BACEN announces public consultations to regulate virtual assets | Virtual Assets Public Consultations (Public Consultations No. 109 and 110/2024)

On November 8, 2024, the Central Bank of Brazil (“BACEN“) published Public Consultation Notices No. 109/2024 (“ECP 109“) and No. 110/2024 (“ECP 110“), the purpose of which is to submit for public consultation proposed resolutions of BACEN and the National Monetary Council (“CMN“) that are intended to:

ECP 109:

1. ensure the protection of consumers and users of the virtual assets market;
2. establish a legally secure environment, ensure the soundness, efficiency, and proper functioning of virtual assets service providers and other institutions operating in the virtual assets market;
3. regulate the incorporation and operation of virtual assets service providers; and
4. provide for the provision of virtual assets by other institutions authorized to operate by BACEN.

ECP 110:

1. amend and consolidate the rules on charging fees for services provided by financial institutions and other institutions authorized to operate by BACEN; and
2. consolidate and regulate the authorization processes for the operation of: (i) foreign exchange brokers firms; (ii) securities brokers firms; (iii) securities distributors firms; and (iv) virtual assets service providers.

BACEN had already indicated that regulating virtual assets service providers would be a priority in 2024. The publication of these notices reinforces its commitment to developing this market while protecting the Payment System, the Financial System, and consumers, given the lack of specific regulations governing operations in the virtual assets market.

Basis of the proosals

The draft regulations submitted for public consultation are based on: (i) Law no. 14,478, of December 21, 2022 (“Virtual Assets Legal Framework”); (ii) Public Consultation Notice 97, of December 13, 2023; (iii) institutional dialogues between BACEN, the Securities and Exchange Commission (“CVM”) and the Financial Activities Control Council (“COAF”); and (iv) technical documents from entities such as the International Monetary Fund (“IMF”) and the Financial Stability Board, linked to the Bank for International Settlements. The aim is to deepen the regulation, defining and clarifying points that still have gaps in the current legislation.

Regulatory Proposals

Notice of Public Consultation No. 109/2024

ECP 109: the main points addressed in the draft regulations include:

1. Definitions: the definition of certain concepts commonly used in the market, such as, among others:

1. virtual asset, refers to the digital representation of value that can be traded or transferred electronically, such as a system based on Distributed Ledger Technology (DLT) or similar, and that can be used for payments or investment purposes, as outlined in Article 3 of Virtual Assets Legal Framework;
2. stablecoin, refers to a virtual asset created with the purpose of maintaining its value stable relative to a reference fiat currency or an index representing the value of a basket of reference fiat currencies;
3. smart contracts, refers to a contract designed and executed through a computational algorithm, developed, in the context of the virtual asset market, for a system based on Distributed Ledger Technology or similar;
4. virtual asset trading, refers to the purchase, sale, or exchange of virtual assets conducted through platforms or other electronic means managed by virtual asset service providers;
5. virtual asset staking: refers to the process through which a natural or legal person locks a virtual asset with the purpose of participating in transaction validation within a system based on Distributed Ledger Technology or similar, using proof-of-stake consensus mechanisms and potentially earning rewards;
6. assets tokenization refers to the process of transforming the representation of any instrument or asset into a token in digital format, registering it in a system based on Distributed Ledger Technology or similar, potentially incorporating other elements characteristic of virtual assets; among others.

2. Modalities of service provision: virtual assets service providers are institutions authorized by BACEN to operate, executing virtual assets services on their own behalf or on behalf of third parties. These providers are classified into the following categories: (a) virtual asset intermediaries; (b) virtual asset custodians; and (c) virtual asset brokers.

3. Regulations concerning the provision of virtual assets services: (a) requirement for equity segregation between all assets of virtual assets service providers and their clients, establishing the obligation for these entities to offer payment accounts to users for holding fiat currency used by their clients on their platforms; (b) specific rules for preventing and combating money laundering; (c) the possibility of contracting essential service providers, both domestically and abroad; (d) hiring a custodian abroad (e) specific rules for staking operations; (f) establishment of minimum conditions for the creation of virtual assets service provider companies; (g) possibility for certain types of virtual assets service providers to operate in the foreign exchange market (BACEN is considering publishing specific regulations on this subject, which will be the focus of a separate public consultation), among others.

