Brazil is ramping up efforts to tighten its financial system and hedge the Brazilian real against growing public distrust. In a move targeting crypto users, Banco Central do Brasil (BCB) has officially proposed a ban on self-custodial stablecoins, sparking backlash from the community. The initiative, expected to be shaped into regulations next year, aims to prevent individuals from holding cryptocurrencies like USDT or USDC in independent, user-controlled wallets such as Metamask, Phantom, or Trezor. BCB: stablecoins facilitate tax evasion and illicit activities The proposal has been under consideration since at least October, when Roberto Campos Neto, the president of Brazil’s central bank, publicly stated that stablecoins and asset tokenization should be regulated in the country next year. However, it is likely that the plan has been in development for a much longer period. As early as 2023, Neto argued that stablecoins contribute to tax evasion and facilitate illicit activities. According to 2023 data from the BCB, annual cryptocurrency imports totaled $7.4 billion, having soared by 44.2% from January to August compared to the same period last year. Brazilians use stablecoins to hedge against inflation Notably, in recent times the local demand has shifted to stablecoins, which are linked to the US dollar or other real-world assets. This tendency suggests that Brazilian citizens are more likely to use cryptocurrencies as a means of payment rather than merely for investment. It’s hardly a wonder. Brazil has been experiencing increased inflation for several years, which has put downward pressure on the real, further exacerbated by political instability. The BCB has had to raise interest rates multiple times to contain price growth. Turning to stablecoins to protect their assets from devaluation has been only natural for Brazilian citizens. Cross-border crypto transactions available only for VASPs At this moment, it is not clear how the BCB plans to put its concepts into practice. The proposal has it that only authorized virtual asset service providers (VASPs) will be able to conduct cross-border crypto transactions. The transfer of stablecoins pegged to foreign national currencies to self-custodial wallets would be completely banned, and the use of such assets for domestic payments would be severely restricted. Additionally, BCB considers a ban on all cryptocurrency transfers (even beyond stablecoins) to foreign user-controlled crypto wallets. Brazilian VASPs would be required to perform foreign asset transfers only to regulated institutions. Brazil’s stablecoin restrictions likely to boost DeFi platforms However, what appears as a preventive measure to tackle looming dollarization of the Brazilian economy may in fact contribute to further decentralization. Brazilian authorities can force regulated platforms to implement controls on asset transfers but they have virtually no means to control the DeFi market and peer-to-peer transactions. Nevertheless, such a measure is likely to limit the amount of stablecoins changing hands in the local market due to more stringent KYC procedures. Brazil’s government is currently holding a public consultation set to conclude in February 2025. If new regulations are passed, decentralized platforms such as Uniswap or SushiSwap are likely to be among the winners. This occurred when China introduced a ban on centralized crypto exchanges and when Nigeria implemented anti-crypto policies preventing banks from facilitating crypto transactions.
