Brazil's Central Bank has taken a significant step by launching a public consultation that equates "stablecoins" - cryptocurrencies pegged to traditional currencies like the US dollar - with traditional foreign exchange. This move has far-reaching consequences for the cryptocurrency sector and the country's financial landscape.

Key Aspects of the Central Bank's Move

According to the newly published rules by the monetary authority, cryptocurrency exchanges dealing in stablecoins will need to secure two types of operating licenses from the Central Bank. One as a virtual asset service provider (VASP) and another as a currency exchange operator. This integration of stablecoins into the exchange sector brings with it a set of strict regulations.For instance, exchanges will be required to report their transactions to the Central Bank when clients engage in activities such as buying or selling stablecoins or making international payments or transfers using digital currencies. The information required for these transactions is detailed and comprehensive, including the date of the operation, client identification, and the volume of the virtual asset. In the case of international transfers, additional details such as the purpose declaration, differentiation between remittance and receipt of the virtual asset, and the identification of both the client and the overseas payer or recipient must be provided.Erik Oioli, founder and managing partner of VBSO Advogados, highlights the significance of this move. He explains that the Central Bank's decision to equate stablecoins with exchange affects Resolution 277, which governs the foreign exchange market. As a result, these exchanges will have to comply with the same rules as a currency exchange broker, including obtaining Central Bank authorization, maintaining a minimum operating capital, and implementing anti-money laundering controls. A designated director responsible for exchange operations will also be required to ensure compliance.Alessandra Rossi, a partner at Machado Meyer Advogados, points out that VASPs encompass both entities with their own licenses and financial institutions choosing to operate in this segment. These entities will now be able to operate with stablecoins and utilize crypto assets for overseas remittances, opening up new avenues for financial transactions.However, a controversial aspect of the consultation is the Central Bank's prohibition on withdrawing stablecoins to self-custodial digital wallets. Currently, exchange clients have the option to transfer their cryptocurrencies to wallets like MetaMask and Phantom, allowing them to hold digital currencies in encrypted keys. This restriction on self-custody weakens peer-to-peer (P2P) cryptocurrency trading and goes against the principles and nature of freedom advocated by the crypto market.Rodrigo Caldas Carvalho Borges, a partner at CBA Advogados, argues that this move contradicts the fundamental principles established by the creator of Bitcoin in 2009, which emphasized disintermediation and freedom from the banking system.Nicole Dyskant, an advisor at the Israeli blockchain infrastructure company Fireblocks, views the new consultation as highly controversial. She notes that unlike previous consultations where there was significant debate on how crypto exchanges could comply with regulation, this one came unexpectedly with minimal dialogue with the private sector. The restriction on withdrawals to self-custodial wallets is seen as a way to implement the "travel rule," but it is a decisive step that has drawn criticism.Ms. Dyskant also argues that the regulator has contradicted itself by equating stablecoins to foreign exchange and then setting limitations on digital tokens that traditional exchanges do not have. This creates an imbalance and restricts the freedom and flexibility of crypto operations.Numerous experts claim that this restriction effectively prevents Brazilians from participating in various decentralized finance protocols where many transactions are conducted using stablecoins. It seems as if the Central Bank is criminalizing this environment and allowing crypto operations only within centralized and regulated entities.In addition to these regulations, the Central Bank has imposed a $100,000 limit on international transfers made via digital assets. Ms. Dyskant questions the justification for this limit, as there seems to be no equivalent in comparative regulation. She suggests that the Central Bank may have been overly cautious in this initial phase to implement its agenda for anti-money laundering and the integrity of the foreign exchange market.Overall, Brazil's Central Bank's actions regarding stablecoins have sparked significant debate and have far-reaching implications for the cryptocurrency industry and the country's financial system.