By: Antonio Mazzucco and Luiz Doles

The Brazilian crypto market has undergone several changes over the years, including some attempts to regulate the use of crypto assets,

FTX was one of the largest crypto exchanges in the world, being valued at over USD 30 billion a few years ago, which did not prevent it from going bankrupt due to liquidity crises and possible misallocation of resources.

The company offered several services, including:

1. Payment Services via FTX US
2. Financial services, including derivatives, via the company Ledger X
3. Securities brokerage services via the company FTX Capital Markets LLC
4. Asset custody services via FTX Value Trust
5. Cryptocurrency portfolio management services via Alameda Research LLC
6. Crypto asset sale, storage and trading services via the company FTX Trading Ltd.

The companies described above were incorporated in several different jurisdictions, but it is worth checking how their actions would generate impacts if they had occurred in Brazil, but specifically those related to the financial and capital markets.

Cryptocurrency exchanges do not have specific regulations in Brazil, and are generally classified as software development and business intermediation companies in general. Therefore, general corporate legislation applies to these entities, and the lack of corporate governance creates great risks in the conduct of their business.

As described in the petition seeking FTX bankruptcy[1], the company:

1. Did not have any internal control over expenses and revenues
2. Used own funds to purchase private assets of administrators
3. It did not account for values regarding its management and custody
4. Used funds under management to pay the company's debts

Thus, there is a great lack of internal controls and compliance routines that can lead to the diversion of resources and individual decision-making, increasing business risks and even the exposure of administrators.[2] if guilt is characterized for the losses generated before the partners.

Furthermore, the companies did not hold regular partner meetings, nor did they have audit committees or a fiscal council (which are quite relevant considering the size of the operation).

Regulated markets have this type of risk reduced given the numerous obligations that participating entities must fulfill in order to provide services given their strategic importance in the national economic scenario. The Basel standard and the Credit Guarantee Fund do not exist only to inflate the compliance and control routines of financial institutions, but to give greater solidity to a market that is essential for economic development and stability, objectives that should be part of the Brazilian crypto agenda.

This scenario does not reflect the company's size and market presence. We are talking about one of the largest crypto exchanges in the world, with operations on all continents, a structure that demands intense internal controls.

Let us begin the analysis by taking into account capital market activities.

The company offered tokens on the market that would be used to contract its services within the FTX platform.

The sale of this type of product should not be confused with the case of the company Atlas Quantum[3] which offered an investment opportunity whose remuneration would be linked to the automated purchase and sale of cryptoassets through an arbitration algorithm, using an appeal to the public to enter into contracts that, as they have been offered, fall within the legal concept of a security.

The distribution of these service tokens does not involve an offering of securities since section IX of article two of law 6,385/1976 [4](CVM law) were not filled in. This understanding is in line with the recent CVM opinion regarding digital assets, which considers them as utility tokens “used to acquire or access certain products or services”[5].

However, when analyzing the administration and management activities of investment funds, we can see that FTX's operations do not meet the criteria indicated by CVM and ANBIMA.

Administration and management activities are regulated by CVM Resolution 21/21[6] and the duties of diligence, transparency and accountability are quite clear in the standard.

The exercise of the activity of management or administration of resources is inherently fiduciary and demands a clear separation of the assets of investors and administrators, and it is certain that the use of such resources to pay expenses of the company or its partners goes against the very idea of managing third-party resources.

Furthermore, according to article 22 of the CVM regulation, “The securities portfolio manager, a legal entity, must ensure, through adequate internal controls, permanent compliance with the standards, policies and regulations in force, relating to the various types of investment, the activity of managing securities portfolios itself and ethical and professional standards”.

ANBIMA is moving in the same direction in its ANBIMA Code of Regulation and Best Practices for the Management of Third Party Resources.[7].

Violating these rules in Brazilian territory can result in several penalties, but it is worth mentioning those that most cause fear among businesspeople (all of them present in law 13,506/2017):

1. Fine of up to R$50,000,000.00 (fifty million reais);
2. Temporary disqualification, for a maximum of 20 (twenty) years, from holding the position of administrator
3.  suspension of authorization or registration to carry out activities related to securities

Thus, it is clear that FTX's actions could generate several penalties if they had occurred under national jurisdiction and the case reminds us of an important lesson: not all that glitters is gold.

[1] Available at fdd-52615f0a-fb09-41ce-a398-b97b20bc1c36.pdf (d1e00ek4ebabms.cloudfront.net) – verified on 11/16

[2] Civil Code – Art. 1,016. Administrators are jointly liable to the company and third parties harmed by fault in the performance of their duties.

[3] CVM DECISION Nº 826, OF AUGUST 13, 2019 – available at https://conteudo.cvm.gov.br/legislacao/deliberacoes/deli0800/deli826.html – accessed on 11/16/2022

[4] Art. 2^the The following securities are subject to the regime of this Law:

(…)

IX – when publicly offered, any other securities or collective investment contracts, which generate the right to participation, partnership or remuneration, including those resulting from the provision of services, the income from which comes from the efforts of the entrepreneur or third parties. 

[5] CVM Guidance Opinion No. 40 – available at https://conteudo.cvm.gov.br/legislacao/pareceres-orientacao/pare040.html accessed on 11/16/2022

[6] Available at https://conteudo.cvm.gov.br/legislacao/resolucoes/resol021.html, accessed on 11/16/2022

[7]  Available at Third Party Resource Management Code 02_01_19.pdf (anbima.com.br) – accessed on 11/16/2022