4. Authorization to operate: the authorization process for virtual assets service providers will be regulated by specific rule, proposed by ECP 110. This rule will distinguish virtual assets service providers between those already proven to operate in the virtual assets market and those not yet operating in this market until the entry into force of the resolution proposed by BACEN, based on the following parameters:

1. virtual assets service providers that have demonstrably initiated virtual assets market activities before the proposed resolution’s effective date must apply for authorization to operate by a specific date in 2025, to be determined. During the period between the resolution’s effective date and the authorization application deadline, these companies are prohibited from expanding their range of activities. The authorization process will occur in two phases: (a) proof of compliance with minimum capital and equity requirements, through documents, although it has not yet been defined which ones will be required for virtual asset companies to prove the start of their activities; and (b) analysis will primarily focus on requirements related to infrastructure, organization, control, and management. Additionally, virtual assets service providers currently operating in Brazil must, within six (6) months from the date of submitting their authorization request to BACEN, implement the necessary adjustments to comply with all other applicable regulations;
2. in the other hand, virtual assets service provider companies that have not started their activities by the effective date of the proposed regulation must request prior authorization from BACEN to begin providing virtual assets services, according to the process established in the specific resolution.

5. Virtual assets intermediaries: the proposed regulation establishes the activities that must be included in the corporate purpose of virtual asset intermediaries, such as, for example, intermediation in the distribution of virtual assets, purchase, sale, and exchange of virtual assets on their own account or on behalf of third parties, provision of liquidity in the virtual assets market, management of portfolios composed of virtual assets or portfolios composed of virtual assets, securities, financial assets, and other financial instruments permitted under specific regulations (including those of CVM), conducting staking operations of virtual assets for their clients, among other activities.

6. Virtual assets custodians: virtual assets custodians must include in their corporate purpose the custody of virtual assets, which encompasses (a) safekeeping and control of virtual assets on behalf of their clients; (b) continuously updated description of the virtual assets position for each type of asset held by the owner, as well as reconciliation of this position; (c) execution of movement instructions issued by the virtual asset owner; (d) handling of events affecting the virtual assets; (e) creation and removal of encumbrances or liens on the virtual assets.

7. Virtual assets brokers: exclusively for virtual asset brokers, BACEN proposed the possibility of combining the activities performed by intermediaries and custodians. It is important to note that this option would not be available to intermediaries and custodians, who would be prohibited from combining activities with other modalities.

8. Governance: the proposed regulation establishes that a virtual assets service provider must include, in its corporate name, the expression “Sociedade Prestadora de Serviços de Ativos Virtuais”.

1. Prohibition of single-member ownership: the regulation prohibits the establishment of a virtual assets service provider as a business entity in which a single natural person is the sole shareholder.
2. Governance policy: a virtual assets service provider must implement a governance policy aimed at ensuring compliance with regulations governing such institutions, which must, at a minimum: (i) define roles and responsibilities; (b) be adequately documented and submitted for review every two (2) years and kept at BACEN’s disposal; and (c) be approved by the company’s Board of Directors or Board of Officers.
3. Administration: the articles of association of a virtual assets service provider established as a limited liability company must include a section specifying that the institution’s management must consist of at least three (3) managers.
4. Policies: virtual assets service providers must keep their policies and procedures permanently updated: (a) the conduct of their employees; (b) the collection and analysis of data for the purposes of recording and monitoring transactions carried out; (c) the prevention of fraud and crime in general; (d) risk management and business continuity; (e) the management of services provided by third parties; (f) safekeeping and protection of private keys; (g) approving client transactions; (h) institutional security; (j) preventing and combating money laundering and terrorist financing; and (k) a security policy comprising cyber security and information security.

Consequently, the companies must engage independent auditors, conduct internal risk assessments, conduct regular training for their staff, provide informational content to disseminate knowledge on best practices and risks in market operations, implement robust technological systems for recording organizational processes and internal actions for inspection and auditing, establish limits for transactions and withdrawals, designate emergency contacts to address BACEN demands, and strengthen the sharing of information regarding suspicion lists and restrictive lists of national and international operators.

9. Minimum Capital: the draft regulation also provided the minimum limits for fully paid-in share capital and net equity required for virtual assets service providers, which are: (a) BRL 1,000,000.00 (one million Brazilian Reais) for those operating as intermediaries; (b) BRL 2,000,000.00 (two million Brazilian Reais) for those operating as custodians; and (c) BRL 3,000,000.00 (three million Brazilian Reais) for those operating as virtual assets brokers. An additional capital requirement of BRL 2,000,000.00 (two million Brazilian Reais) is imposed on entities that operate with margin accounts and

10. Service fees: ECP 109 also presents a proposal for a normative act aimed at amending the current CMN Resolution No. 3,919, dated November 25, 2010, to regulate the charging of fees for the provision of virtual assets services.

