1 Legal and enforcement framework
1.1 What general regulatory regimes and issues should blockchain developers consider when building the governance framework for the operation of blockchain/distributed ledger technology protocols?
Most blockchain applications in Brazil involve financial services; therefore, financial regulations are commonly applicable and should be carefully considered. Broadly, these include monetary policy, securities regulation and insurance regulation. Taxation rules and general contractual rules are also relevant.
The Central Bank of Brazil (BCB) is responsible for monetary and financial regulation in general, which includes monetary policy, the stability of the financial system, coin emission, foreign exchange controls and so on. The BCB's regulatory controls are especially relevant regarding products that involve stable crypto coins.
The Brazilian Securities Commission (CVM) regulates the securities market. In the case of blockchain products involving tokenisation and related products, as well as public offerings involving crypto assets as an investment, CVM regulations should be observed. The CVM has issued several ordinances with a practical effect on blockchain-based products and has been the most active authority to date with regard to blockchain and crypto assets.
The insurance market, also a focus of blockchain-based products, is regulated by the Superintendence for Private Insurance (SUSEP). This industry has enjoyed considerable growth in recent years and SUSEP has been at the forefront of the regulation of blockchain-based products relating to the insurance market.
The tax regimes applicable to financial services and products should also be considered. The tax authorities - particularly at the federal level - have been paying close attention to the development of blockchain-based products and services, especially crypto coin negotiations and tokenisation of assets.
As regards smart contracts using blockchain, it is still unclear which regimes and issues will be the most relevant to consider. General contractual law, as outlined in the Brazilian Civil Code, shall apply. Depending on the final product being offered, a variety of sectors may be affected and various regulators may be watching. For the time being, we would highlight the consumer protection agencies, the National Industrial Property Institute and of course the courts, with regard to the validity of smart contracts in general.
1.2 How do the foregoing considerations differ for public and private blockchains?
It is expected that regulation of public blockchain applications will increase. It is anticipated that the authorities will focus on investor protection, consumer protection and financial stability, among other issues, which are particularly hard to monitor in the case of public blockchain applications. It is also expected that the authorities will spend more time and resources on developing ways to reduce the risks associated with public blockchain products; thus, stakeholders should prepare for much greater regulatory scrutiny in this regard.
Private or permissioned blockchains, on the other hand, tend to be regarded more as IT infrastructure, managed by a private company or organisation. The government's approach here tends to be lighter touch, since there is a central control in place, which allows for scrutiny by authorities and third parties. Also, in case of violation of any law or regulation, affected individuals or companies can use existing instruments (eg, courts, arbitration) to protect their rights, thus reducing the need for specific government intervention. In such cases, the authorities will probably concentrate their supervision on anti-money laundering and counter-terrorist financing controls, and cybersecurity.
1.3 What general regulatory issues should users of a blockchain application consider when using a particular blockchain/distributed ledger protocol?
Anyone interested in using a blockchain application should consider the following aspects:
- How popular is the protocol - for example, in how many jurisdictions is it operational? Being well known is an advantage in such a novel sector, as this might be indicative of the robustness of the protocol.
- Does the protocol have a presence in the country - a ‘face' that might play an institutional or representative role before the local authorities?
- How credible is the protocol - is it connected with atypical or unlawful activities or products?
- What is the protocol's capacity to comply with the regulations - although these should not differ too much from those applicable in other major countries, the protocol should nonetheless be sufficiently flexible to adapt to local rules.
1.4 Which administrative bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?
The BCB is responsible for monetary and financial regulation in general, which includes monetary policy, the stability of the financial system, coin emission and foreign exchange controls. It has strong oversight and investigative powers: it can issue warnings, impose fines, conduct audits and suspend or prohibit operations of financial companies and related individuals.
The CVM has a mandate to promote the development of the securities market, ensure its efficient functioning, protect investors and ensure that there is adequate information on the market. It is also the industry watchdog, with the power to authorise companies to operate, supervise market agents and impose sanctions. It issues and enforces its own regulations, which apply not only to companies, but also to individuals working in the securities market.
SUSEP is responsible for regulating the insurance, private pension funds and capitalisation markets. It has regulatory power over insurance companies, authorising their establishment and monitoring their operations. SUSEP has been cooperating closely with the BCB and the CVM in fostering innovative services in Brazil using new technologies such as blockchain.
