Here’s What’s in Brazil’s Crypto Bill – Bitcoin Magazine
On Tuesday, Brazil’s House of Representatives approved 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 offer services to the public and what are the penalties for fraud and money laundering involving cryptocurrencies.
The bill had been debated in Congress for seven years, but recent events in local and global markets, including the fall of prominent exchange FTX, put pressure on the vote and subsequent approval.
After being approved by the Chamber of Deputies, the bill passed to the Senate, which amended parts of the bill and added a few new sections. The text was then brought back to the floor so that the Senate amendments could be voted on, which happened on Tuesday.
Now President Jair Bolsonaro, who is scheduled to hand over the presidency to Lula on January 1, has 15 days to sign or veto the bill. A partial veto is also possible, an event in which the president would be able to reject only one or more parts of the bill. The bill enters into force 180 days after a possible signature by the president.
Here’s everything in Brazil’s new regulations for bitcoin and cryptocurrency markets.
The assets
A virtual asset is “a digital representation of value that can be traded or transferred electronically and used for payments or as an investment,” according to the bill’s text.
This definition should not be overlooked, as it directly legitimizes the use of bitcoin and cryptocurrency to make payments in the country. While regulatory approval for such activity is arguably necessary given Bitcoin’s decentralized nature, gaining greater regulatory clarity encourages businesses to explore the growing payment method more closely. This in turn could lead to more widespread use of bitcoin as a medium of exchange in Brazil.
The same can be said about El Salvador’s national adoption of bitcoin. There was nothing stopping 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 Act – but the advent of the legal tender law allowed many more companies to start accepts BTC as payment. It also attracted tourism and investment. And while Brazil does not recognize bitcoin as legal tender, which in some ways is a lost opportunity, this could mark a first step towards a greater spread of bitcoin payments in the country’s economy. Whether that will actually happen, however, will depend on the actions of the watchdog tasked with monitoring the market.
The regulator
Originally, the bill directly tasked the Central Bank of Brazil (BCB) with regulating the bitcoin market in the country. This aspect was later removed, and the executive branch is now directly tasked with choosing 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 vehicle. It is expected that the two state bodies will act in cooperation in these matters. Both BCB and CVM, along with the Federal Tax Administration (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 comply with applicable legislation.
The service providers
As already mentioned, VASPs will have to obtain regulatory approval from the watchdog chosen by the executive branch before operating in the country.
The bill considers VASPs as an entity “that performs, on behalf of third parties, at least one of the following virtual asset services: exchange between virtual assets and domestic 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 participation in financial services and the provision 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 have a specific type of Brazilian business ID called a CNPJ (a CNPJ is similar to a business tax identification number, TIN, or employer identification number, EIN, in the US). Second, it requires that the aforementioned services be provided on behalf of a third party for the supplier to be considered a VASP. These two points mean that individuals, as well as hardware and software services such as self-custody solutions, should not fall under the rules and therefore not be identified as VASPs.
The penalties
The bill states that existing criminal penalties for fraud and money laundering should also include illegal acts involving cryptocurrency. The punishment varies from three to 10 years in prison, in addition to fees, and in some cases is more severe if virtual assets are involved.
The parts left out
Key aspects of the bill were removed from the text in the final vote. Here are some of the most important.
Patrimonial segregation
A rule added by the Senate required VASPs to keep user funds separate from equity capital. It sought to prevent problems similar to what happened to FTX, the now-bankrupt global exchange that apparently used customer funds to finance trades executed by a sister company, Alameda. In particular, 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 debts.
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 pose a major barrier to entry into the cryptocurrency market.
Tax exemption on mining rigs
Another apparently 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 on the benefit, such as the need to use renewable energy sources. The rule could have helped promote a healthy mining market in the country, as federal import taxes alone can often double the price of some commodities shipped to Brazil.
Government agencies that maintain accounts on VASPs
A third rule that did not make it into the final text allowed government agencies to open and operate accounts with VASPs, such as stock exchanges. The possibilities for operating such accounts will be limited by those established by the executive power.
