Why Latin America Is Fertile Ground for Crypto: Spotlight on Brazil

As we mentioned in our last markets piece, interest in crypto has recently been surging among our Latin American neighbors to the south, and for good reason. Many nations in the region present scenarios that crypto projects are ideally suited — even designed — to address. In this piece we will (1) look at essential use cases around hyperinflation and remittances, and (2) dig into some recent developments in the region’s largest economy and an integral part of any conversation about crypto in Latin America, Brazil.

Remittance, Payments, and Savings

The region’s economies, including dominant players like Argentina, Brazil, and Mexico, have all suffered through bouts of hyperinflation and inefficient remittances. This leaves many individuals unbanked and businesses struggling to find efficient payment systems and banking services. Whether it be liquidity, operational, or FX, the costs associated with local and cross-border transactions in this region are vast.

For citizens, hyperinflation dampens the value of the remittances many households receive and greatly rely on, since, usually when funds arrive from abroad and are withdrawn, they are converted into local currency. Depending on how much time has elapsed between receiving the money and it actually being withdrawn to buy something, its purchasing power can be greatly diminished.

This instability has long inspired the hunt for better financial infrastructure and safer assets than unstable currencies. Whether through bitcoin, stablecoins, or blockchain implementation, many crypto initiatives are emerging to further develop this critical financial infrastructure.

Several projects, including Valora, Valiu, and MeuBank, have been explicitly designed to address the issues of hyperinflation and cheaper remittances.

• Valora (from the creators of Celo*) is a new mobile wallet and global payments app that makes sending, saving, and spending crypto as easy as sending a text. Valora uses Celo Dollars (cUSD), a stable, carbon-neutral, cryptocurrency pegged to the value of the US Dollar.
• Valiu, a blockchain-based international remittance firm located in Colombia, is developing cross-border peer-to-peer payment systems and crypto lending and investing tools. The company claims that its goal is to “democratize access to digital dollars in Latin America in order to protect the users against the highest rates of inflation and depreciation of local currencies in the world.”
• Mercado Bitcoin, the largest crypto exchange in Brazil, has rolled out a digital wallet product called MeuBank that allows users to store various digital assets, pay everyday bills using crypto, and transfer and exchange money. The product is in the process of being regulated by the Central Bank of Brazil.

These noble goals find support among the US blockchain community, including notable Silicon Valley investors. While it remains to be seen what other use cases prove durable in the region, hedging against inflation and providing a means for cheaper remittances using blockchain and crypto is gaining heavy traction.

Spotlight on Brazil

While the inflation-hedge use case has long appealed to the crypto-savvy Brazilian, the secret appears to be out, with the country’s crypto users surpassing 100 million earlier this year. It’s therefore little wonder that Brazil, as the region’s largest country and economy, also houses Mercado Bitcoin, the company that claims to run the largest crypto exchange in the region (although Mexico’s Bitso disputes that claim).  The firm, which raised BRL 200M in a deal announced in January and led by GP Investimentos and Parallax Ventures, says it intends to use the investment to accelerate its growth and consolidate its leadership in the region, including expanding operations outside of Brazil. The company emphasized its focus on institutional investors accessing cryptocurrency and digital-assets markets, while also claiming to be working with the Central Bank to develop regulations around its digital wallets.

It’s not just the exchanges, however, that are catching users’ attention; just like among enthusiasts to the north, the Brazilian crypto scene is producing projects in DeFi and other novel areas. One example is Monnos, which provides a crypto debit card that allows users to earn up to 5% cashback and an exchange with features to “copy crypto trading strategies of experienced traders.” Another is Hashdex, an alternative money management firm focused on crypto and based in Sao Paulo that recently raised $26M from investors including SoftBank Group Corp. and Coinbase Global Inc.

Transfero Swiss, a firm with headquarters in Zug, Switzerland and Rio de Janeiro, Brazil, is another example of a Brazilian platform receiving a recent cash infusion from a well known entity. Founded in 2017, the company issued the BRZ token, the first stablecoin pegged to the Brazilian real, part of their mission to “facilitate and promote the access to digital assets.”

Here comes Johnny Law

Just like in the US, when enough users and dollars (or reals, as it were) come into play, the regulators aren’t far behind. While the government remains poised to provide further guidance, facing internal pressures to do so (this will sound familiar to crypto users in the US), some guidance has been forthcoming.

The Brazilian Central Bank has issued a reminder that digital asset securities must observe the applicable securities regulations. While there is no general prohibition on trading crypto, the fiat onramps still prove challenging, particularly given the Brazilian regulations around foreign currencies that require the intervention of financial intermediaries like banks when dealing with foreign currencies, under penalty of financial sanctions (e.g. selling some of your BTC for USD). The Receita Federal do Brasil (the federal tax agency) issued a regulation clarifying that exchanges should send certain information on crypto trades to the agency for purposes of facilitating collections.

Unfortunately the Comissão de Valores Mobilliários (similar to the U.S. Securities and Exchange Commission) has prohibited Brazilian funds from directly investing in crypto, although they are allowed to do so indirectly through regulated foreign funds. It remains to be seen whether this guidance changes.

Finally, the courts have begun to look at crypto projects as well, though not always in the best light: BWA and Grupo Banco Bitcoin (GBB) were both sent into judicial receivership after blocking or impeding investors from accessing their funds or crypto, having sold some of those assets.

BWA was declared bankrupt in April after a BRL 300 million default on its debts. BWA proposed to pay its creditors in “BWA” tokens, which appear to have completely crashed in value. Criminal charges in connection with an alleged pyramid scheme loom on the horizon.

GBB appears to be headed towards a similar fate, not having serviced its debts in more than two years. A petition for a declaration of bankruptcy was submitted last year by a lawyer and former investor/user of the platform claiming that the company continues to operate irregularly in ways that compromise the receivership process.

While these activities by potentially unsavory players besmirche the industry, it is noteworthy that it appears to be the bad actors — not industry participants acting in good faith — that are finding themselves facing scrutiny from Brazilian courts. One way to read the tea leaves is as a sign that the industry is welcome, as long as they play by the rules and aren’t defrauding investors. This could be very auspicious for the industry.

Aonde vamos daqui?

While we cannot be certain that Brazil will bloom into a paradisiacal crypto garden, flourishing like an Amazonian jungle, we can hope that some of these positive signs show promise of a bright future. We can be certain, however, that promising use cases have already found eager users among Brazilians, which further fueled their interest in this burgeoning industry. As it blows up, it’s natural that regulators are going to start poking around, both to make sure that they are fulfilling their mandate to protect citizens and to understand these developments for themselves.

Brazilians sometimes joke about the title of Stefean Zweig’s book, “Brazil, Country of the Future,” by sardonically adding, “and it always will be.” Perhaps this time it will be, by embracing crypto and providing a model for the region.

Legal Notice:

*The Celo project conducted a token sale on CoinList.

This blog post shall not be construed as legal advice. Insights regarding recent regulatory developments in Brazil provided by our friend Celso Contin and his partners at Vieira Rezende Advogados.

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