The Federal Revenue Service (RFB) is the federal tax authority, with extensive powers to collect, regulate and issue rulings and fines in connection with federal taxes. The RFB has been very active in trying to frame blockchain businesses for taxation purposes. It recently issued Ordinance 1.888, requiring the disclosure of information regarding cryptocurrency transactions, under penalty of a fine if the information is inaccurate, incomplete, incorrect or overdue.
The recently created National Data Protection Authority is responsible for enforcing the data protection law in Brazil. It has broad regulatory and supervisory powers, including the power to issue regulations and rulings and to impose sanctions in the form of warnings and fines. It can also block or prohibit the use of personal data in case of infringements, as well as suspend the operations of a database and any data processing activities.
Along with the administrative sanctions applied by the abovementioned authorities, criminal or civil prosecutions may be pursued by state or federal prosecution offices, as appropriate.
1.5 What is the regulators' general approach to blockchain?
The general view is that blockchain is an important tool, with the capacity to transform important aspects of diverse markets and to affect various regulated sectors. Nevertheless, a high level of ignorance, mistrust and uncertainty still surrounds the capabilities and attributes of blockchain-based products. The approach apparent from official documents and regulations thus far appears cautious, and might thus be characterised as a nurturing ‘wait and see'.
This is perhaps most clearly evident in the approaches adopted by the BCB, the CVM and SUSEP. These are all recognised as very technical agencies, with strong regulatory capacities in their fields. In its 2019 Working Agenda, presented in May 2019, the BCB identified blockchain - along with artificial intelligence and cloud services - as a key aspect of a data revolution aimed at the democratisation of financial services. In a joint initiative, the BCB, the CVM and SUSEP are also creating a regulatory sandbox focused on applications based on distributed ledger technology, blockchain, robots and artificial intelligence. It is clear from this move that the agencies are seeking new ways to foster innovation while continuing to protect their regulated markets.
The tax authorities have taken a slightly different, more pragmatic approach, focused on the practical results of blockchain products and, of course, taxation. The RFB recently issued Ordinance 1.888, which imposes several obligations with regard to the trading of crypto assets.
The Brazilian Congress is another important stakeholder whose attitude to blockchain should be considered. While government agencies are responsible for interpreting and applying the existing legal framework, the number of legislative initiatives relating to blockchain, crypto assets and similar has increased significantly of late. Fierce debates and discussions are ongoing as to whether and how the technology should be regulated. As expected, since many of the issues that most resonate with voters concern fraud and Ponzi schemes, discussions in Congress have concentrated on how to protect the population against such schemes - sometimes at the expense of potential innovation.
1.6 Are any industry or trade associations influential in the blockchain space?
Two associations are focused on blockchain and cryptocurrencies: the Brazilian Cryptocurrency and Blockchain Association, established in 2018; and ABCripto, established in 2017. However, although these two associations claim to have dozens of associated companies, neither seems to be representative of the blockchain market.
Traditional associations have also become increasingly active with regard to blockchain. For example, the Brazilian Bank Federation recently announced the creation of a private blockchain network for the financial sector. Members of the Brazilian Financial and Capital Markets Association have also spearheaded initiatives involving blockchain-based business.
The public notary sector is also very powerful in Brazil and associations of public notaries are closely following the impact of blockchain solutions on their business. The National Association of Notaries is considered to be the most influential association in the sector.
2 Blockchain market
2.1 Which blockchain applications and protocols have become most embedded in your jurisdiction?
In terms of crypto coins, the top five on the Brazilian market are Bitcoin, Ether, XRP, Tether and Litecoin. Bitcoin is by far the most traded, although use of Ether is growing.
Smart contracts and other blockchain applications are still rare in Brazil, but we have observed a preference for Bitcoin and Ethereum protocols among the existing developers.
2.2 What potential new applications/protocols are most actively being explored?
Since late 2017, discussions on initial coin offerings (ICOs) have been ongoing in Brazil. In October that year the Brazilian Securities Commission (CVM) issued a formal press release indicating that an ICO would be considered a securities public offer and would thus be subject to the applicable regulations. Since then, however, although many stories about potential ICOs have been reported, no actual ICOs have taken place under the Brazilian regulation.
