Brazilian crypto industry gets regulatory clarity amid global uncertainty

The recent regulatory framework from the Brazilian Congress will benefit the country’s financial institutions and bridge local liquidity with global markets.

As the global crypto community is still licking its wounds from the FTX collapse, a liquidity crisis continues to spread around centralized exchanges and decentralized finance (DeFi) alike. 

It is soon to be decided whether the coming regulation triggered by FTX’s bankruptcy will bring a silver lining to crypto.

The Chamber of Deputies of Brazil, the lower house of the country’s federal legislative body, has passed a regulatory framework that legalizes the use of cryptocurrencies as a payment method within the country.

It is estimated that 10 million Brazilians, or about 5% of the population, trade crypto assets.

The largest centralized exchange in Brazil is a local business called Mercado Bitcoin, with roughly three million users. International players like Coinbase or Gemini do not have such a relevant presence in Brazil.

Thus, global bankruptcies like FTX’s have not affected the blockchain market in Brazil as strongly as in the United States or Europe.

Recent regulatory news from Brazil gives a ray of hope as other countries around the world are targeting the cryptocurrency industry without making any distinction between good and bad actors, especially in the U.S. and Europe.

In a blog post titled “Bitcoin’s last stand,” the European Central Bank warned banks against interacting with digital currency as it could taint their reputation, claiming BTC is hardly used for legal transactions and that the regulatory attention it is currently receiving from lawmakers around the world could be “misunderstood as approval.”

The U.S. Commodity Futures Trading Commission (CFTC) continues to aggressively police new digital commodity asset markets. According to a report from the CFTC, a total of 82 enforcement actions were filed in 2022’s fiscal year, imposing $2.5 billion in “restitution, disgorgement and civil monetary penalties either through settlement or litigation.”

Although the framework voted by the Brazilian Congress doesn’t make Bitcoin legal tender as it was achieved in El Salvador, legalizing crypto as a payment method is a positive step toward encouraging local businesses to adopt and transact using crypto.

Salvadoran President Nayib Bukele announced that the country would be implementing a Dollar-cost average trading strategy to accumulate Bitcoin. After buying a large chunk of its Bitcoin reserves at market heights, El Salvador currently finds most of its crypto investment to be underwater.

Current crypto landscape in Brazil 

Brazil has been steadily preparing for the regulation of tokenized assets and the current administration has taken a positive stance on financial innovation for the last couple of years, but no one was expecting it to be voted on so suddenly.

The Brazilian Securities and Exchange Commission is pursuing changes in the country’s legal framework concerning its regulation of cryptocurrencies. In 2021, the securities regulator approved a sandbox structure for the testing of blockchain companies and solutions.

The Central Bank of Brazil also shared its objectives to create the country’s sovereign digital currency pilot before the end of the year.

Recent: FTX collapse won’t impact everyday use of crypto in Brazil: Transfero CEO

Luis Felipe Adaime, CEO of Moss.earth — a Brazilian climate tech that develops blockchain-based solutions to help companies offset carbon — told Cointelegraph:

“The Central Bank innovated massively in 2020 with the ‘PIX,’, an electronic instant payment method that has gained wide acceptance in the country. Considering the success it’s had so far I would imagine that the next natural step would be to have the ‘PIX’ on-chain.” 

Brazil’s legal framework states that the central bank will determine the rules, and a license will be required for any firm that exchanges fiat for crypto or offers crypto custody and crypto-related products. 

“Licence requirements will limit who can participate and run these kinds of operations, the process of approval by the central bank might constrain the market.” Thiago César, the CEO of fiat on-ramp provider Transfero Group, told Cointelegraph, adding, “There is no reason why the president will not sanction this law, this is the final step and he will probably do it as there is big pressure from the central bank to accept the legal framework.”

The current president of Brazil, Jair Bolsonaro, has relied on the Ministry of Economy and the advice of technical nominees for such complex economic decisions and is likely to approve the framework before leaving office on Jan. 1, 2023.

A clear regulatory framework will bring more legal certainty for some institutional players to participate but by no means was Brazil hindered in terms of innovation within this field.

Banks and financial institutions might venture into new product offerings such as credit lending with crypto and maybe even crypto remittances with this new regulated environment in Brazil. Three major banks in Brazil were already offering crypto-related products before Brazil’s Congress passed the bill.

Who is set to benefit the most from this new regulation?

Despite GDP stagnation in the past two decades, Brazil has had a relatively benign low-inflation scenario — especially when compared to neighboring Argentina and Venezuela — and has implemented significant financial innovation in recent years.

Positive regulation might allow listed funds and publicly traded instruments to purchase their crypto locally instead of going outside of the country.

Investment funds in Brazil are only allowed to buy crypto assets on regulated exchanges. This created a scenario in the past, where a fund that wanted to allocate part of its investments in crypto had to resort to international exchanges that were regulated in a different jurisdiction.

Anything that bridges liquidity between multiple jurisdictions and Brazil is a very interesting opportunity. An international investor would face a less complicated bureaucratic process and local businesses could access more capital.

“I believe Brazilians have benefitted strongly from financial and tech innovation like the rise of fintech and the adoption of blockchain, with wider access to cheaper credit, growing investments and trading in crypto,” Adaime stated.

DeFi initiatives involving Brazilian stablecoins like the Celo Brazilian real (cREAL) and the Brazilian Digital Token (BRZ) are making foreign direct investment easier by enabling international stablecoin holders to fund local small and medium enterprises.

Related: Luiz Inácio Lula da Silva wins Brazil’s presidential race — What does this mean for crypto?

Brazil is a very financially secluded market from the rest of the world due to the restrictive nature of its local currency. “The only currency that can be used in Brazil is the Brazilian real so there are no USD purchases or foreign currency bank accounts. This makes the local currency quite strong.” Cesar added:

“Naturally, local players are expecting regulators to be tough on international players so that they have a better fighting chance.”

International exchanges in Brazil such as Binance, ByBit and Crypto.com were expanding fast and storming the market with better product offerings, more liquidity and books that are more liquid and globally integrated.

A group of local exchanges has been vocal about international exchanges operating in Brazil without any type of regulation. Those local exchanges played a big part in pushing the vote by Congress to happen as soon as possible.