Commercial – Crypto & NFTs
What are the biggest investment opportunities in digital – and how can clients decide on the best entry point for them?
As the digital ecosystem evolves, financial assets such as NFTs, cryptocurrencies and other virtual currencies are leading the way in the search for investment.
In Brazil, according to the Brazilian Association of Financial and Capital Markets Entities (ANBIMA), the volume of money traded by investors in the crypto-assets market has reached R$300 billion, which is half of the total amount of transactions carried out through B3, the largest and leading securities exchange in Brazil.
In addition, the Central Bank of Brazil (Bacen) has been promoting discussions regarding Central Bank Digital Currencies (CBDC) to create a digital currency called “Real Digital”, for which guidelines were published in May 2021, aiming to improve the efficiency of the National Financial System and the Brazilian Payment System, as well as to keep up with the dynamism of the technological evolution of the Brazilian economy in the global scenario, while improving international payments.
How is your jurisdiction managing the legal challenges of NFTs: for instance, taxation on purchases, IP, ownership and theft?
Despite the existence of rules related to investments in virtual currencies, as in the case of Normative Instruction RFB 1.888/2019, which requires legal entities and individuals to report to the Brazilian Federal Revenue the operations performed with crypto-assets, Brazil was one of the countries without specific regulation for crypto-assets and NFTs until the end of last year.
On 29th November 2022, the National Congress approved Bill 4.401/2021, which, inspired by arguments like those presented in the past by the European Central Bank on the systemic risks involving cryptocurrency activities, aims to ensure that activities involving virtual currencies are regulated. The bill now goes to the presidential sanction, which may be done in full agreement with the wording of the National Congress or with some vetoes.
According to the proposed regulation, companies that provide the following services will be considered service providers of virtual assets: (a) the exchange between virtual assets and national currency or foreign currency; (b) the exchange between one or more virtual assets; (c) transfer between virtual assets; (d) custody or administration of virtual assets or instruments that allow control over virtual assets; and/ or (e) participation in financial services and services related to the offer by an issuer or sale of virtual assets.
The Brazilian President will be responsible for appointing the specific entity that will regulate and supervise the crypto activity. It is expected that the Central Bank will be responsible for the operation, regulation, and supervision of crypto-active services, including licensing companies to operate in Brazil.
The regulator will have the following responsibilities regarding virtual assets service providers: (a) authorising the operation and corporate changes; (b) establishing management rules and the exercise of statutory and contractual positions; (c) supervising and applying penalties; (d) cancelling authorisations; and (e) establishing rules and criteria regarding the foreign exchange market.
“It is worth noting that operations involving virtual currencies, despite being allowed in Brazil, continue to be considered as high-risk transactions by financial and capital market regulators”
Securities concepts
In parallel to the crypto-assets regulation, in October 2022, the Brazilian Securities Commission (CVM) issued a statement about the criteria for framing crypto-assets as securities, to state its concerns and limits in the exercise of its regulatory power.
From the concepts of securities applied to crypto-asset products, inspired by what occurs in the United States, CVM highlights the following: (1) expectation of economic benefit generated in the investor, who expects to be entitled to redemption, receipt or participation in the results of the investment; (2) effort of entrepreneur or third party, since the result of the investment does not depend on the direct action of the investor, but of third parties; and (3) public offering, taking into consideration the digital features used to reach the public and affect the investments made by residents in Brazil. In other words, the so-called “Howey Test” will be considered.
CVM’s understanding is that the legal protections for cryptoassets should cover financial liquidity, systemic risk mitigation, and fraud and crime prevention.
To ensure the transparency and confidence of cryptoassets submitted to public offering, CVM advocates measures so that information about the offerings is clear, coherent, understandable, and complete to all investors, without discrimination.
The bill’s text foresees it will come into effect within 180 days from its official publication. Regarding the act that will designate the responsible entity to supervise the crypto-assets activities, there is no specific deadline for this to occur.
While all the regulatory guidelines have not been completely defined by the body that will be responsible for supervising crypto-assets, it is worth noting that operations involving virtual currencies, despite being allowed in Brazil, continue to be considered as high-risk transactions by financial and capital market regulators, because they are not guaranteed by any national monetary authority and are not backed by real assets.
NFTs have been debated and heavily exploited by investors and investment firms, but so far there is no bill or regulation involving them.
TOP TIPS
Exploring digital asset investments
- Upon entering the Brazilian market, the virtual asset service providers should be aware of the new regulations, which are expected to change substantially in the coming months.
- The virtual currency market also creates opportunities for adjacent digital services companies. Technology and digital payments companies, for example, can add value to the flow of investments, the functionality and security of transactions, and the custody of virtual assets.
- The proposed new regulation indicates that companies that already have a license to operate issued by the Central Bank will be able to also provide virtual asset services, which is why many companies in the market are already looking for projects that involve a relationship with the Central Bank.
- When exploring investments in crypto-assets, it is important to be assisted by experts who understand and are familiar with the regulatory standards of the Central Bank and CVM (Securities Commission) and the legal aspects involved in each service the company wishes to provide.