We have recently seen some initiatives involving asset tokenisation led by crypto coin exchanges and investment funds. These have been dubbed ‘alternative' investments, in comparison to traditional investments. They basically involve the offer of non-security tokens relating to real estate assets, judicial rights or other similar assets.
In the field of smart contracts, a few start-ups are now offering services using smart contracts and some major companies have declared an interest in using smart contract and blockchain-based applications in specific areas of their product and service offerings. However, it is still unclear how effective those applications currently are and will be in the near future.
2.3 Which industries within your jurisdiction are making material investments within the blockchain space?
The finance industry has the greatest interest in developing blockchain-based products. In this regard, the crypto coin sector is particularly relevant and has grown fast. There are now dozens of exchanges trading all relevant crypto assets and developing other services and products based on blockchain. Sadly, however, there has also been a wave of fraud and similar schemes using crypto assets as bait to lure ill-informed investors.
Within the financial sector, small investment firms, fintechs and crypto exchanges have invested heavily in blockchain solutions. Financial products should benefit significantly from the disruptive aspects of blockchain applications, and we are noticing relevant movement in securities, insurance and other related markets.
In other sectors of the Brazilian economy, interest in blockchain and its potential uses is also increasing. However, doubt and uncertainties remain as to how the technology might be used most effectively. To address this knowledge gap, two other segments have become very active in the blockchain space: training and legal. There has been a surge in the number of blockchain seminars, courses, workshops and similar programmes, to fill the need for quality information on the subject. Law firms are also leading efforts to enhance understanding of blockchain technology and its potential uses in many industries.
2.4 Are any initiatives or governmental programmes in place to incentivise blockchain development in your jurisdiction?
The main financial regulators are jointly creating a regulatory sandbox to promote the development of financial products using blockchain and other new technologies. A new regulation is under public consultation and should become effective in the first quarter of 2020. The agencies have primarily drawn on the experiences in the United Kingdom and the European Union in designing the sandbox.
In 2019 the Brazilian federal government also announced several studies and initiatives aimed at promoting blockchain applications in general. These initiatives are being led by different entities and agencies, such as the Brazilian Development Bank, the Ministry of Science and Technology and the Federal Service of Data Processing. Major states, such as São Paulo and Rio de Janeiro, have also announced blockchain-related projects.
3.1 How are cryptocurrencies and/or virtual currencies defined and regulated in your jurisdiction?
There is no legal or regulatory definition of ‘cryptocurrency' in Brazil. The authorities have preferred to use the term ‘crypto asset', which seems to cover both virtual assets and cryptocurrencies.
In Ordinance 1.888, issued by the Federal Revenue Service (RFB) on 3 May 2019, a ‘crypto asset' is defined as "a digital representation of a value defined in its own account unit, which price can be expressed in fiat coin local or foreign, negotiated electronically with the use of cryptography and distributed ledger technologies, that can be used as a form of investment, a mean to transfer values or access to services, and that does not constitute legal course currency". This is the only clear regulation thus far, and it focuses on the obligation to provide information on the trade of crypto coins for taxation purposes.
The Brazilian Central Bank (BCB) issued a notice in November 2017 warning of the risks associated with the purchase, trade and storage of crypto coins. The BCB emphasised that such coins have no guarantee and can cause monetary losses. It also stated that there is no need to regulate crypto coins as they do not pose a threat to the monetary system. This seems to be the prevailing position to date. In August 2019 the BCB adopted the International Monetary Fund's understanding of crypto assets, as recommended in the document entitled "Treatment of Crypto Assets in Macroeconomic Statistics", thus regarding them as "produced nonfinancial assets".
A couple of legislative bills are currently before the Brazilian Congress that would define and regulate crypto assets and crypto coins.
3.2 What anti-money laundering provisions apply to cryptocurrencies?
Brazil has had effective anti-money laundering laws in place since the late 1990s. In August 2019, when the Counsel of Control of Financial Activities was replaced by the Unit of Financial Information (UIF), the BCB - to which the UIF is subordinate - became the main agency responsible for monitoring and preventing money laundering and terrorist financing in Brazil. The tax authorities are also an important part of the anti-money laundering system.
