José Luiz Homem de Mello

Pinheiro Neto Advogados, São Paulo

jhmello@pn.com.br

Tatiana Guazzelli

Pinheiro Neto Advogados, São Paulo

tguazzelli@pn.com.br

Isabela Piovesan Dall’Oglio

Pinheiro Neto Advogados, São Paulo

ioglio@pn.com.br

Thaís Mayumi Nagura

Pinheiro Neto Advogados, São Paulo

tnagura@pn.com.br

On 22 December 2022, the Brazilian Federal Government published Law No 14,478 (Law No 14,478/22), which deals with the regulation of the crypto asset market. It will become effective in June 2023. In line with jurisdictions such as Japan and Hong Kong, the focus of the law is on the entity providing the services rather than the virtual asset.

The new law provides for concepts, principles and guidelines that will rule the rendering of services in the crypto asset market, including free competition, protection of personal data, protection of popular savings, consumer protection and money laundering prevention. In addition, it empowers the authority – yet to be designated, but which is expected to be the Central Bank of Brazil – to authorise, regulate and supervise virtual asset service providers (VASPs) within the scope of Law No 14,478/22.

Law No 14,478/22 defines crypto asset (or virtual asset, as used in the law) as the digital representation of value that can be negotiated or transferred by electronic means and used to make payments or for investment purposes, but excludes from its scope the following assets:

• national and foreign currencies;
• electronic currency, under the terms of Law No 12,865 of 2013;
• instruments that provide their holder with access to specific products or services, or to the benefit of these products or services, such as points and rewards of loyalty programmes; and
• representations of assets that have their issuance, bookkeeping, negotiation or settlement provided for by law or regulation.

Crypto assets that are characterised as securities are expressly excluded from the concept of virtual assets contained in Law No 14,478/22. Therefore, security tokens (and certain utility tokens) are excluded from the scope of the new law.

A VASP is defined under Law No 14,478/22 as the entity acting on behalf of third parties that conducts at least one of the following services:

• exchange of virtual assets and fiat currencies;
• exchange of virtual assets;
• transfer of virtual assets;
• custody or administration of virtual assets or instruments which allow for the controlling of virtual assets; or
• participation in financial services or any other services related to the offering, by an issuer, or the sale of virtual assets.

Although market expectation is that the Central Bank of Brazil will be the regulatory authority for VASPs, the Executive Branch must still issue a decree in this regard. There is no specific deadline for such a decree being enacted, but it is expected that this will occur soon given that the new law will become effective in a few months (June 2023). Once this authority is designated, the new regulation for VASPs will follow and shall set a period (not shorter than six months) for those entities to adapt to the new rules.

According to Law No 14,478/22, virtual assets service providers already operating in Brazil may continue operating until the relevant authorisation is granted. However, there are no details yet on what the regulator will consider to be ‘operating in Brazil’ or on the requirements for authorisation to be granted.

Law No 14,478/22 also brings some other regulatory changes that seek to provide greater security for the crypto asset market, including:

• introducing a new criminal offence specifically with regard to fraud using virtual assets;
• equating VASPs to financial institutions for the purposes of Law No 7,492 of 1986 dealing with crimes against the financial system;
• expressly adding VASPs to the list of obligated entities subject in Law No 9,613 of 1998 (the Brazilian AML Law), which deals with money laundering and other financial crimes; they are thus required to report suspicious money laundering operations to the Brazilian financial intelligence unit, the Financial Activities Control Council (Conselho de Controle de Atividades Financeiras or COAF); and
• making virtual asset market transactions subject to the Brazilian Consumer Protection Code.

An asset segregation requirement was also proposed by the Federal Senate during the discussions of the new law, but this was rejected. This is an important protection that is currently being discussed in several jurisdictions, especially in view of the recent collapse of crypto exchanges. The Federal Senate had proposed a rule requiring VASPs to keep the proceeds and the virtual assets of customers segregated from those of the crypto exchange itself, not being liable for the exchange's obligations in the case of judicial procedures, such as seizure, or in the case of bankruptcy or any other regime of reorganisation or dissolution of the exchange. Given that a legal provision for such asset segregation was not included in the new law, which additional protections the infra-legal regulation should contemplate are now being discussed.

With the enactment of Law No 14,478/22, Brazil joins the list of countries that regulate the crypto asset market. However, while the general guidelines, definitions and principles applicable to VASPs are already known, there are no formal licensing options available for VASPs in Brazil, considering Law 14,478/22 is yet to become effective and is pending regulation.

Also, as mentioned above, several virtual assets are excluded from the scope of Law No 14,478/22 and will not be affected by the new legal framework. This is the case of security tokens, with respect to which the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários or CVM) remains the sole regulator.

In this respect, it is worth mentioning that, in October 2022, CVM published Guidance Opinion No 40 on virtual assets within the Brazilian securities market, which highlights three situations in which virtual assets are classified as securities:

• if they are derivatives, which are necessarily securities, regardless of the nature of the underlying asset, as provided for in Article 2, VIII of Law No 6,385 of 1976;
• if they are publicly offered collective investment agreements, which is an open concept similar to the one adopted under the Howey test in the United States; and
• if they are certificates of receivables (under securitisation transactions) provided for in Law No 14,430 of 2022.

Therefore, statutory regulation from both CVM and the authority yet to be designated (likely to be the Central Bank of Brazil) is pivotal for bringing greater legal certainty to the Brazilian market and greater protection for investors.