#168: Central Bank proposes stablecoin self-custody ban as BRL hits all-time low

Plus: Strategic Bitcoin Reserve legislation introduced in Brazil's Congress

Olá pessoal!

Welcome back to 🇧🇷Brazil Crypto Report for the week of November 25-29!

👋 If you’re new here, BCR is a newsletter and podcast platform that provides actionable intelligence for investors, operators and builders with an interest in the Brazil and Latin America digital asset ecosystem

We’ve got massive news this week — Brazil’s Central Bank dropped a bomb on the industry a proposal to prohibit exchanges from permitting stablecoin withdrawals to self-custodied wallets. We explore what this means in greater depth below.

Also - it was great seeing many of you at the G20 TechSprint event at the Central Bank last Wednesday!

Questions? Comments? Suggestions? Feel free to shoot me a note at @AaronStanley on Telegram or on Linkedin

🔎 What’s in this week’s BCR?

• Strategic Bitcoin Reserve legislation introduced in Brazil’s Congress
• Drex Phase 2 could incorporate 20 new use cases
• A comprehensive new report explores Brazil’s asset tokenization space

Thanks for reading and have a great week!

-AWS

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🎙New podcast!

This week I talk to Noelle Acheson , analyst and author of the Crypto is Macro Now newsletter. We discuss the latest macro narratives impacting bitcoin right now, including a possible strategic bitcoin reserve in the US and Michael Saylor hoovering up massive amounts of bitcoin via MicroStrategy.

Noelle is the former head of research at both CoinDesk and Genesis Trading, and has a rich background in markets and corporate finance prior to entering crypto. She’s one of the most articulate voices out there at explaining the intersection of bitcoin and global macroeconomics so I highly recommend having a listen and following her work if you’re interested in that subject.

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Strategic Bitcoin Reserve bill introduced in Congress

The text was introduced into the Chamber of Deputies by Dep. Eros Biondini, who represents the state of Minas Gerais. The reserve would serve to diversify the assets of the National Treasury and protect its foreign reserve balances against exchange rate volatility and geopolitical risks. It requires that the state begin gradual bitcoin purchases up to 5% of international reserves.

The bill requires that cold storage wallets be used in the management of the bitcoin, and all transactions must be presented semi-annually to Congress. Both the Central Bank and the Ministry of Finance would be tasked with managing the reserve.

The proposal also calls for the Drex CBDC to be backed by bitcoin rather than reals. In justifying the bill, Biondini wrote:

“The creation of RESBit [Portuguese acronym] is a strategic measure that positions Brazil at the forefront of the new digital economy, reducing economic risks and expanding opportunities for technological and financial development. The approval of this project is essential to guarantee the country's economic sovereignty and align Brazil with global innovation trends."

Portal do Bitcoin Blockworks CoinTelegraph Brasil Exame Livecoins CriptoFacil

Drex may incorporate 20 new use cases into 2nd pilot phase

The Central Bank projected that at least 20 new use case proposals could be tested in the next phase of the project starting in early 2025. There are currently being tested in the second stage of the project, but the bank has been seeking new ideas and submissions from the market.

Speaking at the Drex Forum event at the bank headquarters in Brasilia, Drex coordinator Fabio Araujo said the market is “buzzing” with ideas:

“The first phase of the pilot had simple governance, since only the Central Bank was responsible for implementing the smart contracts and the participants tested them. A financial ecosystem requires participants to implement smart contracts to offer services, so we need to be mindful of the governance of these contracts."

Araujo also spoke to the security and privacy standards that the Drex team is abiding by in the development of the project, including users’ banking secrecy and Brazil’s General Data Protection Law.

“The law is the law, and the code helps to enforce the law. Our idea is that, instead of having governance external to the blockchain to verify activities on the platform, in a DLT [distributed ledger technology] environment you incorporate governance into the blockchain to facilitate and simplify processes. This is one of the great promises of tokenization, simplifying processes to eliminate unnecessary intermediaries.”

Clarissa Souza, IT director for the Drex project, explained at the event how each of the various privacy solutions (Anonymous Zether, Parfin’s Rayls and EY’s Starlight) had performed during the first round of testing. Unfortunately, none of these were able to fully meet the required mix of strict user privacy combined with visibility from the regulator’s end.

Souza mentioned that the team has not had the chance to fully evaluate another proposed solution — Microsoft’s ZKP Nova.

A formal report on the first phase of the Drex pilot completed in June is in the final stages and should be released before the end of the year.

CoinTelegraph Brasil CriptoFacil Valor Exame BeinCrypto

Central Bank proposes self-custody ban on stablecoins

The Central Bank released its awaited public consultation on stablecoins and VASPs operating in foreign exchange markets.

Broadly, the draft rules define three activities of relevant VASPs: 1) international payment and transmission of virtual assets, 2) exchange or custody of virtual assets by non-resident clients, and 3) operations with virtual assets in foreign currency.

The most controversial part of the proposed rule is a ban on transferring cryptocurrencies denominated in foreign assets to self-custody wallets. The text states:

“The virtual asset service provider is prohibited from transferring virtual assets denominated in foreign currency to a self-custody wallet."

