunately, Brazil is positioning itself alongside countries with high economic freedom such as Switzerland, Hong Kong and Dubai, creating laws to provide security to the sector and attract companies and investments.”
🎙New 🇧🇷BCR Podcast Episodes
🔥Inside the SEC’s War on Crypto with Lewis Cohen and Nik De
My co-host Antonio and I invited two craques to the show to help us interpret the recent regulatory and enforcement events in the US.
Lewis Cohen is an honorary Brazilian (through marriage) and is one of the top lawyers in the US at the intersection of crypto and securities law.
Nikhilesh De is a former colleague of mine at CoinDesk, where he overseas all coverage of crypto policy and regulation in the US.
💣 Onsite at Consensus 2023: Guilherme Santana of Preservaland
I had the chance to chat with Guilherme at Consensus 2023 back in April (took forever to get the audio from the organizers, hence the delay in publishing).
While I’m generally bearish on these “NFTs saving the environment” type projects, what Guilherme and his team are doing is super interesting. They identify land in Brazil that is legally deemed “preservable”, and then pay the landowner to convert the land to a special legal status preventing it from being deforested or developed.
The parcel of land (and relevant metadata) is then represented by an NFT which can be purchased by publicly-traded companies looking to keep carbon credits or biodiversity credits on their balance sheet.
🗞Brazil Crypto News Rundown
The B3 Exchange, Brazil’s primary stock exchange, postponed the launch of its bitcoin futures product until the second half of 2023. The product was originally supposed to go live in the second half of 202;, the new launch date has been pushed back to September 30, per the B3 website. (InfoMoney)
SMU Investimentos launched on the secondary market the first CVM-approved fixed income token. The token - which provides a 2.25% monthly return - represents a commercial note issued by Grupo Muda, which specializes in reverse logistics, waste management and circular economy. The asset reached the secondary market after raising R$600,000 - 20% more than the original target. (InfoMoney)
Crypto exchange Bitget saw a 43% increase in Latin America users from June 6-9 after the SEC sued Coinbase and Binance. Deposits from the region surged by 134% increase in deposits during that time.
New users in Brazil increased 54% with a 208% increase in total deposits. (CoinTelegraph Brasil)
Maria Carmo, a leader of the Cardano community in Brazil, defended the project against claims by the US SEC that it’s native token ADA is a security during a talk at last week’s BitSampa event in São Paulo:
“ADA is decentralized. If all exchanges in the world close, we will continue. There are more than three thousand pools.” (Portal do Bitcoin)
99Pay launched a new service that will guarantee crypto custody of funds up to US$250 million. The service applies to BTC, ETH, MANA, SOL and USDC, and will protect against hacking, theft, human error and technology failures. 99Pay also entered a new custody partnership with BitGo to store customer assets. (CriptoFacil) (Portal do Bitcoin) (CoinTelegraph Brasil)
📱Adoption + Digital Real
Brazilian Web3 venture firm Viden Ventures is partnering with BeinCrypto, a crypto news site that publishes in 14 different languages.
There are more than 1600 crypto-related job openings in Brazil, per Linkedin aggregated by CriptoFacil
Investors and entrepreneurs are optimistic that the continued crackdown on crypto in the US will benefit countries like Brazil. José Gabriel Bernardes, a partner at Fuse Capital, told CoinTelegraph Brasil:
“If we look at the top fifteen companies by market cap in the crypto industry, I would say that one or two are headquartered in the United States. We still have an innovation curve, but it is not happening in the US”
“For example, Brazil is gaining global recognition, and it has been on an exponential scale”
Brazilians have been one of the main targets of a malicious browser extension called Satacom that steals users’ cryptocurrencies. (Livecoins)
Henrique Meirelles, former Central Bank president and finance minister and current Binance advisor, argued that the Digital Real has the potential to put Brazil at the forefront of global financial innovation. He stated:
“It is important to prepare for this major change, which, in addition to generating countless new business opportunities, also places Brazil in the role of a global player when it comes to financial innovation.” (Valor)
Lift Lab, the Central Bank’s financial innovation program executed in conjunction with Fenasbac, saw its highest number of registrations (95) for its 2023 cohort since the initiative began in 2018. 18 of the proposals are related to the Digital Real. (BlockNews)
The Central Bank opened registration for the Real Digital Forum, which will be a permanent advisory committee and a vector of communication between the bank and financial market participants. (BlockNews)
Blockchain technology could have mitigated the tax fraud and accounting inconsistencies uncovered inside Americanas, the now bankrupt retailer, experts argue. (Exame)
Mynt, BTG Pactual’s crypto platform, launched a new educational program called “Bitcoin Experts” exploring the history and building blocks of bitcoin and blockchain tech. (Exame)
C&A, the Brazilian retail fashion brand, announced a new denim jeans collection with blockchain traceability in partnership with the Brazilian Association of Cotton Producers. Hussein Rodrigues, commercial director for C&A, stated:
"The technology also contributes to reducing socio-environmental risks and offers our customers a more conscious purchase option.” (Exame)
Bitcoin miners in Brazil are struggling given current market conditions, including those who have found ways to mine without paying for energy. Juliano Freitas, who runs a YouTube channel focused on crypto mining, told Portal do Bitcoin:
“In Brazil, you need free energy to mine with ASIC. Otherwise it is impossible to be profitable.
