Brazil may ban stablecoin self-custody transfers

In November 2024, the Brazilian central bank, Banco Central do Brasil (BCB), issued a draft regulation proposing restrictions on transferring stablecoins, such as Tether’s USDT, to self-custodial wallets like MetaMask. The draft is open for public consultation until 28 February 2025.

The regulation would prohibit virtual asset service providers (VASPs) from enabling the transfer of virtual assets denominated in foreign currency to self-custodial wallets. The proposal is part of a broader initiative to amend 2022 resolutions on VASP operations within the foreign exchange market, aiming to expand the regulatory framework to include crypto payments, sales, custody, and foreign-currency transactions.

Under the proposed rules, VASPs would be required to collect and provide information to the central bank, including client identification and transaction details. The BCB states these measures align with the government’s broader goal of tightening controls on capital flows and improving oversight of the foreign exchange market.

Self-custodial wallets, which allow users to manage their digital assets without relying on third-party custodians, are currently less regulated than centralized exchanges. These wallets provide users with complete ownership and responsibility for their holdings, but they also operate outside the direct control of financial authorities, which has drawn regulatory attention.

Why act now?

The proposal comes as the Brazilian real has significantly depreciated against the USD, with the exchange rate reaching a record high of 6.09 BRL per USD on 29 November. Over the past year, Brazil has emerged as a major market for stablecoin transactions, driven in part by local efforts to hedge against currency devaluation. According to Chainalysis, Brazil ranked as the second-largest stablecoin market globally in 2023, with stablecoin transactions comprising nearly 60% of its total crypto activity and $90 billion in crypto inflows during the year.

The proposal reflects Brazil's attempt to balance the benefits of stablecoin adoption with regulatory measures aimed at safeguarding economic stability and controlling capital outflows.