What changes with the approval of the legal framework for crypto assets?

After seven years of processing, the Chamber of Deputies approved last Tuesday (29) a bill that regulates the crypto market in national territory. The proposal, which formalizes the sector in Brazilian legislation, awaits the sanction of President Jair Bolsonaro (PL).

The bill approved by the Chamber was reported by Deputy Expedito Netto (PSD-RO) and rejected a series of changes that had been made by the Senate to the original text, proposed in 2015 by Deputy Aureo Ribeiro (Solidariedade-RJ).

UNDERSTAND THE LEGAL FRAMEWORK OF CRYPTO-ASSETS

What is a virtual asset?

A virtual asset is now defined by law as a digital representation of value that can be traded or transferred and used for payment or investment purposes. The law provides a very generic definition and, to avoid noise, makes some exceptions explicit.

Loyalty and mileage programs, as well as fiduciary currencies, are not included in this definition. This means that the digital real –which is being studied by the Central Bank– will not be governed by this legislation. In the case of assets representing securities –securities or publicly offered collective investment contracts–, the rules of the CVM (Comissão de Valores Mobiliários) continue to apply.

What are the implications of the law?

The law provides for guidelines to be observed in the activities and regulation of virtual asset service providers. The approved text does not detail specific rules, which will be the responsibility of the regulatory body later.

Thamilla Talarico, leading partner of blockchain and digital assets at EY Brasil, sees the legal framework as “principled”, that is, a law that brings guiding principles. “It is the beginning of a regulatory legal framework for the subject”, she says. According to her, the law provides legal certainty for both investors and companies.

For Marcos Viriato, CEO of Anglo-Brazilian fintech Parfin, the approval of the proposal puts Brazil at the forefront on the global stage. “Few countries in the world have legislation dedicated to regulating crypto assets. It is super positive that Brazil is taking the lead”, he says.

When does the law go into effect?

Approved by the Chamber of Deputies, the text went on to be sanctioned by President Jair Bolsonaro (PL). Once sanctioned, the law will enter into force 180 days (six months) after the official publication. The legal framework provides for a transition period for digital asset service providers to adapt to the new regulation.

But measures can actually become effective even later. This is because it is also necessary to consider the deadline for the infralegal rules to be determined by the regulatory body – still to be defined.

In a scenario that he considers optimistic, Isac Costa, partner at Warde Advogados and former Capital Markets analyst at CVM, predicts that the law will not produce relevant practical effects in the Brazilian market of cryptoassets before one year after its approval. In the pessimistic scenario, he estimates that it will take at least two years.

“It is normal for a complex law to have a long transition period. The problem is that some more serious and imminent risks did not have to wait”, he says. He is concerned about the lack of stricter controls on foreign brokerages not domiciled in the country.

How is the situation of foreign companies in Brazil?

The approved bill requires companies operating in the crypto market to be headquartered in Brazil. To create a CNPJ and regularize their registration status, foreign brokerage firms not domiciled in Brazil will have a period of 180 days. At the end of the period, companies will be subject to the rules established by the regulatory body.

Who will be the regulatory body for the crypto market?

The text approved by Congress does not specify a regulatory body for the activity, but states that it is up to the Executive Branch to assign to one or more public bodies the discipline of functioning and supervision of the provider of virtual asset services.

Among the agents in the sector, there is an expectation that the Central Bank will be appointed – which has already shown an interest in assuming responsibility. But even if the monetary authority is chosen, the regulation of digital assets that represent securities will remain the responsibility of the CVM.

What punishments are foreseen in case of fraud?

The regulatory framework provides for punishments in different spheres. In the criminal category, anyone who “organizes, manages, offers or distributes portfolios or intermediates operations involving virtual assets, securities or any financial assets with the aim of obtaining illicit advantage, to the detriment of others, inducing or keeping someone in error, through artifice, ruse or any other fraudulent means.”

The Penal Code now considers fraud involving the use of virtual assets, securities or financial assets as a case of embezzlement, with a penalty of four to eight years in prison, in addition to a fine. The period of imprisonment may be increased by one to two thirds if the offenses are committed repeatedly.

For Talarico, from EY Brasil, penalties alone are not enough to bring more security to investors. “They are complementary to the rules that will be created from these general principles that we have in the newly approved law”, he says.

In the opinion of Costa, ex-CVM, “prevention is better than cure” when it comes to financial losses. “Trying to detect the problem as early as possible to try to prevent investors from being harmed is much more socially effective and brings much more security to investors and citizens than punishing someone later”, he says.

How was the discussion about property segregation?

The bill approved by the Chamber excluded the issue of asset segregation – a legal device that would prevent brokerages from using investor funds for their own operations. The discussion gained more relevance after the collapse of FTX – the second largest cryptocurrency exchange in the world, behind only Binance.

When the investors’ assets are not included in the brokerage firm’s assets, in the event of the service provider’s bankruptcy, clients can formulate a refund request in order to have priority in receiving the funds deposited. Otherwise, you have to queue to try to get your money back.

Without asset segregation, in a hypothetical situation, the clients of a brokerage firm that had their assets frozen by a lawsuit would also be unable to move their investments.

Those who defend the absence of the device claim that this allows for new business models and greater leverage on the part of service providers. The theme was included in the text that passed through the Senate, but was rejected by the deputies, despite the appeal of Brazilian companies. The expectation is that asset segregation will be included in the standard later.