Brazilian Central Bank opens public consultations on regulation of virtual assets market

On November 8, 2024, the Brazilian Central Bank (BC) published Public Consultation Notices No. 109/2024 (CP 109) and No. 110/2024 (CP 110) to gather input on proposals to regulate aspects of the virtual asset sector:

a) CP 109 – Opens a public consultation for:

• Proposed BC Resolution: provides for rules on establishing virtual asset service providers (VASPs) and their operations, as well as virtual asset services provided by other institutions authorized to operate by the BC;
• Proposed Brazilian Monetary Council (CMN) Resolution: amends and consolidates rules on financial institutions and other institutions authorized to operate by the BC charging fees for their services.

b) CP 110 – Opens a public consultation for:

• Proposed BC Resolution: amends and consolidates the rules on authorization processes to operate as VASPs, foreign exchange brokerage firms (SCCs), securities brokerage firms (SCTVMs), and securities distribution firms (SDTVMs).

Public Consultation Notice No. 109

According to the BC, the proposed resolutions are intended to establish protections for consumers and investors and a regulatory environment that ensures institutions operating in the virtual assets market function properly, guaranteeing legal certainty and governance for the sector. Moreover, the proposed resolutions seek to mitigate risks associated with the emergence of virtual asset activities, including vulnerabilities related to money laundering and the financing of illicit activity.

CP 109 stems from the development of inputs collected from the public within the scope of Public Consultation Notice No. 97, as well as positions the BC has established with the Brazilian Securities Commission (CVM) and the Council for Financial Activities Control (COAF).

In brief, the main aspects of each proposal include provisions regarding the following:

BC Resolution

• Definitions: the resolution defines certain important terms used within the sector that were not clearly defined under the applicable legal framework, such as ‘stablecoin’, ‘smart contract’, ‘network fork’, ‘airdrop’, and ‘staking’;
• Types of VASPs: the resolution provides for three types of VASPs: intermediaries, custodians, and brokers (the latter being a combination of the first two). These VASPs will be subject to minimum capital and net worth requirements, ranging from BRL 1 million to BRL 3 million (depending on the type of VASP);
• Additional capital requirements: VASPs that act as intermediaries and brokers offering or conducting margin account transactions and staking (assessed as higher risk) must add BRL 2 million to their minimum capital and net worth requirements;
• Payment accounts: intermediaries and brokers must offer payment accounts for the purpose of protecting clients, observing the regulations governing such accounts;
• Authorization and operations: institutions that can already demonstrate they operate in the segment may continue to do so provided they follow a two-phase authorization process, which includes (a) proof of compliance with minimum capital and net worth requirements; and (b) analysis of infrastructure, governance, and control requirements, among others. Moreover, these institutions will have up to six months (as of their authorization request) to adapt their activities to the new regulations. New entrants must request prior authorization from the BC to commence activities;
• Denomination and governance: the adoption of names that confuse clients and users of services as to which type of VASP the institution is or names that include terms related to other unauthorized activities will be prohibited. Additionally, VASPs must implement a governance policy to ensure compliance with the resolution;
• VASP responsibilities: VASPs would be responsible for settling transactions involving virtual assets, ensuring the legitimacy of virtual assets, the necessary documents accompanying each transaction and the authenticity of transactions, and maintaining and providing evidence of virtual asset records. To this end, VASPs must have technically qualified personnel responsible for each activity they carry out;
• Asset segregation: VASPs must keep their own resources segregated from those of their clients (including via individualized payment or deposit accounts), and the mechanisms and procedures for asset segregation must be documented in a specific policy;
• Contracting essential services: VASPs may outsource essential services in Brazil and abroad. Essential services are regarded as those that can affect the performance of activities or the exercise of clients’ rights, such as custody, technology, and liquidity provision services. When outsourcing, VASPs must verify the technical and operational capacity and compliance of the contracted entity, develop incident recovery plans, establish internal controls to monitor and identify sanctioned virtual asset portfolios as an anti-money laundering and terrorism financing (AML/CFT) measure, and provide clear information about the outsourcing. VASPs assume full responsibility for any outsourced services provided via the contracted entity;

