Brazil: Steps forward for bitcoin and the digital real

Brazil is trying to take some steps forward in the adoption of technologies related to bitcoin and cryptocurrencies, as well as for the digital real. 

For now, this is not a real breakthrough, but small concrete steps forward. 

Opening up to tokenization

The first concrete step forward is the openness to tokenization. 

In fact, the Superintendent of Institutional Investor Supervision of Brazil’s Comissão de Valores Mobiliários (CVM), Daniel Maeda, has said that the regulator will study the creation of a new regulatory sandbox specifically for use cases related to tokenization. 

Maeda’s hypothesis is that from 2024, Brazil will launch a second regulatory sandbox programme specifically dedicated to tokenized assets, following the first positive experience in this regard, which allowed the tokenization of around USD 36 million of assets.

In fact, this positive experience, launched in May 2022, has convinced the VCM to plan a second sandbox that will focus on exploring some specific use cases in the agribusiness and ESG sectors.

Regulation and infrastructure 

Maeda himself also revealed that the Brazilian crypto market could evolve significantly next year, thanks to the introduction of new crypto regulations by the Central Bank and the so-called Drex. 

Drex, to be precise, is a digital currency infrastructure designed by the Central Bank that will allow payments to be made entirely on the blockchain.

According to Maeda, Drex will take the tokenisation market to a new level, as it will eliminate many of the frictions that currently exist in the entry and exit of crypto markets, particularly with regard to fiat currency exchanges. 

Instead, with this new infrastructure, financial transactions will be able to take place entirely in crypto, including fiat currency exchanges, with greater speed and a new range of products. All this could even lead to a rethinking of the basis of financial products and a very promising regulatory moment. 

The confrontation with the SEC

Maeda did not spare the US SEC any barbs.

In fact, he stated that while he has a lot of respect for the US regulator, he sees the VCM as more inclined to innovation, as it has focused on the benefits of the crypto market rather than the problems. 

He is referring in particular to tokenization, but also indirectly to the SEC’s punitive stance towards crypto companies.

For example, the CVM allowed mutual funds to invest up to 10% of their net assets in cryptocurrencies, thanks to the so-called Resolution 187. 

According to Maeda, the biggest risks in the crypto sector are related to investors and retail speculators, so an intervention that focuses on technical aspects would be less risky.

Not just digital money: crypto adoption in Brazil

The adoption of cryptocurrencies in Brazil is currently on the rise. 

In fact, the country’s central bank has just announced a tightening of regulations in this area, particularly with regard to tax evasion and money laundering. 

In June, President Lula also signed a legal framework that defines the different roles that the country’s central bank and the CVM should play in regulating digital assets. 

So, on the one hand, there seems to be a phenomenon of mass migration to the crypto world that is difficult to stop, while on the other, instead of trying to stop it, government authorities are trying to regulate it. 

The digital real and interest in bitcoin in Brazil 

In this context, there is also a discussion about whether a native digital version of the national currency, the Brazilian real, should be introduced. 

To be honest, with two of the most prominent active experiments in the world (China and Nigeria) not yielding encouraging results, the development of new CBDCs has slowed down considerably. 

Certainly, the Drex, which should be operational next year, could help in no small way at the technical level with a view to the eventual release of a digital real. But the real problem is not technical. 

In both China and Nigeria, for example, the biggest obstacle has been citizens’ attitudes towards the digital yuan or eNaira. 

However, the approach of the Brazilian VCM seems to have taken these problems into account and therefore seems to focus mainly on a purely technical use of a Brazilian CBDC. 

This approach was actually developed by South Korea, which decided to temporarily suspend testing of the retail digital won and instead focus on the interbank use of a central bank-issued digital currency. 

While the use of CBDCs at the retail level will easily continue to be severely hampered, mainly by fears of loss of privacy in citizens’ financial transactions, at the interbank level this problem simply does not exist.

Brazil: Bitcoin, cryptocurrencies and the digital real

At this point, it is easy to see that all this will ultimately benefit the use of Bitcoin and cryptocurrencies. 

Moreover, the increase in adoption in Brazil from this point of view is already happening, and if the regulatory and institutional framework becomes permissive but clear, adoption will only increase. 

It must be said that platforms such as Drex could also establish themselves as strong competitors to some crypto platforms, but for sure Digital Real can never be a competitor to bitcoin, just as no other CBDC is. 

CBDCs are merely digital versions of normal fiat currencies, so paradoxically they compete precisely with the old, natively non-digital fiat currencies. 

Instead, the ability to remove much of the friction in and out of crypto markets (so-called crypto-to-fiat transactions) could end up being very helpful to the development of the crypto markets themselves.