The Securities and Exchange Commission of Brazil (CVM) published CVM Guidance Opinion 40, approved by its joint committee, on October 11th. The document makes public the regulator's consolidated understanding of the rules applicable to cryptoasset securities. The aim of the agency is to guide market participants and bring legal security and predictability to development of the sector.

Cryptoassets, or virtual assets, are divided into cryptocurrencies, such as bitcoin, altcoins, and stablecoins, and tokens, such as utility tokens, security or equity tokens, and non-fungible tokens (NFT).

CVM's position is that bitcoins and most other cryptocurrencies are outside its regulatory scope, as they are not considered securities or financial assets.[1] The competence of the agency, therefore, does not cover service providers that perform administration, management, custody, or operate exchanges on which only cryptocurrencies are traded.

Tokens, in turn, may fall under the regulatory reach of the CVM, provided they are classified as securities. When this occurs, all service providers involved in the issuance, public distribution, centralized deposit, clearing and settlement, bookkeeping, and issuance of certificates, custody, as well as brokers that act, directly or indirectly, in the secondary trading of these tokens must comply with CVM regulations applicable to the respective professional activities performed.

Currently underway in the National Congress, Bill 4,401/21,[2] known as the Legal Framework for Cryptocurrencies, proposes regulation of virtual asset service providers. Its main regulatory focus, however, is virtual assets used for investment or payment that are not considered securities, since there is no regulation of their activities or supervision by a regulatory body.

The bill expressly excludes regulation of virtual assets considered securities, which are already subject to Law 6,385/76 (Capital Markets Law) and to the CVM’s supervision.

There is, therefore, complementarity between the initiatives of the CVM and the Legislative Branch regarding the regulation of the cryptoasset sector (virtual assets) as a whole. The Legal Framework for Cryptocurrencies bill even makes it clear that the CVM's jurisdiction over tokens considered securities should remain unchanged.

Regarding CVM Guidance Opinion 40, we highlight the main guidelines:

  • Technological neutrality: following the international trend, the CVM adopts a neutral posture in relation to the technologies employed and is receptive to new technologies. The technologies behind cryptoassets (e.g. blockchain or other DLT) are not subject to regulation in the capital markets, nor are they relevant to the process of classifying an asset as a security or for submitting a certain activity to CVM regulation.
  • Cryptoasset categories: the CVM chose to adopt a functional approach in categorizing cryptoasset to indicate their legal treatment, classifying them among:
  • Payment tokens: their functionality replicates that of currencies, as a unit of account, medium of exchange, and store of value.
  • Utility token: their functionality is to purchase or access a certain product or service.
  • Asset referenced token: their functionality is to represent one or more assets, which can be tangible or intangible, such as, for example, security tokens, stablecoins, non-fungible tokens (NFT), and other assets subject to tokenization operations.

A single cryptoasset may fall into more than one category according to the functions performed and the associated rights. Furthermore, tokens may or may not be characterized as securities, depending on the analysis of each case, based on the guidelines explained below.

  • Classification of cryptoassets as securities: the classification of cryptoassets as securities is important as this brings about the CVM's jurisdiction over issuers and public offerings of these virtual assets, as well as the agents involved in the brokerage, bookkeeping, custody, centralized deposit, registration, clearing, and settlement of transactions involving cryptoassets considered securities, in addition to the administration of organized markets for secondary trading of this type of cryptoasset.

According to the CVM’s guidance, cryptoasset securities should be considered securities in the following cases:

  • If the token is characterized as a publicly offered collective investment contract that generates holding, partnership, or remuneration rights, including those resulting from the provision of services, whose income arises from the efforts of the entrepreneur or third parties, as set forth in subsection IX of article 2 of the Capital Markets Law.

This can occur even if the collective investment vehicle invests in or takes on exposure to cryptoassets that are not considered securities, such as bitcoin or other cryptocurrencies. According to the administrative case law of the CVM, the characterization referred to in the above paragraph does not depend on a prior opinion of the CVM but on the application of the Howey Test, which will be explained below.

  • If the token is the digital representation of any of the securities provided for in subsections I to VIII of article 2 of the Capital Markets Law, that is:
  • shares, debentures, or subscription warrants;
  • coupons, rights, subscription receipts, and certificates of splitting of such receipts;
  • certificates of deposit of securities;
  • debenture notes;
  • quotas of securities investment funds or investment clubs in any assets;
  • commercial notes;
  • futures, options, and other derivatives contracts, whose underlying assets are securities; and
  • other derivative contracts, regardless of whether or not the underlying assets are cryptoassets.
  • If the token is the digital representation of certificates of receivables offered publicly or admitted for trading on a regulated securities market, as provided for in article 20, paragraph 1 of Law 14,430/22 (Legal Framework of Securitization Companies).
  • Collective investment contracts and the Howey Test to characterize a publicly offered cryptoasset as a collective investment contract under the terms of subsection IX of article in order to classify a security as a marketable security, the CVM uses the Howey Test, inspired by the method used by the U.S. Securities and Exchange Commission (SEC).

The CVM lists the characteristics that must be taken into consideration for classification purposes when analyzing a case:

  • investment;
  • formalization;
  • collective nature of the investment;
  • expectation of economic benefit by entitlement to some form of holding, partnership, or remuneration, which must result from the efforts of the entrepreneur or a third party, and not from external factors, such as, for example, equity participation or redemption rights, remuneration agreements, and receipt of dividends;
  • entrepreneurial or third-party effort, such as when the entrepreneur's or the third party's actions are necessary for the creation, improvement, operation, or promotion of the enterprise; and
  • public offering.
  • Public Offering: the public distribution of cryptoassets considered securities in the capital markets is subject to prior registration with the CVM, as provided for in article 19 of the Capital Markets Law, except in situations in which the distribution is expressly exempted under the terms of the infra-regulatory rules issued by the CVM, as delegated to the agency by articles 8, I, and 19, paragraph 5, of that law.

