As part of our ongoing expert series on global crypto legal regimes, we analyze and evaluate different regulatory approaches for digital assets. Looking at Brazil, there has been a flurry of activity as Brazilian operators move into digital assets in anticipation of regulatory certainty ahead.
In December 2022, the Brazilian government passed a new legal framework for virtual assets, which came into force in June 2023. Although the act conveys regulatory powers over virtual assets to the Brazilian Central Bank, the Bank itself has announced a delay of the rollout of new rules until 2025 to allow for an extended consultation period. This article examines the current state of cryptocurrency regulation in Brazil and what comes next for Brazilian VASPs seeking to implement a compliant crypto asset offering.
Brazil’s virtual asset regulation and its history
A legal framework dedicated to digital assets is a relatively new development in Brazil, as in many other jurisdictions. However, the Brazilian Central Bank (BCB) has formally recognized cryptocurrencies since 2014, when it issued a policy statement to confirm that so-called “virtual currencies” or “encrypted currencies” were not covered under the terms of a previous statute designed to regulate electronic payment systems. This regulation laid out definitions of “electronic money,” which the BCB defined as assets denominated in Brazilian real and stored in an electronic format.
In 2017, the BCB reinforced this position with a policy note that also warned that virtual asset service providers (or VASPs) were not regulated or supervised by the BCB.
In 2019, the Brazilian Federal Revenue Office issued a ruling establishing reporting requirements for cryptocurrencies, which provided definitions for crypto assets and crypto asset exchanges. From a reporting standpoint, this ruling remains in force until this day; however, the new 2023 regulation governing virtual assets provides updated definitions.
Since 2018, the government of Brazil has been actively involved in several initiatives involving the research and development of digital assets technologies for the country’s financial systems. These include the establishment of a Financial and Technological Innovations Laboratory in 2018 and a project to develop a central bank digital currency called Real Digital, which was formalized in 2021.
Therefore, as underscored by the BCB in a 2024 statement, the regulatory approach is to enact consumer protections and secure the financial system’s stability while positioning the country to benefit from the value in the development of digital assets and the broader industry.
The legal framework of Brazil’s virtual asset regulation
Law No. 14,478/22 – the legal framework for virtual assets – was passed on December 21, 2022, and came into effect from June 2023. Unlike the EU, which issued the MiCA regulation as a comprehensive framework designed for direct implementation, the Brazilian approach is somewhat more similar to Turkey’s, in that the regulation is executed in phases. Therefore, the legal framework offers some broad guidance and provides an indication of the regulatory direction of travel, while some uncertainty remains regarding how parts of the new rules will be implemented in practice.
Scope and definitions
The framework’s scope is to provide a set of rules covering the “provision of virtual assets services and […] the regulation of virtual assets providers. From its scope, it expressly excludes virtual assets issued as securities, which remain under the purview of the country’s Securities and Exchange Commission (Comissão de Valores Mobiliários or CVM).
A virtual asset is defined by the framework as: “the digital representation of value that can be traded or transferred by electronic means and used for payment or investment purposes.” However, this definition is somewhat broad and it is anticipated that further clarity over types of tokens (e.g. payment, utility) may come in future iterations of the rules.
A Virtual Asset Service Provider (VASP) is defined as a legal entity performing one or more services from the below list:
- Exchange of virtual assets to or from fiat currencies.
- Exchange of virtual assets to or from other virtual assets.
- Transfer of virtual assets between wallets or entities.
- Custody and administration.
- Participation in financial services around the offer or sale of virtual assets.
The framework also allows that the BCB may define further services that could be included in this list.
VASP licensing and BCB authority
The framework lays down the requirement for VASPs to be authorized by the BCB. They must also formally register as a company in Brazil and, depending on their activities, will be required to report to the Financial Activities Control Board (COAF), the Central Bank of Brazil (BCB), and the Securities and Exchange Commission of Brazil (CVM).
Even so, it does not issue any procedure for obtaining authorization; merely conveys responsibility to the BCB for defining an approval process. Therefore, the law is somewhat of a gray area currently, since the requirement to obtain authorization is in place, but there is no procedure.
However, legal opinion tends to be favorable for VASPs that wish to set up in Brazil prior to the issuance of any authorization procedure. Since it is not possible to obtain authorization, any prohibition on operation under the new law would be likely to violate existing Brazilian laws governing economic freedom.
VASPs that were already operating in Brazil prior to the implementation of the framework will also need to undergo an approval process by the BCB. For these entities, the framework stipulates a minimum of six months will be permitted to attain compliance.
Along with the responsibility for VASP authorization, the framework conveys broad powers on the BCB to regulate virtual assets and requires it to lay out definitions and regulatory guidelines for the activities of VASPs.
The Brazil virtual asset regulation and its future roadmap by the BCB
In December 2023, the BCB opened an initial consultation to develop more comprehensive rules covering digital assets and VASP activities. In mid-2024, the Bank announced it would delay the rollout of the new laws until 2025 to allow for further consultation on the new rules. While the first consultation focused on issues not covered by the framework, such as asset segregation, the second will focus on the proposed regulatory text.
It’s now anticipated that a first draft will be ready by the end of 2024, meaning the new rules are likely to become effective in 2025.
In the meantime, VASPs in Brazil are taking advantage of the favorable regulatory outlook to establish their offerings in a country that consistently ranks in the top ten for cryptocurrency adoption. In June 2024, Brazil’s largest bank, Itaú Unibanco, launched a retail crypto offering to all of its customers, representing some 60 million people, while digital rival Nubank had already entered the market with its own crypto service offering back in 2022.
Whether a VASP enters the market now or in 2025, the new framework and the efforts of the BCB mean that regulatory certainty is an inevitability, and all operators will need to obtain a license – either as a newcomer or retroactively as a transitioning incumbent. For those choosing to launch their offering sooner rather than later, establishing an offering with best practices baked in from the start will provide a solid foundation for obtaining approval when the time comes.
Prime brokerage – Market potential and digital asset business cases for banks
Based on the Brazilian Securities Commission’s Resolution No. 175 (CVM 175), allowing investment funds to allocate up to 10% of the fund’s current market value in crypto assets, banks are very interested in expanding their infrastructure so they can provide crypto custody and trading offerings to institutional clients in the context of prime brokerage and service products.
Some banks have looked to start in a simple fashion with a single broker setup using local liquidity providers – meaning that all liquidity for their offerings will be sourced through one single counterparty. However, in order to achieve true best execution and to optimize fee structures for revenue maximization, banks must access liquidity from multiple venues and most probably from international exchanges and liquidity providers who are proven to provide best and most reliable liquidity.
In addition and also crucially, banks will need to demonstrate operational resilience and redundancy in their infrastructure to ensure their offerings to clients are both accurate and allow clients to trade when they need to. If a bank only uses one liquidity provider and that provider’s service stops working, then the bank will not be able to provide a service and thereby stopping clients from buying and selling at critical time points in the market. To meet these requirements for best execution and operational resilience, banks rely on Wyden’s premier digital asset trading infrastructure.
Wyden Infinity covers the entire end-to-end trade lifecycle of digital assets across all pre-trade, trade and post-trade use cases. It enables sell-side firms such as banks, brokers and exchanges to build and maintain retail and institutional client offerings as well as support internal prop-trading needs via a single platform, making Wyden Infinity the ideal choice for banks, brokers and exchanges when building and scaling their compliant digital asset businesses.
Connect with us and book a platform demonstration of Wyden Infinity.
Please note that the above article does not constitute legal advice.