On Tuesday, Brazil’s Chamber of Deputies approved a landmark cryptocurrency legislation that sets the tone for how the country will regulate bitcoin.
Key aspects of the bill relate to the way “virtual assets” are defined and their possible local uses, who can provide services to the public and what are the penalties for fraud and money laundering that involve cryptocurrencies.
The bill had been discussed in Congress for seven years, but recent events in local and global markets, including the fall of prominent exchange FTX, placed urgency on its voting and subsequent approval.
After being approved by the Chamber of Deputies, the bill headed over to the Senate, which modified parts of the bill and added a few new sections. The text was then brought back to the Chamber so the Senate’s changes could be voted on, which is what happened on Tuesday.
Now, President Jair Bolsonaro, who is scheduled to hand over Presidential reins to Lula on January 1st, has 15 days to sign or veto the bill. A partial veto is also possible, an event through which the president would be able to reject only one or more parts of the bill. The bill comes into effect 180 days after an eventual signature from the president.
Here’s everything that’s in Brazil’s new regulatory framework for bitcoin and cryptocurrency markets.
The Assets
A virtual asset is “a digital representation of value that can be negotiated or transferred electronically and used for payments or as an investment,” per the bill’s text.
This definition shouldn’t be overlooked, as it directly legitimizes the use of bitcoin and cryptocurrency for conducting payments in the country. While arguably no regulatory approval for such activity is needed given Bitcoin’s decentralized nature, receiving greater regulatory clarity encourages businesses to explore the burgeoning payment method more closely. This, in turn, can translate into more widespread adoption of bitcoin as a medium of exchange in Brazil.
The same can be said for El Salvador’s national adoption of bitcoin. There wasn’t anything preventing businesses in the Central American country from accepting bitcoin –– as evidenced by the fact that the circular bitcoin economy in Bitcoin Beach predates the Bitcoin Law –– but the advent of the legal tender legislation allowed many more corporations to start accepting BTC as payment. It also attracted tourism and investments. And while Brazil is not recognizing bitcoin as legal tender, which is in some ways a missed opportunity, this can mark a first step toward a greater dissemination of bitcoin payments in the country’s economy. Whether that will actually happen, however, will depend on the actions of the watchdog tasked with overseeing the market.
The Regulator
Initially, the bill directly tasked the Central Bank of Brazil (BCB) with regulating the bitcoin market in the country. That aspect was later removed, and the executive branch is now directly tasked with picking a watchdog for the sector.
The expectation is that the BCB will be in charge when cryptocurrencies are used as payment, while the country’s securities and exchange commission (CVM) will be the watchdog when they are used as an investment asset. It is expected that the two government bodies will act in collaboration in these matters. Both the BCB and the CVM, along with the federal tax authority (RFB), helped lawmakers craft the overhaul legislation.
The regulator will be tasked with authorizing virtual asset service providers (VASPs) to operate in the country, as well as overseeing their operations to ensure they abide by current legislations.
The Service Providers
As already mentioned, VASPs will need to obtain regulatory approval from the watchdog selected by the executive branch before operating in the country.
The bill considers VASPs an enterprise “that executes, on behalf of third parties, at least one of the following virtual asset services: exchange between virtual assets and national or foreign currency; exchange between one or more virtual assets; transfer of virtual assets; custody or administration of virtual assets or of instruments that enable control over virtual assets; or the participation in financial services and offering of services related to the offer by an issuer or the sale of virtual assets.”
There are two key aspects to highlight in this definition. First, it only applies to entities that hold a specific kind of Brazilian enterprise ID called CNPJ (A CNPJ is similar to a business’ tax identification number, TIN, or employer identification number, EIN, in the U.S.). Second, it requires that the aforementioned services be provided on behalf of a third party for the provider to be considered a VASP. These two points mean that individuals, as well as hardware and software services such as self-custodial solutions, shouldn’t fall under the rules and therefore not be identified as VASPs.
The Penalties
The bill establishes that existing criminal penalties for fraud and money laundering should also encompass illegal actions involving cryptocurrency. Penalties vary from three to 10 years in prison, in addition to fees, and are in some cases more severe if virtual assets are involved.
The Parts Left Out
Key aspects of the bill were removed from the text in the final voting. Here are some of the most important ones.
Patrimonial Segregation
One rule added by the Senate required VASPs to keep user funds separate from their own capital. It sought to prevent issues similar to what happened with FTX, the now-bankrupt global exchange that apparently used customer funds to fund trades executed by a sister company, Alameda. Notably, this rule meant that in the event of a bankruptcy, user funds would be immediately returned instead of being part of the bankruptcy process or used to settle some of the company’s debt.
The inclusion of this section was supported by several key players in the market, as well as the BCB. Deputies voted against it in Tuesday’s session, arguing that the rule could stifle innovation in Brazil as it could present a big barrier for entry into the cryptocurrency market.
Tax Exemptions On Mining Rigs
Another seemingly positive rule that was left out of the final text sought to exempt federal taxes on the purchase of mining equipment and software such as ASIC rigs until December 2029. It included some conditions for the benefit, such as the need to use renewable energy sources. The rule could have helped spur a healthy mining market in the country as federal import taxes alone can often double the price of some goods being shipped to Brazil.
Public Agencies Holding Accounts On VASPs
A third rule that didn’t make it to the final text allowed governmental agencies to open and operate accounts at VASPs such as exchanges. The possibilities for operating such accounts would be limited by those established by the executive branch.