The Banco Central do Brasil has published a consultation relating to cryptocurrency, cross border payments and foreign exchange. It proposes to ensure that only virtual asset service providers (VASPs) authorized to deal in FX can conduct cryptocurrency transactions for cross border payments and foreign exchange (FX) purposes. Additionally, it plans to ban the transfer of foreign currency stablecoins to domestic self hosted wallets and restrict the use of foreign currency stablecoins for domestic payments.
This self hosted wallet restriction attracted attention from the cryptocurrency community. Stepping back, it appears that the central bank wants to keep tabs on cross border payments. If money can go to self hosted wallets, from there it can be transferred abroad without any reporting.
An additional proposal includes banning all cryptocurrency transfers (not just stablecoins) to foreign self hosted wallets. Authorized Brazilian VASPs can also only make transfers to foreign regulated institutions.
Currently, Brazil does not have any material capital controls and has a free floating exchange rate. Hence, these moves appear to be for monitoring purposes. The Brazilian real was moderately stable for the four years to 2023, but has devalued by 23% over the past year. Whether or not one agrees with the moves, from the central bank’s perspective, these proposals will allow it to monitor what’s driving that devaluation more effectively.
One take was provided by the COO of the Unity Wallet, James Toledano, “This is precisely what led to the birth of Bitcoin and DeFi. These types of policies are the exact ones that drive people to DeFi in the first place.”
Preventing stablecoin dollarization
However, the central bank initiative also appears to be an attempt to tackle the potential dollarization of the economy pre-emptively. One of the proposed clauses effectively prevents residents from using foreign currency stablecoins for payments. Such payments would only be allowed “in the event of legal or regulatory provision for stipulating payment in foreign currency”.
Cryptocurrency observers have noted that the proposal does not ban the holding of other cryptocurrencies in self hosted wallets, so investors could switch from a stablecoin to Bitcoin and transfer that to a self hosted wallet. That’s true, but for average person who just wants to hold dollars, that’s more volatile compared to dollars. Hence, those people are more likely to hold stablecoins on a cryptocurrency exchange.
Meanwhile, stablecoin usage is growing for cross border payments, including between Latin America and the United States, as highlighted in a recent stablecoin report from Brevan Howard Digital and Castle Island Ventures. The acquisition of Bridge by Stripe is likely to accelerate these trends.
