How crypto fits into Brazil’s vision for the future of banking 

Brazil, the financial hub of Latin America, has in recent years evolved into an important fintech hub as well. Will it become a cryptocurrency hub, too?

Cryptocurrencies have gained particular appeal across Latin America, as an alternative store of value and to guard against high inflation rates as well as for sending remittances. In Brazil, which has the largest economy in Latin America and one of the strongest currencies in the region, they have been especially popular with the financially savvy as a form of speculative investing or doing business abroad.

However, the financial landscape in Brazil is changing quickly. The country’s financial industry has seen a massive shift in the past decade or so, with the emergence of digital banks looking to revolutionize a traditional banking system known for high costs and lots of red tape. 

Noticing the interest in cryptocurrencies and fintechs alike, Brazil’s Central Bank has been pushing a broader policy agenda that focuses on using technology to lower barriers to entry for the nation’s financial system. 

At the moment, Brazil is still trying to figure out how digital assets fit into the equation. 

In theory, Brazil’s huge market and reputation as a financial hub could lay the foundation for a future environment in which cryptocurrencies and traditional fintech coexist on digital banking platforms, and people have more options than ever before for payments and financial services.

Why Brazil wants to disrupt its banking system

Many people in Brazil prefer to avoid the country’s banking system, which can be complicated and expensive to use.

According to research conducted in 2019 by Locomotiva Institute, about 71% of Brazilians preferred paying for things using cash and about 45 million didn't have a bank account at the time.

“Brazil's banking system is known as one of the most bureaucratic in the world, with the country's five largest banks holding 80% market share in the credit business,” Mary Saracco, co-founder and CFO of Buenos Aires-based Settle Network, said in an email. “In return, consumers are faced with very negative user experiences, with high barriers of entry and [foreign exchange] restrictions."

On the other hand, a high percentage of Brazil’s 212 million people have embraced mobile technologies. And the promise of mobile banking in the country has been put on display during the Covid-19 pandemic. 

Last year, as part of the so-called “Coronavoucher” program, the government had disbursed funds to about 66 million low-income people by August through an app from state-owned Caixa Econômica Federal (CEF) bank. About 36 million of those people were previously unbanked, according to a Mastercard-commissioned study of the program.

Settle, which calls itself the “largest digital assets settlement network” across Latin America, is one of more than 700 fintech companies that were operating in Brazil as of 2020, many trying to capitalize on the population’s dissatisfaction with the country’s banking system. Key players include digital bank Nubank, now valued at about $25 billion, payments solution provider EBANX and the e-commerce company PagSeguro.

According to Gilberto Martins, global regulatory affairs and legal director at EBANX, the boom of fintech and payment services in Brazil has helped improve financial access, addressing high costs and a lack of competition by providing products like no-cost digital accounts, more consumer-friendly credit cards, loan platforms with lower interest rates and digital wallets. 

“We bridged the access gap between Latin Americans and international companies such as AliExpress, Uber, Airbnb, Spotify and Wish, by offering over 100 local payment options to these merchants' clients,” he said. “Since then, over 70 million consumers who didn't have an international credit card, or even a bank account at all, were able to access global services and products by using their preferred, local payment method.”

One reason Brazil has become a hotbed for fintech firms is that its central bank, Banco Central do Brasil, has embraced digital payment technologies and platforms. The country is historically known for a lack of competition in the banking sector that has translated into high fees and lending rates. The bank is trying to turn that image around.

One of the most successful central bank projects so far is the instant payments system called Pix, which the central bank launched in November. People can use the Pix system to send money for free to friends, family or more than 700 institutions like banks.

Pix has become immensely popular in a short amount of time. The system has already logged 215 million registration keys (people can have more than one, as well as businesses), Brazilian financial news site Valor Investe reported in mid-April. It’s now responsible for 78% of bank transfers countrywide, reported Payment Media. Banco do Brasil even launched integration of Pix with WhatsApp, which allows users to scan Pix QR codes in the app and initiate transfers with voice commands.

By comparison, Mexico’s central bank-developed CoDi payment system — a QR-code-based platform that has also been mentioned among the top real-time payments platforms in the region — had only managed to pull in about 6.4 million users after more than a year of operations, according to S&P Global Market Intelligence.

In May of 2020, Brazil's central bank introduced a new "open banking" regulation that opened the door for financial institutions to share certain customer data. And in October it launched a regulatory “sandbox” for financial services. In general, these sandboxes allow companies to test new ideas in a controlled environment. 

The bank has asked for projects related to specific goals, such as financial inclusion, open banking, PIX instant payments and the foreign exchange and rural credit markets. If successful, the government would issue a license to participants to keep operating.

The program started taking applications for potential participants on Feb. 22. The application has now ended, and the bank said it will choose 10 to 15 projects to participate in the sandbox for at least a year. It plans to reveal the selected participants in September. 

