Virtual Assets Law is published in Brazil

On December 21, 2022, Law No. 14,478 (the Virtual Assets Law) was published, establishing guidelines for the provision of virtual assets services and regulation of virtual assets service providers (VASPs).

The Virtual Assets Law amends the Brazilian Criminal Code to classify fraudulent provision of services with virtual assets as a crime, as well as the Law on Crimes against the National Financial System to equate VASPs to financial institutions, and the Money Laundering Prevention Law to include VASPs in a list within its provisions.

Until now, no specific legislation has regulated activities in the virtual assets market. As such, the law is set to introduce changes to the Brazilian legal framework, especially with respect to regulatory, compliance, consumer, and criminal aspects.

Regulatory Aspects

Virtual assets

The new virtual assets legal framework defines virtual assets as digital representations of value that can be electronically traded or transferred and used for payments or investments. However, the definition expressly excludes the following:

• Brazilian and foreign national currencies;
• Electronic currency referenced in Law No. 12,865/2013, which provides for the Brazilian Payment System;
• Instruments that provide their holders access to specific products or services or benefits arising from these products or services, such as points and rewards from loyalty programs; and
• Representations of assets whose issuance, registration, trading or settlement is provided for by law or regulation, such as securities and financial assets.

Please note that the Virtual Assets Law does not apply to assets representing securities subject to the framework set forth in Law No. 6,385/1976, and the government will be responsible for appointing a public entity and/or other agencies to establish which specific financial assets will be regulated under the virtual assets legal framework.

VASPs

The new virtual assets legal framework considers VASPs to be legal entities that perform at least one of the following services on behalf of third parties:

• Exchanges of virtual assets for Brazilian and foreign currencies;
• Exchanges between one or more virtual assets;
• Transfer or virtual assets;
• Custody or administration of virtual assets, or instruments that allow control over virtual assets; or
• Participation in financial services and services related to the offering of virtual assets by the issuer of such virtual assets.

Guidelines

According to the Virtual Assets Law, the provision and regulation of virtual assets services will have to observe the following principles and guidelines:

• Free initiative and free competition;
• Good governance practices and a risk-based approach;
• Information security and personal data protection;
• Consumer and user protection;
• The protection of popular savings and investments;
• Well-functioning, efficient transactions; and
• The prevention of money laundering, terrorism financing, and the proliferation of weapons of mass destruction (in line with international standards).

Appointed virtual assets regulator

The Virtual Assets Law does not designate a specific body or entity responsible for regulating virtual assets and VASPs; however, it indicates that the Brazilian government will be required to appoint one or more administrative bodies for this purpose. Although there is no express provision in the approved text, there is an expectation that the Brazilian Central Bank (Bacen) will be appointed to supervise this sector.

In regard to VASPs, the appointed regulator will have the powers to:

• Authorize them to operate and carry out corporate reorganizations;
• Establish conditions for statutory and contractual positions and authorize people to hold management positions;
• Supervise activities, including the application of rules in Law No. 13,506/2017, which provides for punitive administrative proceedings;
• Apply fines and penalties;
• Cancel the authorization to operate ex officio, or at the request of the VASP; and
• Establish the situations in which VASPs can operate in the foreign exchange market.

Authorization to operate

VASPs will only be permitted to operate after receiving the authorization of the appointed regulator, which will also set the conditions and requirements to grant this authorization via a simplified procedure.

Combining virtual assets services with other services

Institutions with the Brazilian Central Bank’s authorization to operate may exclusively provide virtual assets services or combine them with other activities, in accordance with the regulations to be issued by the appointed regulator.

Compliance aspects

The approved Virtual Assets Law includes VASPs in the list of entities subject to the obligations and control mechanisms of Brazil’s Money Laundering Prevention Law. This means that VASPs must comply with know your client (KYC) obligations, keep records of transactions and operations involving virtual assets, and report any suspicious activities to the Brazilian Financial Activity Control Council (Coaf). There are also increased penalties for reoccurring crimes committed via virtual assets.

Furthermore, the new law amends the Money Laundering Prevention Law to provide for the creation of the National Registry of Politically Exposed Persons (CNPEP), which will be made available through the government’s Transparency Portal (Portal da Transparência). It also establishes an obligation for the bodies and entities within Brazil’s Federal Government, States, Federal District and Municipalities to keep the CNPEP’s designated manager informed of any present or former members classified as PEPs as per the legislation and regulations in force.

Entities that must comply with the Money Laundering Prevention Law will also be obligated to consult the CNPEP as part of their compliance procedures with this law’s provisions and control mechanisms, without prejudice to carrying out other legally required steps.

Consumer aspects

The Virtual Assets Law expressly determines that whenever applicable, the Brazilian Consumer Protection Code (Law No. 8,078/1990) must apply to virtual assets market transactions.

Criminal aspects

The Virtual Assets Law also amends the Criminal Code to create the crime of fraudulent provision of virtual assets, securities or financial assets (Article 171-A). The provision of the new offense incorporates elements of embezzlement (Article 171); however, it is intended to specifically penalize conduct that uses digital assets to obtain an illegal advantage – whether through organizing, managing or offering portfolios, or intermediating in transactions – in a way that deceives or leads someone to be mistaken through artifice or other fraudulent means. Those accused of this new crime face four to eight years’ imprisonment and a fine.

Given the length of the sentence, accused individuals will not be able to execute agreements with the Public Prosecutor’s Office, such as plea bargains, conditional suspensions of proceedings, or non-prosecution agreements.

The Virtual Assets Law also amends the Law on Crimes Against the National Financial System. Legal entities that offer services related to virtual assets, including intermediation, negotiation or custody, have been added to the listed entities classified as financial institutions.

In addition, the Virtual Assets Law modifies some aspects of the Money Laundering Prevention Law, extending its effects to individuals who use digital assets. Laundering capital via virtual assets will result in a one-third to two-thirds increase in the severity of penalties, corresponding to penalties for actions carried out through criminal organizations.

General provisions

It is important to note that the appointed regulator will establish the conditions and deadlines (no less than six months) for VASPs to comply with the new virtual assets legal framework and applicable regulatory provisions that shall be enacted by the appointed regulator.

The Virtual Assets Law will come into effect in June 2023.

For further information, please contact Mattos Filho’s Cryptoassets practice area.