President Luiz Inácio Lula da Silva signed a new law on Wednesday that grants regulatory authority to Brazilian’s central bank and securities commission to oversee and monitor cryptocurrency agencies.
The decree will be effective from June 20, 2023. The aim is to establish clear responsibilities for the country’s central bank and securities regulator in relation to cryptocurrencies.
The policy’s immediate impact will be limited as the specific regulations for the sector are yet to be developed by the Banco Central do Brasil, the Brazilian central bank. According to experts, it may take six months to a year for the initial rules for exchanges to be released, and it could take up to two years for the first regulated brokerage to emerge.
This latest development follows the approval of a crypto regulation bill in December 2022, which introduced licensing requirements for virtual service providers and established penalties for fraud involving virtual assets.
Brazil took a step forward in clarifying its crypto regulations as the law grants the Central Bank of Brazil the power to regulate and supervise virtual asset service providers, while token projects classified as securities will remain under the oversight of the Brazilian Securities and Exchange Commission or Comiss ão de Valores Mobili ários (CVM).
The CVM clarified later that the authorization for virtual asset service providers does not include activities related to securities, even though it will continue to oversee companies involved in tokenizing assets.
“The CVM reiterates the importance of maintaining a broad dialogue with the crypto market, especially with those initiatives that aim to tokenize securities, for the purpose of building a regulatory framework that is increasingly conducive to the characteristics of these assets,” said Joao Pedro Nascimento, president of the CVM.
In addition, under the decree, Brazil’s Central Bank will also be responsible for regulating and monitoring other digital asset-focused businesses, such as cryptocurrency exchanges and wallet providers.
Yet, experts at BeIn Crypto pointed out that the new law lacks clear guidelines on distinguishing digital assets as securities or non-securities.
In this new decree, the approach to defining a security is influenced by the concept of a collective investment agreement, which draws inspiration from the Howey Test, originally established by US courts. If this interpretation is upheld, it is possible that Bitcoin (BTC) will not be classified as a security.
This goes in contrast to the U.S. Securities and Exchange Commission’s (SEC) efforts to categorize cryptocurrencies as securities. The SEC, under the leadership of Chair Gary Gensler, has targeted popular tokens in recent legal actions.
This interpretation will allow tokens to be classified as securities, making them subject to SEC regulation, which many in the crypto industry oppose.
Therefore, the industry players see this move as Brazilian regulators moving in the right direction. The Central Bank of Brazil, recently empowered, chose 14 institutions, including local banks Bradesco, Nubank, Itaú Unibanco, Banco do Brasil, and payment firms Visa and Mastercard, to participate in the pilot program for the country’s central bank digital currency (CBDC).
“Brazilian regulators are making progress in developing their understanding and regulation about crypto and the associated technology,” said Bruno Ramos de Sousa, head for U.S. and Europe at Hashdex. “Authorities such as the Central Bank and the Securities Commission (CVM) have been actively involved in studying the crypto sector.”
Brazilian crypto scene
Brazil has emerged as a regional crypto hub, with a significant adoption rate of stablecoins and the presence of major crypto companies and protocols.
The country, ranked seventh globally in cryptocurrency usage according to Chainalysis, holds a prominent position among South and Central American countries in terms of cryptocurrency adoption.
The recent regulatory move reflects Brazil’s commitment to developing a regulatory framework for the emerging crypto market. This regulatory approach acknowledges the unique characteristics of cryptocurrencies while promoting innovation and safeguarding investors’ funds.
“The Central Bank has enormous knowledge of the subject, it has working groups discussing the matter for a long time,” said lawyer Rodrigo Borges, partner at Carvalho Borges Araujo Advogados, to infomoney.com.
“It is a great victory for the sector, since we now expect to have a more technical specific regulation, without the need for legislative discussions.”
Nicole Dyskant, a lawyer specializing in digital asset regulation and compliance, also commended the attentiveness of CVM and BC towards the crypto world.
“CVM and BC are two regulators that are very attentive to the developments and opportunities that the crypto world has presented. Two fine examples are Sandbox and Lift, two projects by these regulators whose proposal is to get closer to market players,” said Dyskant.
Designating the Central Bank as the regulator of the crypto market in Brazil is seen as a positive move by experts.
It provides clarity and favors business in the sector, unlike the situation in the U.S., where regulatory bodies like the SEC and the Commodity Futures Trading Commission (CFTC) are openly battling the crypto sector.
The new Brazilian law is expected to ensure individual protection and mitigate risks associated with digital assets. Therefore, the two Brazilian bodies are projected to take a different approach from their U.S. counterparts, focusing on protecting Brazilian investors from irresponsible behavior in the crypto sector.
Brazil is not alone. Countries worldwide are actively developing regulatory frameworks for digital assets. In Europe, Ukraine is planning to adopt the EU’s Markets in Crypto-assets (MiCA) law to enhance transparency and regulation in the crypto industry.
MiCA will govern stablecoin issuers, other crypto assets, and crypto asset service providers for the 27 countries within the EU bloc. It aims to prevent market abuse and insider dealing, including provisions for market integrity.
While MiCA establishes a common taxonomy for crypto assets, there are plans to expand its scope to also cover decentralized finance markets, as well as non-fungible tokens, and crypto asset lending and borrowing within 18 months of its implementation.
China has also shown significant changes in its stance regarding cryptocurrency. Since 2013, the country has imposed strict restrictions, including bans on Bitcoin-related transactions and ICOs. However, Hong Kong’s Monetary Authority is now progressing with its stablecoin regulations.
Additionally, earlier this week, the Bank of China’s investment bank subsidiary issued tokenized securities of 200 million Chinese yuan in value (approximately $28 million) on the Ethereum blockchain. These moves, according to experts, indicate a potential lifting of the crypto ban.
The future is expected to bring significant advancements in global crypto regulation, with investors, policymakers, and regulators working together to establish safer and more inclusive crypto economies.