BACEN also established the possibility for commercial banks, multiple banks, investment banks, Caixa Econômica Federal, securities brokerage firms, and securities distribution firms to operate in the intermediation and custody of virtual assets.

In this sense, ECP 109 represents another significant step by BACEN in regulating the virtual assets market, not only by defining concepts that were previously unclear in existing legislation but also by establishing rules for the incorporation and operation of virtual assets service providers. Furthermore, another highlight of ECP 109 is the prohibition, under any circumstances, of hiring banking correspondents in the country to conduct operations in the virtual assets market.

Finally, in addition to the points highlighted above, ECP 109 also addresses:

1. the types of virtual assets subject to regulation, defined as digital representations of value that can be traded or transferred electronically and used for payments or investment purposes, not including: (a) assets designed as non-fungible tokens (NFTs); (b) financial instruments subject to tokenization processes, such as financial assets and securities; (c) movable or immovable properties subject to tokenization processes, even if designed for investment purposes; (d) national and foreign currencies; (e) electronic currency, as defined by Law No. 12,865 of October 9, 2013; (f) instruments granting their holders access to specific products or services, or benefits derived from such products or services, such as loyalty points and rewards; and (g) representations of assets whose issuance, registration, trading, or settlement is governed by law or regulation, such as securities and financial assets;
2. the general and specific obligations of virtual assets service providers, depending on the type of service offered;
3. governance in the provision of virtual assets services;
4. control and monitoring of transactions conducted;
5. security measures and procedures for the provision of virtual assets services;
6. information that providers must disclose;
7. the rights and obligations of clients;
8. secure storage of private keys and custody of virtual assets;
9. evaluation and alignment of services to the risk profile of clients;
10. communication channels between virtual assets service providers and their clients;
11. information about virtual assets for clients; and
12. margin account operations involving virtual assets, among others.

Notice of Public Consultation No. 110/2024

ECP 110: the draft resolution primarily aims to regulate the authorization processes for the operation of:

1. 1. foreign exchange brokers firms;
   2. securities brokers firms;
   3. securities distributors firms; and
   4. virtual assets service providers.

1. Authorization process before BACEN: the proposed rule establishes that the following depend on authorization from BACEN: (a) the operation of the company; (b) the operation of a virtual assets service provider company in a new type of virtual assets service; (c) the transfer or change of corporate control; (d) the merger, spin-off or incorporation of the institutions it specifies; (e) corporate transformation; (f) investiture and exercise of elected or appointed management positions; (g) change of the amount of share capital; (h) change of corporate name; and (i) change of corporate purpose to some type of institution that is part of the National Financial System.

Although foreign exchange brokers firms, securities brokers firms, and securities distribution firms already have their authorization processes regulated by the CMN, in view of recent changes in legislation that have given BACEN the power to regulate the conditions for the incorporation and operation of entities in these segments, BACEN is proposing the creation of a single set of rules to regulate the authorization of the aforementioned companies, as well as virtual assets service provider company.

Furthermore, it is worth noting that the authorization process, in general terms, follows the framework established by CMN Resolution No. 4,970/2021. This includes requirements for authorization, definitions regarding corporate control and qualified participation, rules governing the assumption of administrative roles or the status of being part of the controlling group or a holder of qualified participation, and conditions for filing, denial, review by authorities, and cancellation of authorizations by BACEN.

2. Communications to BACEN: the assumption of the status of a holder of qualified participation, changes to the structure of administrative positions outlined in the articles of association or bylaws of the virtual assets service providers, and capital increases must be communicated to BACEN.

3. Transitional provisions: the authorization processes for virtual assets service providers operating in Brazil will be conducted in two phases, structured as follows:

1. Phase 1: (a) analysis of proof that the companies started their activities before the entry into force of the proposed resolution and the BACEN resolution that regulates the incorporation and operation of companies providing virtual assets services; (b) verification of compliance with minimum capital and net equity requirements through the submission of audited financial statements; and (c) provision of information regarding their controllers, responsible contact persons, types of services provided, and scale of transactions; and
2. Phase 2: analysis of compliance with the requirements established in the proposed regulation.

Deadline for contributions to ECP 109 and ECP 110

The deadline for interested parties to submit suggestions and comments is February 7, 2025. The proposed normative acts are available on the Portal Participa + Brasil website (www.gov.br/participamaisbrasil), with a link available on the Central Bank of Brazil’s website (www.bcb.gov.br) under the “Financial Stability” successively accessing the links “Norms”, “Public Consultations” and “Consultations and other active participation”.

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