Brazil, the largest country in Latin America, is moving closer to regulating cryptocurrencies with its own version of a Bitcoin law.
Large companies expect that such a framework would put Brazil at the forefront in the region, attracting capital overseas and clients.
On April 26, the Brazilian Senate passed the country’s first bill governing cryptocurrencies. This project defines what a virtual asset is and sets the stage for a broader regulatory perimeter. It would also provide ground rules for day-to-day use and stricter penalties for scams and frauds, which have increased over the past few years in a widely unregulated space.
Virtual assets are a broader category that includes cryptocurrencies like Bitcoin and other digital assets, such as tokens. The bill would also allow the executive branch to create a new body for overseeing crypto, delegating supervision to the central bank or the current financial market regulator, CVM.
The bill’s approval was welcomed by the leading player in the country, Mercado Bitcoin.
“Regulation of virtual assets is fundamental and urgent,” Julien Dutra, government affairs director at the firm, told LendIt Fintech. “It can guarantee a healthy market, with security for entrepreneurs and protection for consumers.”
Record capital flows
The decision to lay the groundwork for the nascent industry comes as companies attracted record capital flows last year: venture funding to Latin American crypto companies grew tenfold during 2021 to $ 650 million from $68 million. Although they still represent a small share of broader fintech investments, crypto is quickly gaining weight.
By far the largest recipient of venture capital funds, Brazil is also home to Latin America’s first cryptocurrency unicorn company.
Mercado Bitcoin surpassed the $1 billion valuation threshold last year when it tapped some $250 million from a series of investor rounds which had Softbank as its leading investor. The Japanese conglomerate, which manages two significant venture capital funds in Latin America, invested some $200 million in the firm.
Mercado Bitcoin is a leading regional crypto exchange that saw its business jump by 530% last year to trade some 40 billion reais in crypto during the previous year.
Regulators scramble to understand
The decision from the Brazilian legislative comes as countries worldwide are scrambling to understand how best to tackle the fast-growing industry. Whereas many experts believe regulation could contribute to more investor and client certainty as it would weed out fraudsters from legitimate businesses. Some argue that a framework done in a hurry and with little interaction could do more harm than good.
“In some countries, the attempt to implement regulations ended up directly deteriorating the operation of many companies,” Manuel Beaudroit, CEO at Belo, said. It is essential, he argued, that crypto firms are effectively able to navigate through the regulation.
To curb fraud, the law project in Brazil demands that the crypto sector supervise its clients (KYC, for “know your client”) and transactions (KYT, for “know your transactions”) as standard financial crime procedures that banks face.
Dutra argued that those controls could be “essential” to curb fraud if expanded to the entire sector.
“Brazil was already implementing best market practices with self-regulation,” he said.
“The (new) regulation is not restrictive to technology but aims to strengthen these best practices and update legislation of the traditional financial system and the criminal code so that there is a policy against illicit activities using digital assets,” he said.
No date for vote
A framework to develop the industry comes as cryptocurrencies are quickly entering the mainstream in Latin America. Chainalysis, an intelligence company, estimated that cryptocurrency usage in LatAm grew 880% from June 2020 through June 2021. According to Ventara, a research firm, salaries and payments being settled over cryptocurrency are growing at 10% monthly.
To become law, the bill approved in the Senate must now be ratified by the Lower House in Congress, only to be then submitted for sign-off by President Jair Bolsonaro.
There is no precise date for the voting session as of yet. But Brazilian largest cryptocurrency firms are eager for that to occur.
“When done well, the regulation goes far from being a restriction,” Mercado Bitcoin’s Dutra said. “It attracts investors, stimulates innovation, and strengthens Brazil’s position in the new digital economy.”