Blockchain Comparative Guide

• Published date: 15 May 2020
• Subject Matter: Technology, Fin Tech
• Law Firm: Fleichman Sociedade de Advogados
• Author: Mr Luciano Costa

1 Legal and enforcement framework

1.1 What general regulatory regimes and issues should blockchain developers consider when building the governance framework for the operation of blockchain/distributed ledger technology protocols?

Most blockchain applications in Brazil involve financial services; therefore, financial regulations are commonly applicable and should be carefully considered. Broadly, these include monetary policy, securities regulation and insurance regulation. Taxation rules and general contractual rules are also relevant.

The Central Bank of Brazil (BCB) is responsible for monetary and financial regulation in general, which includes monetary policy, the stability of the financial system, coin emission, foreign exchange controls and so on. The BCB's regulatory controls are especially relevant regarding products that involve stable crypto coins.

The Brazilian Securities Commission (CVM) regulates the securities market. In the case of blockchain products involving tokenisation and related products, as well as public offerings involving crypto assets as an investment, CVM regulations should be observed. The CVM has issued several ordinances with a practical effect on blockchain-based products and has been the most active authority to date with regard to blockchain and crypto assets.

The insurance market, also a focus of blockchain-based products, is regulated by the Superintendence for Private Insurance (SUSEP). This industry has enjoyed considerable growth in recent years and SUSEP has been at the forefront of the regulation of blockchain-based products relating to the insurance market.

The tax regimes applicable to financial services and products should also be considered. The tax authorities - particularly at the federal level - have been paying close attention to the development of blockchain-based products and services, especially crypto coin negotiations and tokenisation of assets.

As regards smart contracts using blockchain, it is still unclear which regimes and issues will be the most relevant to consider. General contractual law, as outlined in the Brazilian Civil Code, shall apply. Depending on the final product being offered, a variety of sectors may be affected and various regulators may be watching. For the time being, we would highlight the consumer protection agencies, the National Industrial Property Institute and of course the courts, with regard to the validity of smart contracts in general.

1.2 How do the foregoing considerations differ for public and private blockchains?

It is expected that regulation of public blockchain applications will increase. It is anticipated that the authorities will focus on investor protection, consumer protection and financial stability, among other issues, which are particularly hard to monitor in the case of public blockchain applications. It is also expected that the authorities will spend more time and resources on developing ways to reduce the risks associated with public blockchain products; thus, stakeholders should prepare for much greater regulatory scrutiny in this regard.

Private or permissioned blockchains, on the other hand, tend to be regarded more as IT infrastructure, managed by a private company or organisation. The government's approach here tends to be lighter touch, since there is a central control in place, which allows for scrutiny by authorities and third parties. Also, in case of violation of any law or regulation, affected individuals or companies can use existing instruments (eg, courts, arbitration) to protect their rights, thus reducing the need for specific government intervention. In such cases, the authorities will probably concentrate their supervision on anti-money laundering and counter-terrorist financing controls, and cybersecurity.

1.3 What general regulatory issues should users of a blockchain application consider when using a particular blockchain/distributed ledger protocol?

Anyone interested in using a blockchain application should consider the following aspects:

• How popular is the protocol - for example, in how many jurisdictions is it operational? Being well known is an advantage in such a novel sector, as this might be indicative of the robustness of the protocol.
• Does the protocol have a presence in the country - a 'face' that might play an institutional or representative role before the local authorities?
• How credible is the protocol - is it connected with atypical or unlawful activities or products?
• What is the protocol's capacity to comply with the regulations - although these should not differ too much from those applicable in other major countries, the protocol should nonetheless be sufficiently flexible to adapt to local rules.

1.4 Which administrative bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The BCB is responsible for monetary and financial regulation in general, which includes monetary policy, the stability of the financial system, coin emission and foreign exchange controls. It has strong oversight and investigative powers: it can issue warnings, impose fines, conduct audits and suspend or prohibit operations of financial companies and related individuals.

The CVM has a mandate to promote the development of the securities market, ensure its efficient functioning, protect investors and ensure that there is adequate information on the market. It is also the industry watchdog, with the power to authorise companies to operate, supervise market agents and impose sanctions. It issues and enforces its own regulations, which apply not only to companies, but also to individuals working in the securities market.

SUSEP is responsible for regulating the insurance, private pension funds and capitalisation markets. It has regulatory power over insurance companies, authorising their establishment and monitoring their operations. SUSEP has been cooperating closely with the BCB and the CVM in fostering innovative services in Brazil using new technologies such as blockchain.

The Federal Revenue Service (RFB) is the federal tax authority, with extensive powers to collect, regulate and issue rulings and fines in connection with federal taxes. The RFB has been very active in trying to frame blockchain businesses for taxation purposes. It recently issued Ordinance 1.888, requiring the disclosure of information regarding cryptocurrency transactions, under penalty of a fine if the information is inaccurate, incomplete, incorrect or overdue.

The recently created National Data Protection Authority is responsible for enforcing the data protection law in Brazil. It has broad regulatory and supervisory powers, including the power to issue regulations and rulings and to impose sanctions in the form of warnings and fines. It can also block or prohibit the use of personal data in case of infringements, as well as suspend the operations of a database and any data processing activities.

Along with the administrative sanctions applied by the abovementioned authorities, criminal or civil prosecutions may be pursued by state or federal prosecution offices, as appropriate.

1.5 What is the regulators' general approach to blockchain?

The general view is that blockchain is an important tool, with the capacity to transform important aspects of diverse markets and to affect various regulated sectors. Nevertheless, a high level of ignorance, mistrust and uncertainty still surrounds the capabilities and attributes of blockchain-based products. The approach apparent from official documents and regulations thus far appears cautious, and might thus be characterised as a nurturing 'wait and see'.

This is perhaps most clearly evident in the approaches adopted by the BCB, the CVM and SUSEP. These are all recognised as very technical agencies, with strong regulatory capacities in their fields. In its 2019 Working Agenda, presented in May 2019, the BCB identified blockchain - along with artificial intelligence and cloud services - as a key aspect of a data revolution aimed at the democratisation of financial services. In a joint initiative, the BCB, the CVM and SUSEP are also creating a regulatory sandbox focused on applications based on distributed ledger technology, blockchain, robots and artificial intelligence. It is clear from this move that the agencies are seeking new ways to foster innovation while continuing to protect their regulated markets.

The tax authorities have taken a slightly different, more pragmatic approach, focused on the practical results of blockchain products and, of course, taxation. The RFB recently issued Ordinance 1.888, which imposes several obligations with regard to the trading of crypto assets.

The Brazilian Congress is another important stakeholder whose attitude to blockchain should be considered. While government agencies are responsible for interpreting and applying the existing legal framework, the number of legislative initiatives relating to blockchain, crypto assets and similar has increased significantly of late. Fierce debates and discussions are ongoing as to whether and how the technology should be regulated. As expected, since many of the issues that most resonate with voters concern fraud and Ponzi schemes, discussions in Congress have concentrated on how to protect the population against such schemes - sometimes at the expense of potential innovation.

1.6 Are...