On November 8, 2024, the Central Bank of Brazil (BCB) published the Public Consultation Notices No. 109 and 110, which outline the rules for virtual asset service providers (VASPs) and other institutions licensed by the BCB which aim to carry out virtual asset based activities.
These public consultation notices make references to Law 14,478/22 (the Legal Framework for Crypto-Assets), to the feedback of the general public collected through Public Consultation Notice No. 97/23, BCB's discussions with the Brazilian Securities and Exchange Commission (CVM) and the Financial Activities Control Council (COAF), as well as recommendations from the IMF, FSB, and BIS.
The drafts of regulations were prepared with the aim to protect clients and investors in the virtual asset market, to enhance governance within the segment, risk mitigation in the offering of products and services, legal certainty, and ensuring solidity, efficiency, and proper operation of virtual asset service providers and the development of the virtual asset market.
- TYPES OF LICENSE
Through Public Consultation Notice No. 109, BCB proposes to create three categories of virtual asset service provider companies: (i) Virtual Asset Intermediaries, (ii) Virtual Asset Custodians, and (iii) Virtual Asset Brokers, as specified below:
- Virtual Asset Intermediaries:
Virtual Asset Intermediaries are service-providing companies whose corporate purpose allows them to engage in one or more of the following activities:
- To intermediate the distribution of virtual assets;
- To underwrite, individually or in consortium with other licensed companies, issuances of virtual assets;
- To buy, sell, and exchange virtual assets, on their own account and on behalf of third parties;
- To act as liquidity providers in the virtual asset market;
- To manage portfolios of assets composed of virtual assets, or portfolios composed of virtual assets, securities, financial assets, and other financial instruments allowed under specific regulation;
- To perform fiduciary duties in virtual asset market operations;
- To carry out virtual asset staking operations for its clients;
- To provide intermediation and advisory or technical assistance services to its clients and virtual asset issuers, in the virtual asset market;
- To engage in margin account operations related to virtual assets;
- To perform other financial service provider functions in distributed ledger systems or similar;
- To offer payment accounts, in the form of specific regulation;
- To engage in the provision of virtual asset services in the foreign exchange market; and
- To perform other activities expressly licensed by the Central Bank of Brazil, when they are of the same nature and risk as the activities in the virtual asset market mentioned above.
Virtual Asset Intermediaries must offer payment accounts to their clients, in accordance with relevant regulations. Additionally, Virtual Asset Intermediaries must comply with the regulations governing the foreign exchange market when providing virtual asset services in this market.
- Virtual Asset Custodians:
Virtual Asset Custodians are service-providing companies whose corporate purpose is to safeguard virtual assets, which includes:
- the custody and control of the virtual asset on behalf of their clients, as well as the instruments affecting the exercise of ownership of the asset (which includes the preservation of the characteristics of the custodied virtual asset);
- the continuously updated description of the virtual asset position, of each type of the holder's asset, as well as the reconciliation of this position with the pertinent information available in the distributed ledger systems;
- the fulfillment of transfer instructions issued by the virtual asset holder or the person to whom the power to act in the interest of the holder has been delegated;
- the handling of incidents involving virtual assets;
- the creation and extinction of charges and liens on the virtual asset; and
- managing relevant information for the exercise of any of the activities described above, concerning the holder and their custodied virtual assets.
- Virtual Asset Brokers
Virtual Asset Brokers are service-providing companies whose corporate purpose is to combine the activities performed by virtual asset intermediaries and custodians, in accordance with the general and specific rules established in the regulations. Like Virtual Asset Intermediaries, Virtual Asset Brokers must offer payment accounts to their clients.
Capital Rules:
The Central Bank of Brazil (BCB) establishes the following minimum limits for fully paid-up capital and net worth for virtual asset service providers:
- Virtual Asset Intermediary: R$1,000,000.00 (one million reais);
- Virtual Asset Custodian: R$2,000,000.00 (two million reais); and
- Virtual Asset Broker: R$3,000,000.00 (three million reais).
Additionally, any intermediary or broker who intends to perform staking activities on virtual assets, on behalf of their clients, or offer margin accounts for virtual assets to their clients, must add an additional R$2,000,000.00 (two million reais) to the minimum paid-up capital and net worth requirements.
Offer of Virtual Assets by Licensed Companies by BCB:
The proposed regulations authorizes the following institutions to operate in the intermediation and custody of virtual assets: (a) commercial banks; (b) multiple banks; (c) investment banks; (d) the CEF (Caixa Econômica Federal); and (e) brokerage and securities distribution companies.
These institutions must meet the minimum regulatory operational limits, including main capital, Level I and Reference Equity, as well as the minimum net worth limit, and maintain the minimum level of safeguards required for electronic money issuers, in accordance with specific regulations.
Licensed companies who intend to provide virtual asset services must notify the BCB at least twelve months in advance of their intention to start activities in the modalities indicated in the drafts and adopt measures to adapt their operational policies and governance structures, such as internal control and risk management policies.
- LICENSING PROCESS
The regulations proposed through Public Consultation Notice No. 109/24 requires that virtual asset service provider companies must request prior authorization from the BCB to start providing virtual asset services. However, companies that have already commenced providing virtual asset services before the rule comes into force may continue operating, provided they request a license to operate by the date to be stipulated by the BCB in 2025.
These companies may continue providing virtual asset services until the conclusion of their licensing process but are prohibited from expanding the range of activities provided between the effective date of the resolution and the deadline for requesting a license to operate.
