Brazil Crypto Rules Trigger Broad Exit as Only 40 Firms Apply for Licenses

Brazil’s tighter regulation of crypto firms is set to push a large number of operators out of the local market.

Bitcoin.com reported on November 2 that only about 40 companies submitted applications by the Brazilian central bank’s October 30 deadline for virtual asset service provider, or VASP, operating licenses. That was far below earlier expectations that 150 to 200 firms would apply.

Companies that filed by the deadline can continue operating while the central bank reviews their applications. Firms that did not apply must wind down operations and leave the market within a month of October 30. For new entrants, the licensing review can take as long as two years, slowing entry into the market.

The industry has pointed to steep capital requirements and compliance costs as the main reasons behind the low number of applicants. Thiago Severo, a lawyer at Brazilian law firm PSNA, said small and mid-sized firms abandoned plans to stay in business because they could not meet the new framework’s reporting obligations and internal-control standards.

Under the new rules, firms must report daily to the central bank on virtual-asset custody holdings for each customer and submit monthly proof-of-reserves documents. They must also maintain audited financial statements for the past three years and anti-money-laundering systems capable of undergoing external audits. Severo said the cost of maintaining those requirements had become a major burden for smaller platforms.

Major players including Binance and Itau, one of Brazil’s largest financial institutions, have completed their license applications. That has raised the prospect of a market reshaped around larger firms with the capital and compliance capacity to meet the new rules. Small and mid-sized financial institutions and retailers may offer crypto services by using the infrastructure of licensed operators instead of running their own exchanges.

Transactions by unlicensed firms through the existing financial network will also be restricted. Starting November 6, Brazilian banks and payment service providers will no longer be able to support transactions for crypto firms outside the regulatory framework. That will make it harder for companies that did not apply for licenses to access the local fiat payment network.