Brazil sees cryptocurrency as the best lever to escape economic pitfalls, positioning itself as one of the leading countries in crypto adoption.
The Rise of Bitcoin in the Land of Coffee
Governments adopt crypto for various reasons. Japan, for example, has been at the forefront of developing new technologies for decades, knowing that to stay ahead globally and capitalize on potential opportunities, it must rapidly adopt and grow those technologies. Similarly, Brazil views crypto as the key to freeing itself from the economic hole it has been stuck in for decades.
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The country has shown significant interest in cryptocurrencies and blockchain technology. Experts believe high inflation, economic instability, and the need for an alternative to the traditional financial system are the main reasons for Brazil’s shift toward digital currencies.
In this article, we will explore why Brazil’s crypto adoption is growing and its impact on financial well-being and the country’s economic future. However, the question remains: Is simply adopting and protecting user assets through regulation enough for economic prosperity, or are more innovative challenges needed to align with the rapid growth of this technology?
Weak Economy: A Clear Need for Fundamental Change
More than 25% of Brazil’s population lives in absolute poverty due to high inflation and economic instability, making the country a leader in Latin America for the lowest wage levels.
Additionally, around 20% of Brazilians don’t have a personal bank account due to lack of money, high banking fees, and geographical isolation, with many families sharing a single account.
Despite this, Brazil has one of the largest internet user bases in the world, with nearly 85% of its population having access to the internet and smartphones.
This financial and employment situation shows that people in Brazil urgently need alternative ways to meet their material needs. Around 40% of cryptocurrency users earn less than the minimum wage.
From Cautious Steps to Blockchain Confidence
Brazil is one of the largest investors in cryptocurrency. With a population of over 215 million, the country began adopting cryptocurrencies gradually from 2010 to 2013, with public interest in Bitcoin rising steadily.
The crypto story in Brazil began in the early 2010s, when few people knew about Bitcoin or other cryptocurrencies. In fact, Brazilians were among the first to understand the significance of this new phenomenon and recognized its potential much earlier than other countries.
In 2013, Law No. 12,865/13 was enacted to regulate payment systems and introduced the concept of “electronic money” or “electronic currency.” Later, the Central Bank of Brazil issued a statement warning about the potential risks of cryptocurrencies and clarified that virtual or encrypted currencies were not considered electronic money under this law.
In 2014 and 2015, the increasing interest in Bitcoin led to the creation of cryptocurrency exchanges to make investments in the sector more accessible.
2017 marked a turning point for cryptocurrency in Brazil, as the astronomical rise of digital currencies captured the attention of the public. For countries with weaker economies, the potential for preserving or growing wealth through crypto was especially appealing.
That year, Brazil’s Securities and Exchange Commission (CVM) classified cryptocurrencies as “investable assets.” However, the Federal Reserve Bank of Brazil issued another warning about the risks of investing in crypto and emphasized that transactions made by companies on behalf of users were not under the supervision of the government. Citizens were advised to be cautious about the security aspects of the industry.
In 2019, Brazil officially defined cryptocurrency for the first time. The Federal Revenue Secretariat of Brazil issued Ordinance No. 1,888/19, which defined crypto assets as digital assets that could be expressed in national or international currency. These assets are traded electronically using cryptography and distributed ledger technology and serve as a form of investment and value transfer.
Digital Exchanges in Brazil
Digital exchanges are defined as “legal entities, whether involved in financial activities or not, providing services related to cryptocurrency transactions, including brokerage, negotiation, or custody, and accepting various types of crypto assets as payment methods.”
Since 2023, digital exchanges operating in Brazil must obtain authorization from financial institutions in the country and register their legal entity number (CNPJ).
To prevent money laundering, cryptocurrency service providers are required to constantly update their Know Your Customer (KYC) information and report suspicious activities, along with a record of all transactions, to Brazil’s Financial Activities Control Council (COAF).
Currently, 12 approved cryptocurrency exchanges are operational in Brazil, with over 2 million users. The most well-known of these is Mercado Bitcoin.
New regulations also require companies to adhere to consumer protection laws and ensure that cryptocurrency investments and payments follow Brazil’s Penal Code, the Money Laundering Prevention Law, and the Crimes Against the Financial System Law. In simple terms, fraud and crimes in the crypto space will face clear legal penalties.