This would imply that users could only transfer stablecoins like USDT and USDC between wallets hosted on VASPs that are licensed by the Central Bank. They could not be sent to a self-controlled wallet like Metamask or Ledger.

Because exchanges in Brazil must report user transactions to the government, tax authorities would have full visibility into virtual asset transactions using stablecoins.

Rodrigo Caldas de Carvalho Borges of CBA | Carvalho Borges Araujo Advogados explained to BCR:

“The State seeks to restrict peer-to-peer operations with stablecoins to exercise greater control over such transactions, given that Brazilian exchanges are required to report all transactions on their platforms to the Federal Revenue Service.

Recall that a significant majority of crypto transaction volume in the country currently is in the form of stablecoins, particuarly USDT. According to the Receita Federal, R$16.6 billion (US$2.8 billion) worth of USDT was was traded in September compared to just R$1.4 billion (US$234 million) in bitcoin.

😱 The timing of this proposal is conspicuous considering that the Brazilian real hit an all-time low against the US dollar last week and has been among the worst performing currencies globally in 2024.

The Central Bank’s proposed rule also calls for a prohibition on sending stablecoins to users outside the country.

“The virtual asset service provider is prohibited from transmitting virtual assets to a self-custodial wallet held by a non-resident."

Also proposed is a US$100,000 ceiling on stablecoin transfers, along with requirements that companies that touch stablecoins obtain an exchange operator license — be they exchanges, banks or other companies that accept stablecoins even for just trading purposes.

The market is not thrilled

We’ve seen mixed reactions to the idea of a self-custody stablecoin ban.

Fabrício Tota of MB | Mercado Bitcoin suggested that the regulator is trying to better understand what the primary use cases for stablecoins and then to react accordingly:

“What is the use of stablecoins? Protection? Exposure to the dollar? Or cross-border payments? I think that is what the Central Bank is suggesting here. And if they are being used for cross-border payments, the Central Bank will want to apply some rules.”

Tatiana Guazzelli , a partner at Pinheiro Neto Advogados , told CoinTelegraph Brasil:

"I think the BC's measure is rational, because behind it, the regulator wants to establish mechanisms to prevent transfers from occurring outside the exchange market. There are also some value limitations that can vary from US$100,000 to US$500,000 depending on the entity carrying out the transaction.”

Caroline Souza , co-founder of Area Bitcoin argued on X that the rule is an attempt to “close the exits” while BRL is collapsing.

Yulgan Lira (yulgan.eth) , CEO of Colb, wrote on Linkedin that the proposed rule is an attempt to restrict capital outflows but will be a nothing burger in practice because there are technological means by which users can circumvent them.

“Crypto’s decentralized nature makes these restrictions worthless. Users can bypass them easily by sending ETH to the non-custodial wallet and to use cross-chain swaps or DEX to access the stablecoin.

Pedro Heitor de Araújo of Bichara e Motta Advogados called the proposal a “blatant violation of the principles of proportionality and reasonableness”, telling BeinCrypto that there are less onerous alternatives to achieving the intended objectives.

Attorney Nicole Dyskant pointed out that this is just the first of perhaps several public consultations on the question of stablecoins and FX, and that the regulator may be willing to rethink this provision. She told Portal do Bitcoin:

“The question is to see if there would be a less restrictive way — one that would limit citizens less and not create anomalies. Because you can withdraw money and put it in the safe, but you cannot withdraw a stablecoin for self-custody. This is creating a very big restriction and I believe that there are less onerous ways.”

We’ll definitely be keeping an eye on this one as it develops. The public has until February 28 to submit their comments about the proposed rule

Valor Valor BlockNews BlockTrends CriptoFacil

🗞Brazil Crypto News Rundown

📈 Markets

• Cryptoasset “imports” into Brazil totaled US$14 billion between January and October 2024, according to Central Bank data. A total of US$56.2 billion left the country through various financial channels during that period, the largest outflow of dollars for that period since the bank began tracking this data in 1982. (CoinTelegraph Brasil) (CriptoFacil)
• Hashdex amended the S-1 filing for its Nasdaq Crypto Index ETF in the US, marking progress in its quest to launch a diversified crypto index fund product in the US. (CoinTelegraph Brasil)
• Financial influencer and past bitcoin critic Tiago Guitián dos Reis revealed on X that he had invested in bitcoin, though he emphasized that his trade was to bet on the rise of bitcoin and the fall of MicroStrategy shares. (Portal do Bitcoin) (CriptoFacil) (Livecoins)
• The union between credit markets and cryptocurrencies is a “natural evolution”, says AcreFi president Tadeu Silva . ACREFI is the National Association of Credit, Financing and Investment Institutions. He said:

“It is now possible to view credit operations guaranteed by crypto assets and the purchase and sale of real estate with payment in cryptocurrencies. There will be an increasing synergy between the traditional crypto transactional segment and the credit market." (Exame)

