On February 22, 2022, the Commission of Economic Matters of the Brazilian Senate approved a bill of law proposed by Senator Flavio Arns to regulate Virtual Assets (VAs) and Virtual Assets Service Providers (VASPs) in Brazil. The bill of law should be submitted to the lower house for consideration and voting.

The bill of law was proposed after negotiations between representatives of the Central Bank of Brazil and the Brazilian Securities Commission and provides a framework for the conduct of virtual assets activities in the Brazil and for the registration and licensing of VASPs. The bill of law is in aligned with global regulatory standards, including the recommendations of the Financial Action Task Force in connection with Virtual Assets.

Definition of Virtual Assets. The bill of law defines virtual assets as a digital representation of a value that can be traded or transferred by electronic means and utilized for payments or as an investment, excluding: (i) fiat currencies; (ii) electronic currency as provided in law 12.865/2013, means of payment provided by centralized and regulated companies; (iii) services and benefits virtual assets; (iv) virtual assets representing assets of which the issue, bookkeeping, trading or settlement is regulated by law.

Exclusion of the definition of Virtual assets. The bill of law explicitly excludes from the definition of Virtual Assets Under the bill of law, securities under the jurisdiction of the Brazilian Securities Commission (“CVM”) and electronic currency issued by banks and/or payment institutions. Therefore, securities and electronic currency shall not be subject or in any way affected by the guidelines.

Definition of VASP. A VASP is the entity acting on behalf of third parties which conducts at least one of the following services: (i) exchange of virtual assets and fiat currencies; (ii) exchange of virtual assets; (iii) transfer of virtual assets; (iv) custody or administration of virtual assets or instruments which allow for the controlling of virtual assets (v) or participation in financial services or provision of any services to be offered by an issuer or the sale of virtual assets.

Oversight: One or more entities of the federal administration will be responsible for the regulation of VASPs and be empowered to regulate the functioning and the oversight of the providers of virtual services. The Regulatory Agency will have the powers to: (i) authorize the functioning, transfer of control, merger, spin-offs and combinations of the virtual services provider; (ii) establish conditions for the qualification of the members and officers of the virtual assets provider; (iii) oversee that the provider applies the rules set forth in Law 13.506/2017 which provides the administrative rules of the Central Bank of Brazil applicable to financial institutions; (iv) cancel the authorization to function or for members of the provider’s management; (v) define the cases where currency exchange will occur and be subject to the currency exchange regulations. The Regulatory Agency will define the circumstances leading to the cancellation of the authorization.

Standards to be Followed: In the provision of services the provider must observe the following guidelines to be further regulated by the executive branch: (i) free enterprise and competition; (ii) segregation of assets by clients; (iii) good governance and risk assessment; (iv) safety of information and protection of data; (v) consumer and users protection; (vi)  sounding and efficient transactions; (vii) prevention of money laundering, hidden assets, organized crime and terrorist activities, mass destruction weapons and alignment with international standards.

Registration of VASPs. The bill of law provides that VASPs should be authorized by Brazilian Governmental Authorities to carry out their activities after such law enters into effect. The rules for applying and obtaining the prior approval will be defined and the application is to be conducted under a simplified procedure.

Financial Institutions as VASPs: Financial institutions regulated by the Central Bank of Brazil may provide virtual asset services, as stand-alone businesses or as an additional line of business, in a manner to be regulated by the Brazilian Governmental Authorities.

Interim Period for Adjustments: Existing VASPs will have at least six months to adjust and adapt to the new rules following terms and conditions to be defined by the Brazilian Governmental Authorities. It is proposed that the law will come into force 180 days from its promulgation.

Amendment to White Collar Crime Law. Providing services without the prior authorization of the Brazilian Governmental Authorities will characterize a criminal conduct under Brazilian White Collar Crime Law (Law No 7492/1986).

Tax Incentives: The bill of law provides for tax incentives for the acquisition of hardware and software for processing, mining and preserving virtual assets and is to be effective until the end of 2029.