Regulation of the cryptoassets market expected to bring security for businesses and protection for consumers

Bill No. 4,401/2021 (“Bill”), which aims to regulate the already highly-active domestic market of cryptoassets, was approved by the Brazilian Federal House of Representatives. The approved text addresses topics that can offer better legal certainty for the virtual assets market in Brazil, and introduces a number of provisions, of which we highlight the following inclusions as a reference:

1. Straightforward definition of what should be considered a virtual asset, that is, a digital representation of a value that can be transferred and traded by electronic means, and can be used for payments or as an investment. The Bill excludes the definition of “virtual asset” as follows:

(a) local or foreign currency,

(b) electronic currency deriving, for example, from the use of prepaid payment accounts, and

(c) elements of representation of assets that can be issued based on specific law.

2. Clear definition of the activities that service providers in this sector (named “exchanges”) will be permitted to carry out, such as:

(a) exchanging cryptoassets for common currencies (either Brazilian Real or foreign currency);

(b) carry out the transfer of cryptoassets between digital accounts (commonly named “wallets”);

(c) trading of various cryptoassets;

(d) custody and management of these assets; and

(e) participating in financial services and offering of virtual assets per specific issuer or their sale.

This definition brings objective guidelines as to what activities the providers can engage in, without the risk of violating other rules that apply to the financial market. In other words, the Bill clearly establishes the scope of activities that can be carried out by financial service providers.

3. The text of the Bill establishes that the new rules will not regulate assets representing securities, which are governed by Law No. 6,385/76. As a result, CVM’s authority is maintained regarding the activities of the Brazilian capital market.
4. Although the Bill does not define which entity of the federal government will supervise this cryptoasset market, a plausible assumption for such regulatory role is the Central Bank of Brazil. It will have the task of examining the applications for authorization of providers that will engage in the cryptoassets market.
5. It is worth noting that the Bill addressed matters expected to ensure more security to users. For example, the obligation of providers to adopt good governance practices and transparency regarding services and products, in addition to encouraging active risk management for this market, as well as seeking to protect consumers, public savings and, most important, the development of the market on a solid and efficient basis.
6. Although Bill 4,401 introduced provide that can provide greater certainty to market users, – such as ensuring proper governance and transparency in the provision of services and products as well as the active risk management for this market, in order to protect consumers –, the issue of asset segregation between the resources of user and operators of exchange platforms was not regulated by the Bill.

Such matter was already provided for in the original wording of the legislation, and its maintenance faced resistance from certain market agents. As a result, this provision can potentially be delegated to the authority of the regulatory body to which the duty of supervising market operations will be attributed.

In our opinion, it would be more appropriate that the matter be resolved by force of law, as with the means of payment market. In this case, Article 12-A of Law 12,865/13 clearly contemplates asset segregation between (i) the users’ resources intended for the settlement of payment transactions and (ii) the resources of each payment institution participating in the payment arrangement. Such practice would mitigate the risk of confusion (either due to willful misconduct or not) of assets held in custody and managed by the providers, which would mean that, if the provider were to face an economic-financial crisis and, ultimately, go bankrupt, customers could count on the segregation of its assets from the provider’s assets.

This segregation mechanism was expected to be included in the Bill’s final text and, as a result, offer more certainty to investors and users of this type of asset. The matter is expected to be addressed, subsequent to the conversion of the Bill into Law, by the competent supervising entity

7. The submission by providers to the Financial Activities Control Council (“COAF”) was provided for in the original text, and the rule regarding registration in the COAF’ system must be observed.

As a result, service providers would be obligated to implement effective operation control mechanisms against money laundering and the financing of other crimes.

8. The Bill establishes a new criminal definition, which can be considered a “qualified fraud through irregular use of cryptoassets”, adding article 171-A to the Penal Code.

In the definition of such crime, the text proposes actions that contemplate the use of virtual assets, in addition to securities and other financial assets whose purpose is to obtain unlawful advantages, to the detriment of third parties, by inducing and maintaining errors, and the use of fraudulent means. According to the text of the Bill, this new type of crime must be punished by imprisonment for a period of four to eight years, in addition to a fine.

9. In addition to the Penal Code, the law that criminalizes criminal conduct and offenses against the National Financial System (“SFN”) will also be updated. Consequently, Law No. 7,492/86 will also contemplate the use of cryptoassets to define crimes against the SFN.
10. In addition, crimes involving money laundering or concealment of assets, whose sentences currently amount to three to ten years, can potentially be increased by one-third to two-thirds if the crime is committed repeatedly, through a criminal organization, or by using virtual assets.

As a result of the conversion of the Bill into law a regulated environment is created that, in our view, encourages the development of the local market for virtual assets.

We believe that the Bill’s conversion into law will establish a clearer regulatory environment under the regulation and supervision of an agency, such as the Central Bank of Brazil, which will provide more certainty to all agents that can, in fact, offer products and services in alignment with solid and effective principles of governance, transparency and operational security.

Demarest’s Banking and Finance team is available to provide any further clarifications that may be necessary.