The crypto market has been churning out news about the advancement of a regulatory scenario around the world, turbulence at exchanges, and much discussion about expectations surrounding its evolution and maturation. In this scenario, the need for regulation is one of the hotly debated topics – and that’s why governments, companies, and regulatory agencies are constantly discussing good practices and the development of this revolutionary environment which holds tremendous potential, especially with regard to the security of transactions.
At least 27 countries are already working on formulating regulations – and, in Brazil, in late 2022, Congress approved a bill regulating these digital assets in the country. The text approved brings the concepts and principles that should guide the provision of services in the crypto assets market and empower the authorities to be designated to finetune the regulations. It is expected that the Central Bank of Brazil (BCB) and the Securities and Exchange Commission of Brazil (CVM) will play this role. They will establish the guidelines and processes to put the regulation into practice.
To date, there is no specific law to regulate the activities of the digital asset market, and the crypto market grew without any of the safeguards that other financial sectors are known for. Players in the segment should follow the guidelines that establish clear rules about the responsibilities of companies and the role of the regulator. These rules cover topics such as free initiative and competition, good governance practices and risk-based approach, information security and personal data protection, consumer/user protection, and defense of people’s savings, as well as the robustness and efficiency of operations. The regulation dedicates a chapter to anti-money laundering (AML), as well as combatting terrorism financing and the proliferation of weapons of mass destruction, in alignment with international standards.
The new law mainly affects companies that operate in the crypto assets segment, such as exchanges, by creating the figure of virtual asset service providers. Under the new law, crypto brokerages should request a licence to operate in Brazil, as financial institutions do. Companies must also obtain a legal entity registration number in Brazil (CNPJ) and report suspicious transactions to authorities such as the Council for Control of Financial Activities (COAF). The designated regulatory body will authorise the functioning of companies and carry out corporate reorganisations, supervise their activities, apply sanctions and penalties, cancel the authorisation to operate at its sole discretion or upon request, and establish the situations when their activities or operations will come under the foreign exchange market.
Virtual asset service providers will now be subject to obligations and control mechanisms designed to prevent money laundering – and so they must follow the obligations related to the identification and maintenance of customer records (KYC – Know Your Customer), maintenance of records of operations and transactions involving the management of virtual assets (KYT – Know Your Transaction), and report suspicious activities to COAF.
The regulation also governs the adhesion of companies to the Consumer Defense Code, and it includes transactions involving digital assets in the format of payments or investments in the Brazilian Criminal Code, the Money Laundering Prevention Law, and the Law on Crimes Against the National Financial System, establishing penalties for crimes and frauds arising from these operations.
The Brazilian Association of Cryptoeconomics (ABCripto) considers the regulatory framework extremely important and supports the obligation of brokerages to obtain an official local registration (CNPJ) and report to the Central Bank of Brazil information on their activities as soon as the bill is approved. The association also recommends some improvements, including the separation of the assets of clients and exchanges, which was not included in the bill currently approved.
The bill was already approved by both the Senate and Congress – and, on 21 December 2022, it was finally signed into law by the President of Brazil. Consequently, the rules will become effective between May and June 2023 – that is, 180 days after their enactment, as stipulated in the draft approved by Congress. However, the existence of a licence for exchanges, which is the main change proposed by the law, must take longer to take effect.
After the law comes into effect, the authority designated to regulate it will have six months to announce the licencing rules – that is, the end of 2023. This could translate into new deadlines for requests and analysis of licences, resulting in the first properly regulated exchange in Brazil only in 2024. Meanwhile, foreign exchanges can continue to operate in Brazil as usual.
In addition to the creation and implementation of operational means and processes to control this segment, which could be complex for the designated authority, the cryptocurrency market is global and decentralised, which could pose a regulatory challenge as it means that there is no single government or central authority that can establish and impose rules and standards for their use. Instead, the regulation may depend on cooperation between various governments and regulatory authorities in different countries, which again is not a simple and short-term process.
Moreover, the operational rules will be announced by the designated authority in Brazil in 2024, but some specialists are also concerned about minimum capital requirements, complex obligations in the registration process, and other rules that could make the entry of new companies and technologies in the market difficult.
Other specialists point out that the regulation will neither inhibit the segment nor affect prices, since the proposed bill is only targeted at the Brazilian market, whereas the assets, such as cryptocurrencies, are universal. With the arrival of this legal framework, a more secure path for the sector as a whole has been laid out, with transactions and infrastructure being audited, which could attract more investors who did not operate in this market earlier. The regulation will make it possible to appeal to authorities more clearly in case of problems with service providers, since they must have a licence to operate. It is also believed that this more secure environment and the increase in the number of investors (currently about 5% of the Brazilian population, or 10.4 million) will result in new products and services using blockchain technology and driving efficiency in the world of cryptocurrencies. In other words, the regulation could also foster cooperation among companies, governments, and other institutions interested in developing the market, which could create a favorable environment for innovation and the development of new technologies.
Both the optimistic points and concerns are logical arguments right now, but the only valid scenario is that the regulatory movement is happening in Brazil and around the world – and companies will have to adapt in order to survive. The sector as a whole and the teams involved, especially the risk and compliance areas, must prepare for regulation, which we believe will bring greater security to the market, with clients of exchanges benefiting the most. Overall, considering the framework of good practices and clearer rules, the crypto segment could grow stronger both in Brazil and around the world.
With over 25 years leading Brazilian financial institutions, Didier’s expertise includes innovation in payment processing and Brazilian FX regulation. At Bexs, his main challenge is to bring innovation to facilitate, through cross-border transactions, access to global goods and services for Brazilians and the best of Brazil for the world.
Bexs connects Brazil to the world with the best team and innovative FX and payment technologies to bridge the gap between companies and customers on every continent. The group unifies the solutions developed by Bexs Bank, which has been providing tailored transactions and API capabilities to the FOREX market for over 30 years, and Bexs Pay, a pioneering digital payment provider for cross-border markets. This ensures Brazilian customers have access to the best the world has to offer and gives Brazilian products and services cross-border reach. Bexs has already handled millions of payments and FX transactions for global companies including TikTok, Worldline, Kwai, Thunes, and Nubank, among others.
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