Brazilian Senate Report: Bitcoin Isn't Ready for Regulation

A new study commissioned for the Federal Senate of Brazil has sought to examine how the spread of bitcoin and other digital currencies could impact Brazil's economy, and whether formal regulation is necessary for the domestic industry.

Authored by Cesar Rodrigues van der Laan, a researcher at Banco Central do Brasil, the 18-page document concludes that Brazil should not immediately regulate bitcoin, arguing that there is not enough activity in local markets to warrant such rulemaking.

The paper goes on to highlight the varied response regulators have taken to bitcoin around the world, citing the stance taken by Russia, which has taken active steps to ban bitcoin, and the US, where state regulators are seeking to establish a framework for the industry.

Notably, the paper advocates that Brazil follow a similar path to the US, if and when it decides to introduce regulation for the industry:

"The US tax authorities [have] determined that virtual currency is an asset that must be declared and is subject to tax. In turn, the US Treasury has determined that significant transactions in bitcoins are reported to the authorities, as common currencies. Brazil should follow similar path, but only in case of further spread of this new financial asset."

Local entrepreneurs expressed optimism that the document, while not bullish on bitcoin's ability to compete against Brazil's national currency, would help further discussion regarding the potential benefits the technology offers in one of Latin America's largest economies.

"The Senate report encourages me to think regulators here are willing to understand these new technologies, they see it is relevant from a technological point of view and maybe it will be relevant from a financial point of view," Rafael Olaio, co-founder of local Ripple gateway Rippex, told CoinDesk.

The statement marks the third time a major authority in Brazil has issued a statement on bitcoin this year, following Banco Central do Brasil's warning in February and an April decision by the Receita Federal, the country's tax authority, that it would treat digital currencies as financial assets.

Bitcoin-based economy unlikely

Though touching on potential regulatory approaches, Van der Laan spends much of the paper theorizing about how a larger bitcoin ecosystem could affect the Brazilian economy.

The report opens with the context that global media outlets are increasingly interested in bitcoin as an alternative monetary system. However, it finds that bitcoin's furture for this purpose is unlikely given that it could lead to increased money laundering, it has a relatively new market and the fact that a significant number of local settlements are made in cash.

"Given their limited current range, especially in Brazil, we do not see systemic risk to the operation of the domestic economy," the report reads.

The paper goes on to state the while created to circumvent the financial system, it would be beneficial for the technology's users and investors to focus instead on its potential to reduce the cost of payments and online commerce.

Financial crisis concerns

Overall, the paper suggests that bitcoin may hold the most long-term promise as a cross-border payment system, though one that would require a regulatory framework at a later date.

In particular, the paper argues that a large movement to an unregulated market could have potentially negative influence on the market, one that should not be permitted due to the recent 2008-2009 financial crisis.

The report states:

"If there were lessons of the recent financial crisis is the consensus that globalized financial systems need more and not less regulation. For these reasons, it is difficult to consider plausible the hypothesis sovereign currencies be replaced by unregulated virtual currencies and without legal support."

However, the report concludes that whether bitcoin and similar technologies can provide any innovations in payments "remains to be seen".

"It will be adoption that will determine the real competitive potential of these new financial services," the report adds.

Start of dialogue

Local reactions to the report ranged from dismissive of its lack of impact on business to positive.

Andre Horta, CEO at bitcoin exchange startup BitcoinToYou.com, was enthusiastic about the report release, though he questioned whether a regulatory framework would not benefit local entrepreneurs like himself.

"Regulation can be good, because more people and companies would have greater security to use bitcoin to send money to another country without violating the current law. More than this, venture capitals firms and investor are waiting for official regulation of bitcoin to invest capital in bitcoin startups in Brazil," he argued.

Rippex's Olaio chose to focus on the more macro findings of the report, agreeing in particular that bitcoin will have a hard time competing with Brazil's native currency, the real.

"Volatility is the biggest hurdle for bitcoin's adoption as a currency. Today, its compared to gold, but the regular citizen never uses gold as an everyday currency," he said.

Horta, however, believes that the paper might have the most value as a way for the local ecosystem to start a dialogue with regulators, concluding:

"It will be wonderful if they open his door to discuss about bitcoin with the bitcoin community, to see that the bitcoin can be great, to reduce bureaucracy and reduce the costs to make money transfer, to make payments over internet or physically."