On December 22, Brazil officially became a Bitcoin (BTC -0.91%) a bill designed to provide a complete regulatory framework for the trading and use of Bitcoin across the country. While the bill does not officially make Bitcoin “legal tender” within Brazil, it makes it significantly easier and more attractive to use Bitcoin as a form of payment or as an investment asset.
Obviously, the fact that Brazil, which currently has the world’s 12th largest economy measured by GDP, has accepted Bitcoin could be a huge development in the global adoption of the cryptocurrency. With that in mind, let’s take a closer look at what the bill does and doesn’t offer and what it means for Brazil.
What the Bitcoin bill proposes
The new Bitcoin bill creates regulatory clarity and certainty for businesses and individuals looking to use Bitcoin in Brazil. Currently, Bitcoin is not banned in Brazil, so the bill will not open the floodgates for new users. Rather, its biggest benefit may be to attract businesses and individuals who are on the fence about cryptocurrency. If businesses want to accept Bitcoin, for example, they won’t have to worry about falling into a “grey area” where no one really knows the rules of the game.
The Brazilian bill establishes two different regulators for Bitcoin. The Central Bank of Brazil will regulate Bitcoin when it is used as a form of payment, while the Brazilian version of the SEC will regulate Bitcoin when it is used as an investment asset. As the bill has input from Brazil’s federal tax authority, there are also considerations regarding how Bitcoin will be taxed. Moreover, to ensure that everything runs as smoothly as possible, Bitcoin trading companies must obtain a special license to become a virtual asset service provider.
Comparisons with El Salvador
Obviously, many people’s first comparison will be to El Salvador, and for good reason. In 2021, El Salvador became the first country in the world to accept Bitcoin as legal tender, and the President of El Salvador, Nayib Bukele, emerged as one of the biggest supporters of Bitcoin and the modern crypto-economy.
Image source: Getty Images.
On the face of it, the decision to make Bitcoin legal tender in El Salvador appears to be a more robust policy move than just the enactment of a regulatory framework. But note that El Salvador no longer has its own national currency. El Salvador’s economy has been fully dollarized for over 20 years, so there was no risk of affecting the country’s monetary policy by accepting Bitcoin.
Moreover, Salvador’s economy is highly dependent on cross-border remittances. According to some estimates, 24% of the country’s GDP is formed due to remittances. So accepting Bitcoin through blockchain wallets was a step towards making these money transfers as easy and affordable as possible. And finally, there is the issue of the “unbanked” in El Salvador. Embracing Bitcoin was really about financial inclusion and giving low-income individuals a chance to participate in the economy even if they didn’t have a bank account.
Brazil’s bill is more comprehensive than El Salvador’s because it is designed for a more developed economy. Unlike El Salvador, Brazil has a national currency (real). Unlike El Salvador, Brazil has a rising middle class. And unlike El Salvador, Brazil does not depend on global remittances for GDP growth. Only 0.25% of Brazilian GDP comes from remittances, roughly the level of Spain or Germany.
What can we expect from Brazil?
The new bill is likely to make Bitcoin more prevalent as a medium of exchange, especially for e-commerce. This will lead to new investment products and new investment options for millions of middle class Brazilians. And it could create a powerful cryptocurrency industry based on its designation as a virtual asset service provider.
But let’s not expect too much from Brazil. El Salvador’s experience has produced mixed results at best. First, the government of El Salvador is losing money on large Bitcoin investment holdings. The uptake among everyday citizens is said to be much lower than initially expected. There are some notable success stories though, like Bitcoin Beach profiled on CBS. 60 Minutes — it can be difficult to convince people to hold an asset that has depreciated 65% over the year.
Bitcoin in 2023
The bill goes into effect 180 days from now, so it may not be until mid-2023 that we see the first signs of what the impact of this bill will be. Brazil is not trying to replace fiat with crypto. It’s not trying to go “full Bahamas” by passing laws to attract foreign crypto companies. And it’s not trying to convert all 214 million people into Bitcoin owners.
Instead, Brazil is simply realizing that it can no longer put the genie back into the bottle when it comes to cryptocurrency. Bitcoin is too popular to ban. And it offers too much potential to ignore. It is certainly encouraging that Brazil has created such a comprehensive framework for cryptocurrency. This is a bullish sign for Bitcoin’s future growth, and a necessary first step to legitimize Bitcoin globally.