• Service provision governance: VASPs must maintain policies and procedures related to employee conduct, data collection and analysis for transaction recording, fraud and crime prevention, risk management and business continuity, managing outsourced services, custody and protecting private keys, transaction approval, institutional security, and AML/CFT. VASPs must also contract independent annual audits and conduct internal risk assessments, implement systems for process registration and inspections, establish transaction and withdrawal limits, and report anomalies and suspicious activities to the BC and COAF, among other measures;

• Suitability: VASPs must know each client’s risk profile, taking into account their familiarity with the virtual asset market, financial interests, and risk tolerance. If the client wishes to carry out transactions that are incompatible with their risk profile, VASPs must request the client sign a statement of awareness;

• Self-Regulation: VASPs may jointly establish a self-regulation agreement to fulfill obligations related to information disclosure for AML/CFT purposes; and
• Other authorized institutions: In addition to VASPs, commercial banks (bancos comerciais), investment banks (bancos de investimento), multiple banks (bancos múltiplos), and Caixa Econômica Federal are permitted to provide virtual assets. SCTVMs and SDTVMs are also permitted to provide virtual asset services, provided they offer payment accounts to clients. Such institutions must notify the BC of their intentions 12 months in advance.

Proposed CMN Resolution

This resolution is limited to amending CMN Resolution No. 3,919/2010 to accommodate and subject the provision of virtual asset services to the regulatory framework applicable to fees charged for services that BC-authorized institutions provide.

Public Consultation Notice No. 110

Complementing the resolutions linked to CP 109, the resolution proposed via CP 110 provides for the authorization process for VASPs to operate in line with the authority granted to the BC by Law No. 14,478/2022 and Decree No. 11,563/2023.

As per the BC’s proposal, the VASP authorization process would be consolidated into a single regulation with the authorization processes for other companies operating in the foreign exchange and securities markets (namely SCCs, SCTVMs, and SDTVMs), given how similar their activities are.

Main aspects of the proposed resolution

• Authorization requests: the proposal states that the following matters would be subject to the BC authorization: (a) the operation of the VASP, (b) operating as different type of VASP, if applicable, (c) the transfer or change of corporate control, (d) the merger, split, incorporation, or corporate transformation of the VASP, (e) the acceptance and exercise of management positions by elected or appointed persons, and (f) changes to the value of the VASP’s share capital value, corporate name, and corporate purpose;
• Authorization requirements: the proposed resolution establishes nine requirements for entities to obtain authorization to operate, including meeting minimum capital and equity requirements, a corporate governance structure compatible with the complexity and risks of the business, information technology infrastructure compatible with the complexity and risks of the business, and the economic and financial viability of the enterprise;
• Controlling and qualified shareholdings: the concepts of controlling shareholder, controlling group, and qualified shareholder have been defined, as well as the requirements to occupy such positions. Moreover, the resolution prohibits investment funds from being controlling shareholders or members of the controlling group of the institutions subject to the resolution;
• Cancellation of authorization: authorization to operate may be canceled either at the request of the institution or ex officio by the BC. According to the proposal, cancelation implies the need to liquidate or transfer outstanding transactions, and the cancelation must be disclosed via a website, application, and within the institution’s premises; and
• Transitional provisions: there would be a two-phase authorization process for VASPs operating in Brazil. In the first phase, the BC would verify if the companies commenced operating before the rule came into effect, as well as their compliance with the minimum capital and net worth requirements. In the second phase, the BC would mainly address infrastructure, organizational structure, control, and management requirements.

Interested parties should submit their suggestions and comments to the BC by February 7, 2025. Submissions can be made via this link (CP 109) or via this link (CP 110).

For more information on the topic, please contact Mattos Filho’s Cryptoassets practice area.