The Brazilian authorities work in close coordination with international bodies, in particular the Financial Action Task Force.
All legal provisions are applicable to cryptocurrencies and exchanges, although there are no specific provisions focused on the sector. However, the recent Ordinance 1.888 of the RFB imposed certain information obligations connected to the trade of crypto coins which may well be used to prevent money laundering.
3.3 What consumer protection provisions apply to cryptocurrencies?
Brazil has a very effective, well-organised consumer protection system, comprising consumer protection agencies in every state, prosecutors' cabinets devoted to consumer protection and many active non-governmental organisations.
The framework for this system is set out in the Consumer Defence Code (Law 8078/90), which is robust in defending consumers and holding companies liable in case of violation of its rules. It applies to all transactions between a consumer and a company, and is thus applicable to transactions involving crypto assets where a consumer is involved in the transaction. By law, a ‘consumer' can be an individual or a company. Unsurprisingly, the consumer protection agencies have been called into action each time a Ponzi scheme has been discovered.
However, the capacity of the agencies to respond properly to such fraud is questionable. The technical complexity of the crypto market and the lack of proper regulation make it difficult to prevent such schemes from operating.
3.4 How are cryptocurrencies treated from a tax perspective?
From a tax perspective, cryptocurrencies are treated as digital value that is representative of an asset, according to Ordinance 1.888 of the RFB. As such, those that trade in cryptocurrencies are subject to the common tax on earnings. The ordinance also imposes reporting obligations on individuals, companies and exchanges in relation to crypto asset transactions. The ordinance sets out the first official definitions of ‘crypto assets' and ‘exchanges'. The RFB has also instructed taxpayers to include crypto assets in their annual tax declarations.
In our view, the purpose of the ordinance is twofold: assisting in the collection of revenue taxes while also imposing some controls over relevant transactions for anti-money laundering purposes.
3.5 What regulatory requirements apply to a cryptocurrency trader/exchange?
No specific regulatory requirements apply to cryptocurrency traders or exchanges. Thus, anyone can open and operate a crypto exchange as a customary services company.
In November 2017 the BCB issued a notice emphasising that such companies are not monitored or regulated by the BCB.
The recent Ordinance 1.888 of the RFB imposed some information obligations on exchanges, with regard to transactions in and holders of cryptocurrencies. This information can be used for both tax and anti-money laundering purposes.
All legislation and regulations regarding anti-money laundering, counter-terrorist financing, foreign exchange controls, consumer protection and similar apply to cryptocurrency exchanges.
3.6 How are initial coin offerings and securities token offerings defined and regulated in your jurisdiction?
Although there is no clear definition of a ‘security token offering' in Brazil, since October 2017 initial coin offerings (ICOs) have been regarded by the Securities Commission (CVM) as securities offerings to the public and thus as subject to the existing regulations applicable to securities offerings. Non-compliance with such rules - many of which must be observed prior to the offering - subjects the offender to penalties and fines. Any offering can also be immediately suspended by the CVM in case of non-compliance.
4 Smart contracts
4.1 Can a smart contract satisfy the legal requirements of a legal contract under the laws of your jurisdiction? What will be considered when making this determination?
In theory, a smart contract can meet the legal requirements for contractual validity under Brazilian law. Article 104 of the Brazilian Civil Code states that a valid contract must have:
- capable parties;
- a legal, possible and defined or definable purpose; and
- a form that is legal or not prohibited.
However, to date, no smart contract has been tested regarding its validity before any court or administrative body.
Important aspects in assessing the validity of a smart contract include proof of the will of the parties and the accuracy of the clauses ‘translated' into code. The enforceability of a smart contract may be undermined if such aspects are unclear.
Hybrid smart contracts - that is, contracts in which only part of the agreement is a smart contract - will probably be considered fully valid, as the contract would be clear on the will of the parties to have part of the relationship managed through a smart contract protocol.
Full smart contracts - that is, contracts entirely written in code - could encounter some difficulties in execution or enforcement. The Brazilian authorities and courts may have issues when it comes to proof of the will of the parties and demonstration of the clauses of the agreement, due to difficulties in auditing or checking the content of the contract.