The Central Bank of Brazil also applies the IMF’s regulations for buying and selling digital assets. According to these rules, cryptocurrencies are classified as non-financial products and are accounted for as commodities in the Central Bank’s balance sheet. Purchases of crypto assets from foreign exchanges are considered part of the country’s exports and imports.
International exchanges, both licensed and unlicensed, are freely accessible to the public in Brazil. Big exchanges like Binance, Bybit, Gate.io, and MEXC are still operating without licenses but remain popular in Brazil.
Projects in Progress by Brazilian Government Organizations
- The Financial and Technological Innovations Laboratory (Laboratório de Inovações Financeiras Tecnológicas), or LIFT as it is known, was established to collaborate with the National Federation of Associations of the Central Bank Employees (Federação Nacional de Associações dos Servidores do Banco Central). LIFT was created with the goal of strengthening innovations in the country’s financial system by encouraging new technological solutions. Among the blockchain-based projects launched by this institution are the creation of a decentralized platform for credit rights registration, peer-to-peer lending systems, and a digital wallet for tax payments.
Additionally, in 2021, LIFT launched a special sandbox program titled “Real Digital Challenge,” specifically designed to develop Brazil’s central bank digital currency (CBDC).
Real Digital and Its Applications
One of the boldest moves by Brazil’s Central Bank in the blockchain technology development process has been the approval of the Real Digital project. Initial murmurs about the project began in 2021. The main tasks of the sandbox project, aimed at developing Brazil’s national digital currency, are to explore the use cases for cryptocurrencies and assess their feasibility within the Brazilian economy. Out of 47 proposals submitted to LIFT, 9 projects were selected and are currently under development.
For example, a well-known Brazilian financial institution is designing a platform that will allow the holding and exchange of currencies and alternative investments via blockchain and smart contracts. This platform will operate similarly to current decentralized financial systems, featuring liquidity pools with tokens based on stablecoins pegged to the Brazilian Real (BRL), US Dollar (USD), or other fiat currencies.
In February 2023, based on the results from LIFT’s research, the Central Bank of Brazil reviewed the guidelines for Real Digital and began testing the platform designed for Real Digital from March 2023; the final product will be called RD Pilot.
Some of the main guidelines for Real Digital (Digital Real) use cases include:
- Emphasis on developing innovative models involving technologies such as smart contracts and programmable money, compatible with settlements via the Internet of Things (IoT).
- Development of online applications that also allow offline payments.
- Adherence to privacy and security principles, especially concerning banking confidentiality and the protection of personal data as specified by Brazilian laws.
Regulatory Challenges and Regulators with DeFi and Peer-to-Peer Transactions
The regulation of decentralized finance (DeFi) protocols, currently under review, presents unique challenges due to their decentralized nature. Notably, the Central Bank of Brazil has recognized these complexities, particularly when responding to entities such as decentralized autonomous organizations (DAOs), and is aware of their growing role in the financial sector. Furthermore, the Central Bank’s stance on peer-to-peer transactions is that they are not subject to regulations because they fall outside the scope of third-party services.
Tokenization Project Testing Planned for 2024
Tokenization refers to the process of transferring the ownership rights of a real-world asset to digital tokens. Some real-world assets that can be tokenized include financial products like stocks, bonds, and real estate.
The Brazilian Securities and Exchange Commission (CVM) had previously reviewed a few tokenization projects valued at over $185 million. However, the commission has announced that the second testing phase for tokenization is scheduled for 2024, with additional tokenization cases to be tested. The CVM has stated that, considering the benefits of tokenization, including improved efficiency, cost reduction, and greater transparency, blockchain technology will be used to enter the world of tokenization.
Tax on Assets and Income
In May 2019, the Brazilian tax authority, Receita Federal do Brasil, issued guidance under instruction 1888 requiring individuals or companies involved in cryptocurrency activities with a monthly value of over 30,000 Brazilian Reals to report these activities. This includes buying, selling, depositing, withdrawing, and more. Failure to provide such reports results in a penalty ranging from 1.5% to 3% of the undeclared amounts.
