Brazil’s Chamber of Deputies on Tuesday approved landmark cryptocurrency legislation that sets the tone for how the country will regulate bitcoin.
Key aspects of the bill relate to the definition of “virtual assets” and their possible local uses, who can provide services to the public, and what penalties are provided for fraud and money laundering related to cryptocurrencies.
The bill has been debated in Congress for seven years, but recent events in domestic and global markets, including the fall of the prominent stock exchange FTX, delayed its vote and subsequent approval.
After approval by the Chamber of Deputies, the bill was sent to the Senate, which changed some parts and added several new sections. The text was then brought back to the House to vote on the Senate amendments, 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, in which the president can reject only one or more parts of a bill. The bill takes effect 180 days after the president’s final signature.
Here’s everything you need to know about Brazil’s new regulatory framework for bitcoin and cryptocurrency markets.
A virtual asset is “a digital representation of value that can be electronically negotiated or transferred and used as payments or investments,” according to the bill’s text.
This definition cannot be overlooked as it directly legalizes the use of bitcoin and cryptocurrency to make payments in the country. While no regulatory approval is required for such activity given Bitcoin’s decentralized nature, gaining more regulatory clarity encourages businesses to take a closer look at the emerging payment method. This, in turn, could translate into wider acceptance of bitcoin as a medium of exchange in Brazil.
The same can be said for El Salvador’s national adoption of bitcoin. There was nothing stopping businesses in the Central American country from accepting bitcoin—as evidenced by the circular bitcoin economy in Bitcoin Beach predating the Bitcoin Law—but the advent of legal tender legislation allowed more corporations to get started. Accepting BTC as payment. It also attracted tourism and investment. Although Brazil does not recognize bitcoin as legal tender, it is in some ways a missed opportunity, which could be the first step towards making bitcoin payments more widespread in the country’s economy. Whether this actually happens will depend on the actions of the watchdog tasked with monitoring the market.
Initially, the bill directly tasked the Central Bank of Brazil (BCB) with regulating the bitcoin market in the country. Later, this aspect was removed and now the executive is directly tasked with selecting a supervisor for the sector.
The expectation is that the BCB will be the regulator when cryptocurrencies are used as payment, and the country’s securities and exchange commission (CVM) when they are used as an investment asset. It is expected that the two state institutions will work together in these matters. Both BCB and CVM, along with the federal tax authority (RFB), helped legislators draft major restructuring legislation.
The regulator will be tasked with licensing virtual asset service providers (VASPs) operating in the country, as well as overseeing their operations to ensure they comply with existing legislation.
As already mentioned, VASPs must obtain regulatory approval from a regulatory body selected by the executive branch before operating in the country.
The draft law considers VASPs “an entity that performs at least one of the following virtual asset services on behalf of third parties: exchange between virtual assets and domestic or foreign currency; exchange between one or more virtual assets; transfer of virtual assets; maintaining or managing virtual assets or tools that provide control over virtual assets; or participating in financial services and offering services related to the offer of an issuer or the sale of virtual assets.”
Two main aspects should be emphasized in this definition. First, it only applies to businesses with a special type of Brazilian business identifier called a CNPJ (CNPJ is similar to a business tax identification number, TIN, or employer identification number EIN in the US). The second requires the provision of the above services on behalf of a third party for a provider to be considered a VASP. These two points mean that individuals, as well as hardware and software services such as self-protection solutions, should not be subject to the rules and therefore should not be defined as VASPs.
The bill stipulates that existing criminal penalties for fraud and money laundering should also include illegal actions related to cryptocurrency. Penalties range from 3 to 10 years in prison in addition to fees, and in some cases are more severe when virtual assets are involved.
In the final vote, the main points of the bill were removed from the text. Here are some of the most important ones.
A rule added by the Senate required VASPs to keep user funds separate from their equity. It sought to avoid problems similar to those at FTX, the now-insolvent global exchange that used customer funds to fund trades carried out by sister company Alameda. Note that this rule provided that in the event of bankruptcy, user funds would be immediately returned or used to pay off part of the company’s debt instead of being part of the bankruptcy process.
The inclusion of this unit was supported by several major market players as well as BCB. At Tuesday’s meeting, lawmakers voted against it, arguing that the rule could stifle innovation in Brazil because it would create a huge barrier to entry for the cryptocurrency market.
Tax incentives for mining rigs
Another seemingly positive rule left out of the final text sought to exempt from federal taxes on the purchase of mining hardware and software, such as ASIC rigs, until December 2029. It included some conditions for the benefit, such as the need to use renewable energy sources. . The rule could help develop a healthy mining market in the country, as federal import taxes alone could double the price of some commodities shipped to Brazil.
Public Institutions Holding Accounts in VASPs
A third rule, which did not reach the final text, allowed government agencies to open and operate accounts in VASPs, such as exchanges. The possibilities of keeping such accounts will be limited to the possibilities determined by the executive power.