The Legal Future of Cryptocurrencies in Brazil

Jonathan Darcie has a PhD and Masters in General Theory of Law and Tax Law, and is partner of a law firm in Brazil with ongoing consulting for digital currency businesses.

In this CoinDesk opinion piece, Darcie speaks out about proposed cryptocurrency rules in Brazil, arguing that attempts to regulate the industry at this stage are premature and misguided.

Living in Brazil over the last four years has been an experience of watching a real and live – and even more interesting, some would say – version of TV's "House of Cards".

The still in-course criminal investigation called 'Operação Lava Jato' (Operation Car Wash) has become the most comprehensive criminal investigation in the history of Brazil, sending many dozens of politicians, CEOs and executives of the most important Brazilian companies to prison.

At the same time, the country has entered the most intense recession of its history, leading businesses to bankruptcy, millions of people to unemployment and setting up a scenario of economic chaos.

It is within this window of never-seen-before-events (the last one being a wiretap of the actual president of Brazil) that the Brazilian House of Representatives is doing something else unprecedented – initiating a debate about regulating bitcoin and cryptocurrencies.

The environment today

When reading the news that a legislative commission will study and regulate cryptocurrencies, one might have the impression that local startups will now have limitless freedom to transact and form businesses.

Unfortunately, that's not even close to the reality of any business in Brazil.

As it happens with nations that have their legal system built under a civil law tradition, every innovation that emerges joins the current status quo to become legally equivalent of other similar technologies.

Back in 2009, if someone living under Brazilian law made his or her first transaction buying and selling bitcoin at a profit, they had to pay (or should have paid) income tax in order of 15% of its capital gains (unless the total amount involved was less than to R$35,000 ($10,600) in a month, when a tax exemption was applicable).

This means the current situation is the same for cryptocurrencies as it is for guitars, books or any other goods involved in transactions.

Bitcoin and other cryptocurrencies were never legal currencies under Brazilian law, though a federal law issued a definition of digital currency by declaring it as a resource stored in a device or electronic system.

As this definition didn't capture the nature of cryptocurrencies in general – covering private cryptographic keys instead of 'digital currency' itself – their legal status is given by Brazilian Civil Code, which defines them as regular assets. Being a movable asset means that transactions are possible without any kind of restriction – except for the duty of paying taxes and declaring its property to Brazilian IRS.

The business impact

For businesses, the requirements are a bit more complicated.

It's not easy to have a business in Brazil. Anyone wanting to do so needs to hire an accountant and a lawyer to prepare a contract equivalent to the articles of organization in the US. Afterwards, there is the need to obtain a taxpayer ID issued by the federal, state and municipal governments.

Small businesses are obliged to deliver monthly and annual income information for tax purposes (normally to more than one branch), including information about employees. The obligations more than double for larger businesses.

The exact same process is applied to digital currency businesses. It doesn't matter if we are speaking of an exchange, wallet or payment service: there is not much freedom involved.

But differently from most businesses, cryptocurrency-related ventures that deal directly with large sums of money, securities, art, jewelry or other assets are subject to very specific duties regarding anti-money laundering policies and compliance in general.

These obligations and duties were enacted in 1998 through a federal law written more than 10 years before the first bitcoin transaction happened.

It is therefore required that digital currency businesses comply with strict compliance policies and keep logs of transactions made within its field of operation, reporting activities considered suspicious to the federal council that controls financial activities.

The congressional debate

Considering the intent of congress to specifically regulate cryptocurrencies, most people at this point might be asking: "What is left to be regulated?"

Congressmen involved in the special commission gave statements covering tax aspects and the relation of digital currencies with criminal activities, though this suggests they don't have a strong familiarity with the current legal status of cryptocurrencies.

It's notable then that the timing of the debate follows a recent kidnapping in which criminals asked for the ransom to be paid with monero and z-cash. Just a few weeks later, the WannaCry ransomware attack struck international organizations, bringing negative attention to bitcoin.

It may have seemed like an opportunity for Congress to present the public opinion with a (supposedly) good agenda.

First presented in 2015, the discussed bill adds nothing to the digital currency legal environment.

There are three goals in the bill:

• To consider digital currency payments to be legally payment arrangements, which they already are due to its legal definition
• To declare that digital currency businesses must comply to the federal law of consumer protection, something that they indisputably already have to
• To state that operations involving digital currencies are subject to anti-money laundering policies, which they already are, as previously explained.

So as long as the bill passes in the current form, owners and businesses should be just fine.

Given the tradition of complicating things and the Brazilian actual political crisis, however, 'just fine' might be simply too much to ask for.

Brazilian federal court image via Shutterstock