Today in Brazil, a large part of ASICS mining is done by miners who do not pay for energy. Whether for photovoltaic energy, credits, rural areas, communities or others.”
🎮 NFTs, Gaming and Metaverse
Rede Globo will expand its experimentation with NFTs and announce its plans at the Digital Finance Brasil event next week. (CoinTelegraph Brasil)
🏛 Policy, Regulation and Enforcement
The Parliamentary Commission of Inquiry (CPI) examining cryptocurrency pyramid schemes was formalized on June 13, with Deputy Aureo Ribeiro elected as chairman. The CPI will feature 32 members from Congress and another 32 alternates. It will have a term of 120 days, which is extendable for another 60 days. (CoinTelegraph Brasil) (Valor)
CPI committees have investigative powers similar to judicial authorities in that they can issues summons, request documents and break secrecy rules for bank, tax and telephone records.
Ribeiro stated that the focus of the CPI will be "analyzing service providers in the crypto ecosystem", including brokerages and tokenizers, to see if they "are adhering to the rules that guarantee the safety of investors and the prevention of crimes as money laundering". However, he emphasized that he does not want the commission to “suffocate'“ the crypto market in Brazil. (Exame)
Binance will be the first company summoned, Globo reported
One of the companies being examined by the committee is Trader Group, a pyramid that raised R$38.2 million (US$7.9 million) in 2019 by selling its TGPAR tokens before the platform went down a few months later.
Other projects that will be summoned include Atlas Quantum, Genbit, GAS Consultoria, Braiscompany, the fan token issued by the Brazilian Football Confederation, Xland (a scheme involving former Palmeiras football players)
Ribeiro also intends to examine the advertising contracts the named pyramids had with national television channels like Globo, Record, SBT, Band and Rede TV. He will also ask many of the country’s top football clubs for information about their fan token launches.
Federal Police arrested three and executed eight search and seizure warrants in an operation called “Fantasy Island” against Fiji Solutions, which is an alleged cryptocurrency pyramid based headquartered in Campina Grande. The company, which was a competitor to Braiscompany, moved an estimated R$600 million (US$125 million) over the last three years. (Portal do Bitcoin) (CriptoFacil) (InfoMoney)
Rosa Wever, president of the Supremo Tribunal Federal will create a new working group to study the seizure of cryptos in Brazil. (Portal do Bitcoin)
The CVM issued an investor alert about the Deriv.com brokerage, claiming that it is offering crypto products in Brazil without authorization. (Livecoins)
The Superior Tribunal de Justiça blocked the auction of singer Wesley Safadão’s private jet, which had been seized by authorities as part of an operation against Rental Coins, a crypto pyramid run by “Sheik of Bitcoins” Francisley Valdevino da Silva. The auction was intended to compensate victims of the Rental Coins scheme. (CoinTelegraph Brasil) (Portal do Bitcoin)
A federal judge revoked one of the preventative arrest warrants issued against Glaidson Acácio dos Santos, aka the “Pharaoh of Bitcoins”. However, there are still six other warrants he must respond to. (Portal do Bitcoin)
Metropoles reports that Glaidson’s lawyer David Augusto Cardoso de Figueiredo until recently had lawsuit filed against him. Cardoso was representing his wife, who was a victim of GAS Consultoria.