Brazil: Digital Literacy Paves the Way for Cryptocurrency Use

TaxDAO
2023-11-06 10:55:01
Collection
Brazil is the largest cryptocurrency economy in Latin America: In 2021, 8% of Brazil's 214 million population used cryptocurrency, and usage continues to grow exponentially.

Author: CCI


Original publication date: October 18, 2023

Source:

https://cryptoforinnovation.org/brazil-digital-literacy-paves-the-way-for-crypto-use/

Abstract

  • Brazil is the largest crypto economy in Latin America: In 2021, 8% of Brazil's 214 million population used cryptocurrencies, and usage continues to grow exponentially.

  • Brazilian policymakers and regulators widely support the shift to cryptocurrencies, indicating significant development potential for Brazil and increasing the likelihood of it becoming a regional center for cryptocurrencies.

  • However, stricter regulations pose a challenge, as lawmakers express the need to protect consumers while balancing innovation.


Officials from Brazil and Argentina have indicated they are weighing options for a new shared currency. The increasing success of cryptocurrencies in emerging markets is not surprising. Cryptocurrencies often thrive in countries with a history of financial instability or limited access to banking products. The current global rise in inflation and depreciation of fiat currencies is creating a strong combination, making cryptocurrencies an attractive alternative for those seeking to protect and grow their financial assets.

Brazil faces some of these challenges—suffering from inflation and currency depreciation, and historically dealing with high financial transaction costs and a bureaucratic financial system—but it is also a market with its own characteristics. Many users are investing in cryptocurrency exchanges and trading rather than simply using cryptocurrencies to evade high fees and cope with financial instability.

High Digital Literacy Rate

There are many reasons for the popularity of cryptocurrencies in Brazil. Notably, the country has a high level of "digital financial" literacy, with the government actively promoting digital payments. While this is not cryptocurrency, it lays a beneficial foundation. In October 2020, the Central Bank of Brazil launched the free real-time retail payment system Pix. By November 2021, about 50% of the population was using it, accounting for over 70% of total transaction volume. Additionally, the government used Pix to distribute COVID-19-related economic relief, requiring beneficiaries to register. Since then, many have continued to use it.

In turn, this has laid the groundwork for broader adoption of fintech, and in December 2021, the region's highest-valued e-commerce company, Mercado Libre, began allowing Brazilian users to use cryptocurrencies.

With Brazilians confident in "digital currencies," users are more willing to try using cryptocurrencies for purchases, trading, and saving. Interestingly, data from Brazil shows that individuals use different cryptocurrencies for specific purposes, demonstrating the depth of trading and confidence in the products.

Cryptocurrency Exchanges and Banking

While global exchanges like Coinbase and Binance have established operations in Brazil, regional exchanges are also taking the lead. Mercado Bitcoin is Brazil's largest cryptocurrency exchange. Founded in 2014, it has over 5 million users and raised $250 million in a Series B funding round in 2021.

Its main competitor is the Mexico-based cryptocurrency exchange Bitso. In July of this year, Bitso announced that it had reached 1 million users in Brazil just one year after its launch. It achieved this goal faster than expected. Moreover, from June 2021 to May 2022, its trading volume increased by 66%.

These successes have attracted interest from other participants. Brazilian fintech company PicPay announced plans to launch a cryptocurrency exchange and a stablecoin pegged to the Brazilian Real by the end of the year, while Spanish cryptocurrency exchange Bit2Me also plans to allow users to buy and sell cryptocurrencies with fiat currency and provide services for trading between cryptocurrencies.

The country's banks have also recognized the benefits of these changes. The launch of Pix has significantly reduced account service fees, but it has also had the unexpected positive effect of encouraging unbanked individuals to open accounts. As a result, banks now have more potential customers to whom they can sell products.

These previously unanticipated opportunities may explain why local banks are interested in entering this space. In July, Brazil's largest digital bank by market capitalization, Nubank, gained 1 million users within a month of launching its cryptocurrency trading platform Nucripto. This goal was previously thought to take a year to achieve. Nubank revealed that it has allocated about 1% of its balance sheet to Bitcoin, highlighting its confidence in the future of cryptocurrencies.

Meanwhile, the country's largest private bank, Itaú Unibanco, announced plans to launch an asset tokenization platform that will transform traditional financial products into tokens that can then be logged onto the blockchain.

Cryptocurrency Regulations

Brazil's cryptocurrency regulations came into effect in July. As part of this, the Central Bank is now the main regulator of the country's cryptocurrency industry, overseeing and regulating all virtual asset providers. The legislation aims to prevent fraud related to cryptocurrencies, hoping that stronger regulation will help regain trust in this asset class, even if it does mean fintech companies will face higher compliance costs. In turn, this is expected to lead to higher market penetration in countries where cryptocurrency usage is already high and increasingly mature. According to the legislation, companies in the industry, such as exchanges, will need to obtain a "virtual service provider" license. Fraud involving virtual assets can also be punishable by 2 to 6 years in prison.

Overall, Brazilian authorities are working to explore, understand, and better regulate the cryptocurrency industry. They have shown an openness to tokenization and plan to study the creation of a second regulatory sandbox in 2024, which will be exclusively for tokenization cases. The first sandbox was launched in May 2022, facilitating approximately $36 million in asset tokenization.

The Central Bank of Brazil aims to launch a digital currency—the digital Real (Drex)—by the end of 2024. Drex is the term used for Brazil's digital currency project, designed to provide a secure and regulated digital environment for individuals and companies. Efforts are currently underway to establish the necessary infrastructure and regulations for digital currency, aiming to elevate the tokenization market to a new level. The Central Bank hopes that all financial transactions will be conducted entirely on the blockchain.

Outlook

The rapid pace of development and the swift achievement of goals indicate an optimistic outlook for Brazil's cryptocurrency industry. Reports suggest that several global exchanges view the country as a major market in Latin America—not only the largest in the region but also one with significant potential. Given the high level of digital literacy among the Brazilian population, cryptocurrencies are expected to become a regular payment method in the country.

However, like other emerging markets, regulation remains a concern. Although actions taken to prevent, detect, investigate, or prosecute financial crimes related to cryptocurrencies have been limited, this situation changed in 2023 with the introduction of significant legislation and further practices. Effective legislation will support Brazil's position as a cryptocurrency hub both regionally and globally.

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