It appears that startups developing blockchain-related technologies are eligible to participate. “Any project, regardless of the technology it uses, considering that it is within our legal competence and that it promotes improvements towards efficiency, coverage or capillarity gains, costs reduction or increased security, will be eligible to participate in the Regulatory Sandbox,” Banco Central do Brazil told The Block.

How crypto fits

Indeed, while crypto and fintech are often thought of as separate industries, there is potential for them to coexist in Brazil. 

The nation has been a significant market for digital assets for at least the past few years, spurred by its general inclination to adopt new technology and its collective knowledge of investing.  

According to the Brazilian website Cointrader Monitor, Brazilian exchanges appeared to have seen a 75.7% increase in real-dominated Bitcoin trading volumes in 2020, compared with 2019. Brazil-based cryptocurrency website Livecoins estimates that Brazil has at least 3 million crypto investors. Brazilian crypto exchanges moved the equivalent of about 53.3 billion reais (about $10 billion today) in 2020, according to Cointrader Monitor numbers.

According to a September 2020 report by U.S. blockchain analysis company Chainalysis, “Brazil accounts for by far the most cryptocurrency usage by on-chain volume of all Latin American countries.” 

Juan Mendez, chief brand officer for crypto exchange Ripio, said the cryptocurrency market in Brazil is more speculative compared with other places in Latin America like Argentina, where use cases revolve more around using digital assets as an alternative store of value. 

“In Brazil, the ecosystem is still very maximalist, very close to Bitcoin,” Mendez told The Block, noting that in Brazil the vast majority of trades on the main exchanges are in Bitcoin. Mendez said that in Brazil, Ripio’s user base is growing more than 10% —and its Brazil-based trading volume has been doubling — each month. Ripio's exchange platform has about 1.7 million users, about 700,000 of which are in Brazil.

Stablecoins have been gaining in popularity too, likely in part due to recent inflation. Real currency inflation reached above 5% for the first time in four years according to Reuters. 

It follows logic, then, that crypto companies like Ripio have seen big opportunities in Brazil. In January, the Argentine company acquired BitcoinTrade, the second-largest cryptocurrency exchange in Brazil by volume after Mercado Bitcoin. The company is working to integrate the two platforms so that users can access all of Ripio’s products in one place, Mendez said.

In December, crypto exchange and newly-minted unicorn Bitso raised $62 million to expand from its home base of Mexico into Brazil. “Everything in Brazil is bigger than in Mexico,” CEO Daniel Vogel told The Block at the time. 

To some extent, Brazil’s fintech boom is probably good for blockchain companies because it shows that new digital platforms can be easy to use and legitimate. And on one hand, the government does seem to be open to crypto. 

For example, in March Brazil’s securities and exchange commission (CVM) approved Latin America's first bitcoin exchange-traded fund (ETF), from QR Capital. The bitcoin ETF — a type of investment that is still not allowed in the U.S. — will be listed on Brazil's main stock exchange, B3.

On the other hand, recent comments from the central bank’s president, Roberto Campos Neto, suggest that policymakers would rather see traditional fintech platforms — particularly digital payments networks — generate the same kind of excitement that crypto has in Brazil. 

"We looked at what was happening in the world and saw this demand for cryptocurrencies, digital currencies, stablecoins, we understood what people wanted,” Campos Neto told journalist Nathalia Arcuri. What people are looking for is a form of payment that is “cheap, instantaneous, transparent, and open,” he said, and this is the idea behind Pix.

Brazil, like many countries, is also investigating the use of central bank digital currencies (CBDCs), and there have been reports that Brazil could have a CBDC system ready next year. Brazil’s Central Bank recently confirmed to The Block that it was studying the topic, but did not give a timeline for when it could be available. 

So how exactly does the government view cryptocurrencies? “I don’t think the government is promoting cryptocurrencies,” Mateus Nunes, founder of the Brazilian cryptocurrency news site Livecoins, told The Block. “What exists is a balanced posture of not suffocating the sector but also not opening up too much.” 

Regulations that pertain to cryptocurrency are still not well-defined beyond some tax guidelines. Brazil’s senate is considering a bill aimed at further regulating exchanges and punishing scammers, but the likelihood that it will become law is not clear. In the meantime, crypto-focused companies in Brazil have signed a code of self-regulation.

So, barring a broad government crackdown on crypto, digital assets may be destined to share the same stage with other digital banking tools in Brazil.

“Digital banking, cryptocurrency, artificial intelligence and blockchain technology remain on the path of totally changing the face of financial transactions worldwide,” EBANX’s Martins said. “And fintech regulation and data policies must run together to provide secure payment and internet infrastructure for users to adapt and adopt these new habits.”

Ripio’s Mendez predicts a future in which the walls between fintech and crypto have come down, and it is standard for fintech platforms to offer services directed toward fiat currencies as well as crypto. 

“Without a doubt, in a few years, all of the fintechs that want to compete in the financial market are going to offer the ability to buy and sell crypto.”