Brazil Central Bank unveils crypto rules to tighten oversight and curb illicit use

On Monday, Brazil’s central bank announced the awaited regulations regarding trade and use of cryptocurrencies and other virtual assets.

The new rules effectively apply the country´s anti-money laundering and counter-terrorism financing standards to virtual-asset service providers, which is an important milestone in the application of Brazil’s crypto law of 2022.

Although Brazil had approved its crypto legal framework almost three years ago, full enforcement depended on regulations from the central bank, which were to be complementary to the law.

Last year, the monetary authority held four sets of public consultations to fine-tune the framework.

The set of rules was made public at a time when the use of cryptocurrencies across Brazil is soaring, with stablecoins, or digital tokens supported by real-world assets such as the US dollar, leading the way.

Central bank governor Gabriel Galipolo said in August that such instruments are often linked to illegal activities and employed to evade formal financial supervision.

Rules take effect in February

The new legislation will go into effect in February and will apply to a wide variety of financial players, including foreign exchange and securities brokers, distributors, and virtual asset service providers.

According to the central bank’s official announcement, these firms will now need to get specific authorisation to function under the amended compliance framework.

The central bank stated that the guidelines seek to fix regulatory gaps that have allowed some virtual-asset platforms to operate with little oversight.

Policymakers hope that linking cryptocurrency service providers with existing financial-sector rules will prevent fraud, scams, and the use of virtual assets for illegal reasons.

“The new rules will reduce the scope for scams, fraud, and the use of virtual asset markets for money laundering,” said Gilneu Vivan, the bank’s director of regulation, during a press conference announcing the measures.

Stablecoins in the spotlight

Brazilian regulators have singled out stablecoins for particular scrutiny.

In comparison, cryptos like Bitcoin are mostly regarded as investment goods, while stablecoins are placed on average when it comes to payments, providing users with a faster and less expensive alternative to traditional banking channels.

Policymakers pointed out that the stability of these tokens with respect to fiat currencies makes them attractive for cross-border transfers and even everyday purchases. But they have also been used to evade taxes and bookkeeping rules.

The new forex regulations place any purchase, sale, or exchange of virtual assets pegged to fiat currency under the classification of a foreign exchange operation.

Also, the same categorisation applies to international payments or transfers with the use of virtual assets, including settlements of obligations through cards and electronic payment tools.

Expanding consumer and compliance protections

Apart from the foreign-exchange aspect, the regulation also brings virtual-asset activity within the scope of Brazil’s general financial protections.

The rules expand pre-existing standards around consumer protection, transparency, anti-money-laundering, and counter-terrorism financing to the crypto industry.

New governance and security obligations will also fall to service providers.

Such requirements encompass internal controls, incident reporting, and compliance mechanisms that are consistent with those imposed upon traditional financial institutions.

The introduction of the framework illustrates the increasing influence of the central bank on Brazil’s future financial ecosystem.

Setting explicit definitions and operational borders is hoped to stimulate innovation while reducing the blight of the growing virtual-asset market.

Industry stakeholders have less than three months to comply with the new supply chain criteria before the February deadline.

Brazil is taking steps to regulate the rapidly growing domestic crypto market, which has the potential to be a lucrative part of digital finance, to mitigate volatility and dangers.

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