By: Antonio Mazzucco and Luiz Gustavo Doles

LAW 14,478 – REGULATION OF SERVICE PROVIDERS INVOLVING VIRTUAL ASSETS

It is necessary to clarify some facts before we analyze how this law affects the Brazilian crypto market:

1. Law 14,478 does not regulate how virtual assets themselves should function (this role falls to the software that created them), but how service providers should deal with them.
2. The law did not regulate all aspects related to the use of crypto assets, having delegated part of such activities to regulatory agencies.
3. Bureaucracy has been created for the provision of services involving crypto assets, but there is still a need to follow other standards created by other government entities.
4. Guidelines for the provision of services involving cryptoassets were created in article 4, and the vast majority of them were already provided for in other legal instruments. Free enterprise and free competition, for example, are already constitutionally guaranteed in article 160, and the prevention of money laundering is already part of law 9613, with no innovations from the point of view of principles.
5. The law does not indicate many rules in itself, but it establishes the field of action of the regulatory agencies that will effectively regulate the use of these assets.

That said, it is important to analyze the main points of the new legislation so that the market can prepare for the changes that should be part of its planning in the coming months.

Initially, it is worth noting that virtual asset service providers may only operate in the country with prior authorization from a federal government agency or entity. The law does not indicate which agency will be responsible for registration, as the use of crypto assets may fall within the scope of several regulatory agencies, including the BCB and CVM. Therefore, each entity will create its own rules related to the authorization process.

The law indicates a broad concept for virtual assets, as can be seen in its article 3.[1] since these are defined by exclusion. They are not electronic money (position already clarified by the BCB[2]), are not traditional currency, are not scriptural currency and are not securities.

This legislative decision seeks to clarify that the law has already regulated these instruments and the way they are used or presented does not matter, since their content remains the same regardless of the type of technology behind the asset. For example, there is no distinction between a tokenized debenture and a debenture registered in a traditional manner; both are debentures and must follow the rules related to this instrument.

Thus, the law deals with cryptoassets that have not yet been regulated, a very broad concept that will be duly defined by regulatory agencies.

The concept of virtual asset service provider follows a different logic since the activities are very well defined (which will probably generate an update in the CNAE table to adapt to such activities): those that deal with exchange, custody, intermediation, sale of virtual assets in addition to those that participate in financial services involving these assets are service providers covered by the law.

As can be seen, law 14,478 does not establish many rules in itself, but it clarifies that regulatory agencies will be largely responsible for dealing with virtual assets, a wise decision given that this is a subject that requires refined technique and very specific knowledge, characteristics that are not generally associated with the legislative branch.

A great reflection of this line of thinking can be found in article 7 of the cryptoassets law: there we can find the future regulatory agenda of the Central Bank, CVM and other affected agencies.

This is because they will have the following powers and responsibilities:

I – authorize the operation, transfer of control, merger, spin-off and incorporation of the virtual asset service provider;

II – establish conditions for the exercise of positions in statutory and contractual bodies in a virtual asset service provider and authorize the possession and exercise of individuals for management positions;

III – supervise the virtual asset service provider and apply the provisions of Law No. 13,506, of November 13, 2017, in the event of non-compliance with this Law or its regulations;

IV – cancel, ex officio or upon request, the authorizations referred to in items I and II.

V – provide for the cases in which the activities or operations referred to in Article 5 of Law 14,478 will be included in the foreign exchange market or in which they must be subject to the regulation of Brazilian capital abroad and foreign capital in the country.

The only specific clarification provided by the law is the express authorization for institutions authorized to operate by the Central Bank of Brazil to exclusively provide virtual asset services or combine them with other activities, increasing the range of products and services that can be provided by banks and other financial institutions.

All regulations are expected to be issued within the next six months, indicating an intense regulatory agenda to be completed in 2023.

Finally, several criminal types were updated to increase the penalties for people who use cryptoassets for shady purposes: the crime of Fraud using virtual assets, securities or financial assets was created in article 171-A of the Penal Code, the law on preventing money laundering now contains specific provisions regarding cryptoassets and several other provisions now cover virtual assets.

The Mazzucco e Mello Advogados law firm is available to assist companies and individuals interested in using crypto assets, with a team specialized in the subject.

[1] Art. 3 For the purposes of this Law, a virtual asset is considered to be a digital representation of value that can be negotiated or transferred by electronic means and used to make payments or for investment purposes, not including:

I – national currency and foreign currencies;

II – electronic currency, under Law No. 12,865, of October 9, 2013;

III – instruments that provide their holder with access to specified products or services or to benefits arising from such products or services, such as points and rewards from loyalty programs; and

IV – representations of assets whose issuance, accounting, trading or settlement is provided for by law or regulation, such as securities and financial assets.

[2] BCB PRESS RELEASE No. 31,379, NOVEMBER 16, 2017