Anti-Money Laundering Laws
Although Brazil’s government has not enacted specific anti-money laundering laws for cryptocurrencies, the country is a member of the G20 and has adopted the FATF (Financial Action Task Force) guidelines for preventing money laundering and terrorist financing. Under the rules set forth at the 2019 Japan Summit, member countries are required to comply with these laws regarding service providers in the cryptocurrency sector.
While no laws have been enacted specifically for Bitcoin mining, it is not prohibited, and under Brazilian federal tax laws (RFB), miners must pay taxes on the income generated from selling mined tokens and coins to the Brazilian government.
In 2021, despite all the challenges and warnings, the Brazilian Securities and Exchange Commission authorized the creation of exchange-traded funds (ETFs) for Bitcoin (BTC) and Ethereum (ETH). This marked a gradual acceptance of cryptocurrency by the Brazilian government. Following this, the largest cryptocurrency exchange in Brazil, Mercado Bitcoin, increased its investment in cryptocurrencies to $2.1 billion, making Brazil the largest recipient of cryptocurrency investments in Latin America, according to SoftBank.
SoftBank is a Japanese holding company that is considered the world’s largest technology investor, having financially supported numerous companies in sectors ranging from robotics and satellites to blockchain, transportation, artificial intelligence, and human body computing.
Brazil’s Global Share of the Crypto Market
The exponential growth in the number of cryptocurrency holders in Brazil shows that the potential of cryptocurrency has been fully understood by the people, banks, companies, and the Brazilian government. Both the people and the government recognize that decentralized assets and financial systems can save economies devastated by the wrong decisions of past government leaders like those in the United States. According to data provided by Metamask, over 41% of Brazil’s population has purchased cryptocurrencies, meaning more people in Brazil own digital wallets than have personal bank accounts. It is predicted that the annual income of Brazilians from the cryptocurrency market in 2024 will exceed $1 million, reaching more than $1.5 million by 2028.
On the other hand, the Central Bank of Brazil launched its central bank digital currency project, Drex, in late 2020 to facilitate international exchanges. This project, which has made significant progress since its inception, is intended for large-scale transactions and is expected to be operational by mid-2024, contrasting with Pix, the fast payment system designed by the Central Bank of Brazil for small transactions.
Pix is a digital payment system introduced by the Central Bank of Brazil in 2020. Pix uses a digital wallet application and generates unique QR codes to facilitate transactions between users. This service operates 24/7 and completes transactions in less than 10 seconds, with final approval from the user. Major Brazilian financial institutions with more than half a million active accounts are required to offer Pix registration to their clients. Pix transactions have now exceeded $400 billion.
Turning Challenge into Opportunity
Despite the growing popularity of cryptocurrencies, there are several challenges to using this technology in Brazil. One of these challenges is the lack of clear laws and regulations regarding cryptocurrencies. While there are no legal restrictions on mining, buying, selling, or trading cryptocurrencies, no specific law has been enacted yet. The only specific law regarding cryptocurrencies is the tax on income generated from selling or mining cryptocurrencies, as defined by the Federal Revenue of Brazil, which de facto legalizes the buying, selling, and mining of cryptocurrencies.
Another clearly defined law in this sector is that none of the virtual cryptocurrencies are considered legal tender, with the only official currency in Brazil being the Real (BRL), and cryptocurrencies are defined as digital assets. Moreover, there is no law prohibiting Initial Coin Offerings (ICOs), and they are subject to the Securities and Exchange Commission’s regulations and the Brazilian Capital Market law.
Considering that the proposals made allow Brazilian citizens to use cryptocurrencies within specific frameworks while maintaining user privacy, with no restrictions on utilizing the benefits of the cryptocurrency industry, the Brazilian government’s stance on blockchain technology and its potential opportunities is clearly evident. The economic challenges, the government’s rational outlook, and the young generation’s familiarity and enthusiasm for modern technologies have made Brazil a fertile ground for the growth of advanced technologies.
The growing global acceptance of crypto is reminiscent of the acceptance of other practical technologies that were initially difficult to integrate into people’s daily lives due to unfamiliarity. The rise of each new opportunity gives strength and impact to those who discover and pursue it. The land of decentralized technologies and assets is the best destination for countries and people who realize the consequences of past poor decisions and are looking for a way out of centralized, monopolistic laws. As we see in many other areas, the era of global superpower dominance has ended, and whether we like it or not, this marks the beginning of a great end.