At the infra-legal level, issues and offers for public distribution of securities are currently regulated by the CVM in CVM Instruction 400/03 and in Instruction 476/09. These two instructions, however, will be replaced and repealed on January 2, 2023, with the entry into force of CVM Resolution 160/22, which will inaugurate a new regulatory framework for public offerings of securities.

In addition, as the public offering of cryptoasset products is common through the internet and without geographic restrictions, the CVM advises that, in this case, one must observe the parameters of CVM Guidance Opinion 32 and CVM Guidance Opinion 33, both of 2005 and applicable to public offerings of securities issued abroad for a target public residing, domiciled, or incorporated in Brazil.

In the new opinion, the CVM supplemented the guidelines given in 2005 with information regarding the criteria to be taken into consideration in the evaluation of the:

  • effectiveness of measures to prevent the general public from accessing the page containing a private offering of securities; and
  • irregularity of public offerings of securities abroad, without the due registration with the CVM, and of brokerage of transactions with securities issued abroad, including derivatives, intended, in both cases, to the general public resident in Brazil.
  • Informational framework and valuing of of transparency: based on the principle of wide and adequate disclosure that guides the information framework adopted by the CVM, the agency has guided the participants of the cryptoasset market classified as securities to value maximum transparency in their issuance, public distribution, and trading in the secondary market.

 

It recommended that the applicable regulation on this subject be observed and pointed out as an example CVM Resolution 80/22, CVM Resolution 86/22, and CVM Resolution 88/22, as applicable in view of the characteristics of the cryptoassets and the issuer, under the terms of articles 19 and 21 of the Capital Markets Law. As explained above, the current regulations applicable to public offerings of securities must also be complied with.

Regarding the admission for trading in the secondary market, the agency guided that cryptoassets classified as securities must be traded in organized markets that have authorization from the CVM, pursuant to CVM Resolution 135/22.

In a complementary way, it highlighted as an example a minimum set of information related to the rights of crypto holders and to trading, infrastructure, and ownership of cryptoassets, the provision of which in language accessible to the target audience of the offering was considered important by the agency.

The regulator has indicated that it may evaluate the creation of a more flexible framework in the future depending on the evolution and development of the issue. For now, it recommended that market participants give preference to broad transparency and observe all the rules that guide the disclosure of information in effect regarding their respective activities, so that the investor can make a more informed investment decision.

  • Role of brokers: the CVM highlighted the role of brokers that act, directly or indirectly, in the secondary market for trading of cryptoassets considered securities. In addition to the duty to observe applicable regulations, the agency again emphasized the importance of disclosing information to investors.

It recommended that, within their area of expertise, these participants act to ensure an adequate level of transparency and information regarding the characteristics and risks associated with virtual assets in trading, especially when cryptoassets are offered directly, rather than through a regulated product such as, for example, investment funds and ETFs - these investment vehicles are already required to comply with a fairly comprehensive information arrangement.

In the case of business partnerships conducted by brokers, the CVM’s guidance is that they promote due diligence on the internal controls of business partners to mitigate risks and assess whether the investor should be informed about the nature and extent of the business partnership. It also directed that they have segregations and safeguards of an operational, structural, and regulatory nature to prevent any problems arising from a non-security cryptoasset trading environment from impacting on the business of brokers.

Brokers must also, if trading partners offer cryptoassets that are not securities or provide services outside the cryptoeconomy, inform the target audience of the associated risks.

  • Investment funds: the CVM allows indirect investment in crypto assets abroad by investment funds, pursuant to article 98 et seq. of CVM Instruction 555/14.[3] Direct investment, on the other hand, is not allowed, as the regulator has ruled out the possibility of cryptoassets being considered financial assets for the purposes of article 2, subsection V, of CVM Instruction 555/14.[4]

In CVM Guidance Opinion 40, the agency maintained its understanding on the matter, reporting that the evolution of the treatment of the topic depends on the deepening of studies and interactions with the market.

The regulator's focus was to convey guidance for fund administrators and managers to adopt new criteria and take the steps necessary to increase the level of transparency, and to adequately disclose the risks linked to cryptoassets in the funds' mandatory disclosure materials, with an emphasis on describing the risks related to virtual assets based on innovative technologies, such as NFTs.

The CVM also addressed the Regulatory Sandbox experience, reporting that three projects related to tokenization of securities have been approved and given temporary permits to be tested in the market with regulatory waivers. For the regulator, this initiative is a tool that allows evaluation of the need for revision and regulatory updating to accommodate new technologies.

As explained in CVM Guidance Opinion 40, the regulator is tracking the evolution of innovative technologies and use cases for cryptoasset securities classified as securities in the capital markets and related activities. The agency has anticipated that it may regulate this new market, within the limits of its competence, if it sees the need, based also on the experience of the Regulatory Sandbox. Approval of the opinion by the joint committee consolidates the regulator's understanding on the subject and also points in this direction.

The CVM took advantage of the communication with the market to alert participants that it is vigilant and will take the appropriate measures for the prevention and punishment of violations of the laws and regulations of the securities market in the cryptoasset market that may be identified.

We are at your disposal for any further clarifications on this subject.

 

[1] According to Circular Letter 1/2018/CVM/SIN, of January 12, 2018.

[2] After being approved in the House of Representatives, the text was approved in the Federal Senate, with amendments to the merits, and, therefore, was sent back to the House of Representatives, where it awaits approval on the floor.

[3] As per Circular Letter 11/2018/CVM/SIN, of September 19, 2018.

[4] According to Circular Letter 1/2018/CVM/SIN, of January 12, 2018.