Author: Caroline Totola
Those used to high tech, fast paced environments usually feel they are out pacing regulators and rules governing their businesses, who often require time to identify, understand, and form opinions on novel business models their rules did not previously contemplate. Conversely, regulators feel an urgency to move faster in order to facilitate use of new technologies and rebuff its misuse by bad actors which can cause harm to the uninitiated, particularly retail consumers.
When we see meaningful regulatory advance in a continental country such as Brazil, we realize two important things: first, the respective technology has been around for enough time to be considered well established and properly documented to enable legislators to get educated on it, and second, it has already spread out to a sizeable slice of the population and territory area to demand clearer national rules.
As a consequence, Brazil currently has two main bills in progress to regulate the crypto-assets market and we are sharing the following legal highlights so Blocktaners can do their own research.
Bills in Progress:
The first bill is authored by Congressman Áureo Ribeiro (SD-RJ), originated in the House of Representatives in 2015, and on December 09th, 2021 was approved by the House of Representatives and forwarded to the Senate, the house responsible for reviewing and approving the project before it will move on for sanction or veto by the President of the Republic. This bill regulates virtual asset service providers (crypto exchanges, wallets, etc), and amends the Penal Code and the Law on Crimes against the National Financial System, including virtual asset service providers in the list of institutions subject to its provisions.
With a very similar text, we also have Bill #3825/2019, authored by Senator Flávio Arns (Rede PR) which had a substitute bill considered and approved by the Senate Economic Affairs Committee (CAE) last week (2/22/2022), filing bills #3949/2019, authored by Styvenson Valentim (Podemos-RN) and #4207/2020, proposed by Soraya Thronicke (PSL-MS), because they all dealt with the same subject. In this case, as the project was proposed in the Senate, the House of Representatives will function as the reviewing house, if it advances it will be considered by the President of the Republic for sanction or veto.
In short, the most relevant points of these bills are:
- To define principles and guidelines to be followed by the sector, such as free competition, consumer protection, security and protection of personal data, among others;
- Define who are the “virtual service providers” and other terms relevant to the sector;
- To create a specific type of crime to punish scams and frauds involving virtual assets, with a penalty of imprisonment from 4 to 8 years plus fine;
- To equip companies providing virtual services to financial institutions;
- To submit virtual service providers to compulsory reporting of suspicious money laundering operations to the Financial Activities Control Council (COAF);
- To create an authorization from the federal executive branch for virtual service providers to operate in the Brazilian market;
- It is not yet established which body will be responsible for inspecting the industry, which will be determined later by an act of the federal executive branch;
- To authorize the creation of a “simplified procedure” to grant operating authorization to companies providing virtual services;
- To create a tax exemption for the acquisition, by legal entities, of machinery and software to be used in the processing, mining and custody of virtual assets, provided that the enterprises use 100% renewable energy and neutralize 100% of greenhouse gas emissions.
Looking at these main takeaways, The substitute bill approved by the Senate removed from the original bill the Central Bank's competence to issue licenses and supervise the sector, making the final text approved by the CAE more comprehensive and less restrictive. A more specific regulation will come later, with the choice of the body responsible for the inspection.
We clarify that the bills in progress do not bring news about the taxation of crypto-assets, so that, for now, the matter remains regulated by Normative Instruction 1888 of the Federal Revenue Service of Brazil.
IN 1888 establishes and regulates the obligation to provide information related to operations carried out with crypto-assets to the Special Secretariat of the Federal Revenue of Brazil, and states that this information must be provided whenever the monthly value of operations with crypto-assets, individually or jointly, exceeds BRL 30,000.00 (thirty thousand reais).
This applies to the individual or legal entity that performs any operations with crypto-assets, such as purchase and sale, trade, donation, transfer and withdrawal from exchanges, among other operations that imply the transfer of these digital assets.
It is unlikely that a change in this regulation will be included in the new law, since more specific topics are regulated by infra-legal instruments such as ordinances, circulars and normative instructions.
Update on 7/12/2022:
On April 26, 2022, the substitutive bill approved by the Economic Affairs Commission (CAE), was voted on and approved by the Senate. The bill, which is currently being processed as PL 4.401/2021 results from the unification of the two main bills from the House of Representatives and Senate (PL Nº 2.303/2015 and PL 3.825/2019).
Considering the changes made by the Senate, the text returned to the House of Representatives and awaits a final vote before being sent to the President for sanction or veto. PL 4.401/2021 is being processed in the Lower House as a matter of urgency, and has already been placed in the agenda for final voting a few times, which has not occurred until this date (07/12). The rapporteur responsible for the project, Congressman Expedido Netto (PSD-RO), presented the final report for voting last Tuesday (07/04) and some changes were made to the text sent by the Senate.
In addition to returning the text of some articles initially approved by the Lower House, the report proposes removing the obligation of foreign exchanges to be registered with COAF (Council for the Control of Financial Activities) and have an active CNPJ to apply for a license to operate in the country. Such a transition rule was criticized as it would require exchanges to comply with such provisions on the first day of publication of the Law, without granting any timeline for adaptation.
Another major change was the removal of the asset segregation rule. This was the obligation imposed on virtual assets service providers to keep clients' crypto assets separate from the company capital. In this case, if an exchange goes bankrupt or is submitted to a restructuring process, the values that belong to customers could not be used to pay any of the company's debts.
We highlight that these bills are still in the process of being analyzed, and may undergo changes until their final approval, but they already demonstrate an impressive evolution paving the way to curb malicious activities, at the same time, they will also allow proper businesses to thrive, the population to feel secure and much more growth in adoption of crypto asset technologies.
We discuss these and other matters relevant to digital finance on our Telegram channel, join us!