Closing the loophole on virtual assets: international challenges and impacts on Brazil

Adriana Dantas

Lefosse, São Paulo 

adriana.dantas@lefosse.com

Juliana Maia Daniel

Lefosse, São Paulo

juliana.daniel@lefosse.com

Astrid Rocha

Lefosse, São Paulo

astrid.rocha@lefosse.com

André Gonçalves

Lefosse, São Paulo

andre.goncalves@lefosse.com

The regulation of virtual assets, which seemed unchartered territory only a few years ago, is increasingly gaining the attention of government authorities. In this regard, many governments worldwide have recently decided to strengthen their supervision and regulation of such assets – especially in view of growing concerns relating to investor and market security.

Virtual assets are digital representations of an item or asset that can be digitally traded or transferred and can be used for payment or investment purposes. The value associated with virtual assets will depend on their specific underlying assets and will vary under specific scenarios. Usually, virtual assets (or their property) will be represented by tokens, which are nonfungible digital certificates that can be transferred, stored and traded electronically. Unlike traditional currencies, virtual assets are usually nonfungible and are not backed or sponsored by government policies or guarantees. Moreover, while not every virtual asset is a cryptocurrency, every cryptocurrency is a virtual asset.

In the wake of this international move towards increased regulation over virtual assets, in February 2022 the United States Deputy Attorney-General Lisa Monaco announced a new task force entirely dedicated to cryptocurrency within the Federal Bureau of Investigation (FBI). This new unit – the Virtual Asset Exploitation Unit – will be responsible for identifying, seizing and freezing illegal transactions involving crypto-assets, as well as providing training in this respect to other FBI units. The aim is for this new FBI unit to work together with the existing DoJ National Cryptocurrency Enforcement Team.

Brazil has also been discussing a new regulatory landmark that will increase scrutiny over virtual assets, in an attempt to fight and dismantle fraud and illegal schemes that usually involve or make use of such assets.

An example of this strategy is Law n. 14,478/2022 that establishes rules to be complied with by virtual assets’ exchanges and other service providers and is therefore considered an important achievement for the promotion of a safe environment for the trade and circulation of cryptocurrencies in Brazil and for the prevention of wrongdoings - especially in view of cybersecutiry and money laundering concerns. This legislation amended the Anti-Money Laundering Law (No 9,613/1998) to include any ‘virtual assets service provider’ (eg, virtual assets exchanges and custodians) in its list of gatekeepers. This means that additional AML/KYC obligations are now applicable to cryptocurrencies exchanges and custodians, including reporting obligations to the Financial Activities Control System (Conselho de Controle de Atividades Financeiras – COAF) with respect to their transactions.

Furthermore, the law determines that a government authority will be appointed as the entity responsible for authorising virtual assets service providers to function in Brazil – most likely the Brazilian Central Bank. This means that, in future, the regulation issued by the Brazilian Central Bank will be binding on virtual assets service providers and will impose additional obligations, in line with those currently in effect for banks, brokerage companies and other financial service providers (such as Brazilian Central Banks’s Resolution No 3,978/2021).

Some other relevant aspects introduced by this Bill of Law include: (1) the need for these entities to request for previous authorisation to function; (2) mandatory adoption of adequate governance practices, transparency in its transactions and a risk-based approach; and (3) mandatory compliance with rules with respect to the prevention of money laundering and financing of terrorism.

In line with this initiative, the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários – CVM)^[1] has also recently issued an opinion determining that virtual assets are not considered securities. They should therefore not be subject to the CVM’s regulation, unless the crypto are considered a security or have securities as their underlying assets.

Because cybercrimes usually have an international component, expanding international cooperation is key to the oversight and regulation of these assets. Although it is still unclear how this will take place – both domestically and internationally – it is expected that entities will enhance coordination and mechanisms of exchange of information.

With respect to international cooperation, the Organisation for Economic Co-operation and Development (OECD) has proposed the creation of a big data platform including cryptocurrency investor information, suggesting that individuals and companies already dealing with cryptocurrency services would have 12 months to comply with reporting requirements (eg, the existing tax reporting rules, and KYC/KYP/KYE procedures related to the collection of information from those involved in crypto transactions).^[2] However, such proposition has yet to be implemented.

Authorities in Brazil are beginning to experience the first consequences of international dialogue in this context. For example, in August 2021, the Brazilian Federal Police launched 'Operation Kryptos' to investigate a potential scheme to transfer more than BRL38.2bn (approx. US$7.2bn) between 2015 and 2021 through a financial pyramid system involving virtual assets in at least seven countries: the US, United Kingdom, Portugal, Uruguay, Colombia, Paraguay and United Arab Emirates.^[3]

The regulation of virtual assets is, without a doubt, desirable to avoid compromising the credibility of an entire industry which currently has approximately ten million investors in Brazil, corresponding to the fifth largest crypto-asset market in the world.^[4] This exponentially growing market, combined with a more relaxed regulation, will naturally become an appealing environment for criminal behaviour. Over the last two years in Brazil, crimes involving the use of cryptocurrencies have grown by at least 79 per cent,^[5] and the traditionally known structures for law enforcement, intelligence gathering and crime prevention are naturally unable to cope with such growth.

In this scenario, it is increasingly important for companies to be prepared and to anticipate possible risky situations by improving their internal procedures, thoroughly documenting transactions and, above all, being mindful of the fast-changing virtual assets regulation framework. Otherwise, unprepared entities will stay behind and will face growing risks of liability.