Through Public Consultation Notice No. 110/24, the BCB submitted for public consultation the draft of a resolution that regulates the licensing process of virtual asset service providers and consolidates the procedures for the licensing of foreign exchange brokers, distributors, and securities brokers.
In this context, the BCB creates transitional rules applicable to the licensing processes of virtual asset service providers already in operation and those that will start operating after the resolutions come into force.
Regarding the transitional provisions applicable to companies already in operation, the BCB divides the licensing process into two phases:
- Phase 1 - includes: a) the analysis of the evidence of companies that started their activities before the resolutions came into force; b) compliance with minimum capital and net worth requirements; and c) the provision of detailed information about the company's structure and operations (e.g., controllers, responsible parties, types of services provided, and size of operations);
- Phase 2 - establishes the verification of compliance with the requirements set forth in the draft of resolution proposed by Public Consultation Notice 110/24, such as the submission of declarations of economic-financial capacity, the lawful origin of funds, minimum capital requirements, among others.
Additionally, BCB may establish simplified instruction procedures for the submissions of virtual asset service providers already in operation, based on an assessment of the risks involved.
The phased and detailed approach aims to ensure the safety and integrity of operations in the virtual asset market, while allowing the entry of new participants by observing the requirements specified by the regulator.
- SEGREGATION OF RESOURCES
Regarding the segregation of resources, the Central Bank of Brazil (BCB) intends to require that virtual asset service providers keep their own resources separate from those of their clients. Client resources must be necessarily maintained in individual payment or deposits accounts. In this context, the respective VASP must establish policies and procedures to ensure proper segregation of resources.
Additionally, the proposed resolution prohibits virtual asset service providers from using the assets owned by their clients or other counterparties for their own operations. This rule is exempted in the following cases: (i) virtual asset staking, provided specific recommendations and disciplines applicable to these operations are met; and (ii) transactions involving virtual assets owned by qualified or professional investors, as defined by CVM regulations, with the express consent of the virtual asset owner.
- HIRING OF FOREIGN VIRTUAL ASSET CUSTODIANS
It is important to note that the draft of the resolution allows a VASP to hire custodians in foreign jurisdictions, provided they comply with the rules laid out in the draft, specifically:
- They must comply with the applicable provisions for hiring custodians in the country;
- The legislation and regulations of the country where the entity is established must present standards compatible with Brazilian regulations, as evaluated by the Central Bank of Brazil;
- The competent regulatory authority of the country where the entity is established must have a cooperation agreement in effect with the Central Bank of Brazil, applicable to the aspects of the license of entities based in other countries;
- The foreign entity must: (i) be licensed to operate by the competent authority of the country where it is established; (ii) have a legal representative in Brazil; (iii) possess assets and rights established in Brazil or require or hire financial guarantees that can be promptly triggered in case of failures by the foreign custodian; (iv) enable the monitoring of position records, access to relevant information, and control over the virtual assets custodied at the contracted institution, by the virtual asset service provider, concerning the virtual assets covered by the custody contract; (v) grant the Central Bank of Brazil access to the records and other relevant systems of the entity related to the custody of the virtual assets covered by the contract; and (vi) adopt the formalization, with full legal effect in the country of the contracted entity, of the segregation of client virtual assets from any resource of the institution, ensuring timely availability of the virtual assets in the event of insolvency or declaration of bankruptcy or resolution regime by a competent authority.
- HIRING OF CORRESPONDENTS
BCB’s draft suggest prohibiting, under any circumstances, the hiring of correspondents in the country for operations carried out by virtual asset service providers, as well as the hiring of mixers and tumblers aimed at complicating operations with virtual assets.
- FEE CHARGING
The draft proposed by BCB through Public Consultation Notice No. 109 also covers changes in the rules for charging fees by institutions licensed to operate by BCB, specifically Res CMN No. 3.919, of November 25, 2010.
The proposed changes include the possibility of charging fees for activities provided in the virtual asset market, such as the management, evaluation, re-evaluation, or substitution of assets received as collateral for operations, purchase or sale, and custody of assets.
- NEW SUBSIDY INQUIRIES
The BCB also seeks to gather subsidies on: (a) the range of activities allowed for virtual asset intermediaries; (b) the need to establish rules for financial operations carried out in decentralized finance environments; and (c) any absences or omissions identified in the proposed regulatory framework at this step of regulating.
- OTHER POINTS ADDRESSED
In addition to the mentioned points, the drafts also address aspects regarding:
- Minimum requirements for selecting virtual assets to be offered by virtual asset intermediaries and brokers - listing, delisting, and related parties to the virtual assets;
- Eligibility of virtual assets offered by virtual asset service intermediaries;
- Rules regarding the minimum governance of the virtual asset service provider company;
- Responsibility of virtual asset service providers;
- Contracting essential services for providing virtual asset services;
- Governance in the provision of virtual asset services;
- Monitoring of transactions with virtual assets;
- Security procedures for providing and servicing virtual assets;
- Provision and disclosure of information about the virtual asset service provider and its services;
- Rights and obligations of clients;
- Storage of private keys and custody of virtual assets;
- Procedures for evaluating and meeting the risk profile of clients;
- Conflict of interest mitigation;
- Margin account operations with virtual assets;
- Staking operations with virtual assets;
- Provision of virtual asset custody services.
- NEXT STEPS
Public Consultation Notices 109 and 110 are open for subsidy collection until February 7, 2025. The proposals for normative acts are available on the Participa + Brasil Portal, with a link available on the BCB’s website, allowing interested parties to submit suggestions and comments through the mentioned links and the emails: This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..
