On Dec. 22, Brazil officially enacted a Bitcoin (BTC -0.85%) bill that is intended to provide a complete regulatory framework for trading and using Bitcoin within the country. While the bill does not officially make Bitcoin “legal tender” within Brazil, it makes it significantly easier and more attractive to use Bitcoin as a form of payment or as an investment asset.
Obviously, the fact that Brazil, which now has the 12th-largest economy in the world as measured by GDP, appears to be embracing Bitcoin could be a major development in the global adoption of crypto. With that in mind, let’s take a closer look at what the bill does — and does not — offer, and what it could mean for Brazil.
What the Bitcoin bill offers
The new Bitcoin bill establishes regulatory clarity and certainty for businesses and individuals within Brazil who wish to use Bitcoin. Currently, Bitcoin is not banned in Brazil, so the bill is not going to open the floodgates to new users. Rather, its greatest benefit might be attracting businesses and individuals who are on the fence about crypto. If businesses want to accept Bitcoin, for example, they will not have to worry about falling into a “gray area” where nobody really knows the rules of the game.
Brazil’s bill sets up two distinct regulators for Bitcoin. The Central Bank of Brazil will regulate Bitcoin when it is being used as a form of payment, and Brazil’s version of the SEC will regulate Bitcoin when it is being used as an investment asset. Since the bill had the input of Brazil’s federal tax authority, there are also considerations for how Bitcoin should be taxed. Moreover, to ensure that everything runs as smoothly as possible, companies trading in Bitcoin must receive a special license to become a virtual asset service provider.
Comparisons to El Salvador
Obviously, the first comparison many people will make is with El Salvador, and for good reason. In 2021, El Salvador became the first nation in the world to accept Bitcoin as legal tender, and El Salvador’s president, Nayib Bukele, has emerged as one of the greatest proponents of Bitcoin and the modern crypto economy.
On the surface, the decision to make Bitcoin legal tender in El Salvador seems like a more robust policy move than simply putting into effect a regulatory framework. But keep in mind that El Salvador no longer has a national currency of its own. El Salvador’s economy has been completely dollarized for more than 20 years, so there was no risk of impacting the country’s monetary policy by embracing Bitcoin.
Moreover, El Salvador’s economy is very dependent on cross-border remittances. By some estimates, 24% of the nation’s GDP comes from remittances. So accepting Bitcoin via blockchain wallets was a step to make these remittances as easy and affordable as possible. And, finally, there is the question of the “unbanked” in El Salvador. Embracing Bitcoin was really about financial inclusion and giving lower-income individuals a chance to participate in the economy, even if they did not have a bank account.
Brazil’s bill is potentially more far-reaching than El Salvador’s simply because it has been crafted for a much more developed economy. Unlike El Salvador, Brazil has a national currency (the real). Unlike El Salvador, Brazil has a rising middle class. And, unlike El Salvador, Brazil is not dependent on global remittances for GDP growth. Only 0.25% of Brazilian GDP comes from remittances, about the level of Spain or Germany.
What can we expect from Brazil?
Most likely, the new bill will lead to Bitcoin becoming much more prevalent as a medium of exchange, especially for e-commerce. It will lead to new investment products and new investment options for millions of middle-class Brazilians. And it could create a robust crypto industry based around the virtual asset service provider designation.
But let’s not expect too much right out of the gate from Brazil. El Salvador’s experiment has delivered mixed results at best. For one, El Salvador’s government has been losing money on its massive Bitcoin investment holdings. And uptake among everyday citizens has reportedly been much lower than originally anticipated. While there have been some notable success stories — such as Bitcoin Beach, profiled on CBS’ 60 Minutes — it can be hard to persuade people to hold an asset that is down 65% for the year.
Bitcoin in 2023
The bill goes into effect 180 days from now, so by mid-2023, it might be possible to see the first signs of what the impact of this bill is going to be. Brazil is not attempting to replace fiat with crypto. It is not attempting to go “full Bahamas” by enacting legislation to attract foreign crypto companies. And it is not attempting to turn the entire nation of 214 million people into Bitcoin holders.
Instead, Brazil is simply recognizing that it can no longer stuff the genie back into the bottle when it comes to crypto. Bitcoin is too popular to ban. And it offers too much potential to ignore. Certainly, it’s encouraging that Brazil has put into place such a comprehensive framework for crypto. It’s a bullish sign for Bitcoin’s future growth and a necessary first step for legitimizing Bitcoin on a global scale.