4.2 Are there any regulatory or governmental guidelines or policies within your jurisdiction which provide guidance on regulating/defining smart contracts?
Currently, there are no governmental guidelines or policies that specifically concern smart contracts. Thus, the Brazilian Civil Code, applicable to all private contracts, will apply. The Brazilian Internet Rights Code (Law 12.965/14) will also apply, as it sets out principles and general rules regarding the use of the Internet, covering issues such as net neutrality, user protection and rights and liability of content producers.
Regardless of the lack of formal policies, the Brazilian Development Bank is developing a smart contract token based on the Ethereum blockchain to add greater accountability to the funding given to its projects. This kind of initiative, led by such an important institution, should help to increase the acceptance of smart contracts.
4.3 What parts of traditional contract might smart contracts be able to replace?
At this point, this is still unclear. We envisage that initial attempts will focus on replacing clauses in relation to which both parties should benefit from automation, such as identity and document checks which could be conducted digitally. Payment clauses, including fines for delays, also seem to be a good candidate for automation.
Where some clauses of service contracts are replaced by smart clauses, verification by a third party (an ‘oracle') may be needed to confirm that a given event has happened or a certain result has been produced. As yet, such third-party verification bodies are not part of the landscape in Brazil.
4.4 What parts of traditional contracts might smart contracts be unable to replace?
At present, smart contracts - given the intrinsic characteristics of blockchain-based agreements - might be incompatible with Brazilian law and/or legal culture. In the case of clauses that require an event analysis, such as in a service agreement, through which to verify whether a service has been delivered properly, the contracting party might need to perform certain actions, directly or through a third party. This would seem difficult to automate. It would also be difficult to automate clauses that may change many times throughout the life of the agreement.
Obviously, clauses that would not be valid in a traditional contract, such as clauses that contravene the law, will likewise be invalid and should not be incorporated in a smart contract.
Certain clauses are also subject to a high degree of interpretation, due to the existence of conflicting principles or rules under Brazilian law - for example, clauses that might be seen as unbalanced, creating what could be regarded as excessive benefits for one party to the detriment of the other. Agreements or clauses involving weaker or vulnerable parties, such as consumers or infants, will also be more open to judicial scrutiny and a high level of automation is thus not recommended in such cases.
4.5 What issues might present themselves in your jurisdiction with regard to judicial enforcement of smart contracts?
The technological aspects of blockchain and smart contracts will be an issue when it comes to the recognition of validity and enforcement by the courts. In this regard, proof of will is a challenge. It is unclear how and when the courts will be able to verify whether a given code corresponds to what the parties originally intended. In Brazil, judges rely on external experts when dealing with complex matters, such as technology. However, in the case of smart contracts, the technology itself is the essence of the matter, which will require a different level of understanding by the courts.
The virtual immutability and tamper-proof nature of smart contracts also pose a challenge, as the courts will face limitations regarding the possible solutions to be implemented. For example, it is very common to suspend or temporarily alter contractual clauses until the court has assessed their legality. In a smart contract, this might not be possible.
4.6 What are some practical considerations that parties should consider when drafting a smart contract?
Parties that are interested in using smart contracts should be aware of the risks involving flawed code design or misuse. They should also consider the limitations that the technology might present when dealing with obligations that must be fulfilled outside the smart contract environment. Situations that might require the involvement of other third-party software may present numerous risks, including how to trust that the information provided by an ‘oracle' is accurate.
The use of a locally accredited electronic signature or other means to ascertain signature identity is important where a smart contract is to be reviewed by a Brazilian court.
Costs might also be a problem when dealing with smart contracts deployed in public blockchains. Many interactions with a deployed contract incur mining fees for the storage of information. It is highly recommended to conduct a thorough cost analysis beforehand, which also takes into account local applicable costs such as taxation.
4.7 How will the foregoing considerations differ when smart contracts are running on a private versus public blockchain?
The use of private blockchain for smart contract deployment will probably be affected by the specific blockchain rules. Such rules might restrict access or provide for the performance of certain interactions within a smart contract. Therefore, a full understanding of the specific private blockchain rules is necessary to identify additional restrictions they might impose on intended smart contract operations. In addition, running smart contracts on private blockchains will incur different costs from those on public blockchains; this must also be considered for its successful operation.