• OKX Brasil is celebrating its one year anniversary in the market with a zero-fee campaign for new users until the end of the year. (CoinTelegraph Brasil)
• 41% of venture capital funds in Brazil have already invested in tokenization startups, according to a new report exploring by Nexa Finance and FinTrender . The report is the most comprehensive look that we’ve seen into Brazil’s tokenization space so it’s definitely worth a download and a read. (BlockNews)

📲 Adoption

• Mercado Bitcoin will become the first validator in Brazil on the Chiliz Chain as part of a partnership between the two entities. (CoinTelegraph Brasil) (CriptoFacil)
• Brazilian ReFi project Ekonavi was among three winners elected for the G20 TechSprint hackathon, which was launched in April by the Brazilian Central Bank in conjunction with the Bank for International Settlements. (BeinCrypto) (Livecoins)
• Brazil is a key global expansion market for Sam Altman’s World (formerly Worldcoin) project, Tools for Humanity Chief Privacy Officer Damien Kieran told Forbes Brasil. After a one year hiatus, World relaunched in Brazil with 10 collection points on November 13.
• A new survey by Datafolha showed that 65% of Brazilians support a ban on online betting sites in the country, and that 78% disapprove of online slot machine games known as “Tigrinho”. (CoinTelegraph Brasil)
• The city of Niteroi will use Cartesi to integrate blockchain tech into the city’s urban mobility system, with the goal of modernizing the verification and validation of service provision contracts in public transit. (CoinTelegraph Brasil) (Livecoins) (CriptoFacil)
• A new app called Silencio that pays people in cryptocurrency to stop making noise has been launched in Brazil, available on both iOS and Android. (CoinTelegraph Brasil)

🏛 Policy, Regulation and Enforcement

• An elderly woman in Goias was scammed by her son-in-law for R$12 million (US$2 million) via an inheritance scam. The relative used the funds to buy bitcoin. (Portal do Bitcoin) (Livecoins)
• ABcripto - Associação Brasileira de Criptoeconomia will create a system that allows Brazil’s Public Ministry to block cryptocurrencies on exchanges operating in the country. The development is part of an agreement between the trade group and the National Council of the Public Ministry. ABCripto CEO Bernardo Srur said in a statement:

“By joining forces with the Public Prosecutor's Office, we are creating tools that not only assist in complying with the legislation, but also promote education and awareness about the potential and challenges of the sector.”

• Suspected crypto pyramid BeeFund launched a new Telegram group for customers and announced that it would resume normal activities on November 31. Recall that the company froze customer withdrawals last month and then began asking customers to deposit more funds to access their locked balances. (Portal do Bitcoin)
• The Chamber of Deputies will hold a public hearing to discuss stablecoin regulation on December 5th, with representatives from the Central Bank, CVM, Ministry of Finance, COAF, Tether and Circle expected to participate. (Portal do Bitcoin) (Valor)
• The Chamber of Deputies also announced the opening of a public consultation to discuss digital asset regulation in Brazil. (CoinTelegraph Brasil)
• Regulatory rules for the cryptocurrency market in Brazil should be published by June 2025, Central Bank executive Pedro Nascimento said at an event hosted by Abracom . He explained:

"The deadlines for Public Consultations end between February and March (including the CP on stablecoins) and we will gather contributions, suggestions and in the first half of the year we should publish the rules for the market." (CoinTelegraph Brasil)

• A version of legislation that regulates artificial intelligence in Brazil will be presented to the Senate Temporary Committee on AI. (CoinTelegraph Brasil)
• New data from the Financial Activities Control Council (COAF) found R$100 million (US$17 million) in suspicious transactions by companies linked to online betting sites. (CoinTelegraph Brasil)
• CoinTelegraph Brasil has a tax explainer for traders who have profited from memecoins.
• Federal Deputy Lafayette de Andrada introduced legislation that would regulate cryptocurrencies in Brazil. Much of the text is redundant to a law already on the books, but this bill seeks to define concepts like initial coin offerings, smart contracts and real world asset tokens (Portal do Bitcoin)
• Global fintech Revolut, with more than 45 million customers worldwide, has joined ABCripto. Glauber Mota, CEO of Revolut Brasil, said in a statement:

“Joining ABCripto is an important step in our relationship strategy with the Brazilian market. We want to contribute to the construction of a robust regulatory environment that allows the development of innovative financial solutions, such as crypto, in a responsible and secure manner for our users.”

• Federal Police launched Operation Hidden Circuit to crack down on a criminal organization using cryptocurrencies for smuggling, money laundering and currency evasion. The group operates in the underground importation of electronics from Paraguay. (CoinTelegraph Brasil) (BeinCrypto) (Livecoins)
• Federal Police also initiated Operation Tai-Pan to dismantle a group that allegedly moved R$6 billion (US$1 billion) over the last five years on behalf of crypto organizations via crypto assets and stablecoins. (InfoMoney) (BeinCrypto) (CriptoFacil) (Livecoins)
• Digital asset infrastructure company Parfin obtained ABCripto’s seal of compliance. (CoinTelegraph Brasil)
• A Brazilian trader lost R$400,000 worth of crypto via a social engineering scam in which the scammer posed as a recruiter for a translation company. (Livecoins)