From the perspective of validity, a smart contract based on a private blockchain protocol can address some of the issues that may arise before courts and third parties. A private blockchain can provide for proper mechanisms to allow government and courts to confirm that the will of the parties is being respected. It can also be sufficiently flexible to accommodate court rulings or administrative decisions if necessary.
5 Data and privacy
5.1 What specific challenges or concerns does blockchain present from a data protection/privacy perspective?
The very nature of blockchain-based products presents a challenge for data privacy regulators, particularly with regard to public blockchains.
The Brazilian Congress recently enacted a General Data Privacy Law, inspired by the EU General Data Protection Regulation, which will come into full effect on July 2020. There are at least two relevant challenges for blockchain applications in light of the new law: implementation of the right to be forgotten and the possibility to modify personal data records.
Although the new law does not provide for a clear right to be forgotten, the general principle is that personal data should be deleted once the purpose for which it was collected has ended. This is the case:
- when the objective of the use of the data has been verified;
- at the end of the treatment period;
- upon notice from the owner of the data or
- by determination of the data protection authority.
Of course, in the case of a public blockchain application, the deletion of data is virtually impossible. This could imply a conflict between the new law and the very nature of blockchain. Commentators aware of this problem have stated that the new law itself contains the solution, as it provides for the consideration of technical limitations with regard to the deletion of data.
The second issue concerns the possibility to modify personal data, which is provided for by the new law. Again, due to the very nature of blockchain, it is not generally possible to overwrite any stored records. Once again, the law provides for the consideration of technical limitations in order to remedy such apparent incompatibilities.
The above will certainly apply to public blockchains. As regards private or permissioned blockchain applications, since the technical barriers outlined above may not necessarily exist and - equally importantly - since a central authority can be pursued and compelled to act, it is expected that such blockchain protocols will be checked for full compliance with the new law.
5.2 What potential advantages can blockchain offer in the data protection/privacy context?
The features of blockchain - such as traceability, immutability and their tamper-proof nature - are potentially advantageous in a variety of situations in relation to data protection and privacy. In principle, the existing regulatory framework in Brazil poses no obstacle to such solutions, although it is difficult to anticipate them at this point.
There are very early-stage solutions being developed in Brazil that use the traceability afforded by blockchain solutions to track money in case of payments or donations. Other related services aim to use blockchain solutions to register internet pages in an immutable record, thus allowing them to be used as proof before the courts.
6.1 What specific challenges or concerns does blockchain present from a cybersecurity perspective?
Cybersecurity is a serious concern for companies and individuals in Brazil. As the population goes digital – embracing online shopping, internet banking and similar services –companies are increasing their investments in cybersecurity. However, there is a significant lack of technical and human resources to implement adequate cybersecurity measures. In addition, a huge portion of the population – and even many companies – are still unfamiliar with more complex digital applications beyond email and social networks, and are thus poorly educated on cyber threats.
These same challenges apply regarding blockchain applications. Developers must take into account the dearth of skilled technical personnel when developing and implementing their products in Brazil, which may have security implications. The lack of digital education is also a challenge: should security issues arise, it may be difficult to identify whether a security failure was caused by a product flaw or user error. As the average user may be vulnerable to cyberattacks, additional care regarding security is advisable. Furthermore, Brazil has a strong consumer protection regime, so it is likely that any administrative or legal dispute will be resolved in favour of the consumer.
6.2 What potential advantages can blockchain offer in the cybersecurity context?
As blockchain-based systems are seen as more secure and resilient, this is widely recognised as a tool that can improve cybersecurity across different sectors. The advantages of using blockchain for security purposes include operational resilience, identity protection, immutability (data integrity), traceability and auditability. All these features are pertinent to the Brazilian context, but we believe that operational resilience is the most relevant. In our view, the combination in Brazil of poor infrastructure, an untrained workforce and a consumer base which is largely unfamiliar with digital applications may prove challenging to the stability of blockchain-based services and products. In this scenario, resilience, flexibility and an ability to recover quickly will be very advantageous.
6.3 What tools and measures could be implemented to mitigate cybersecurity risk?
We would recommend that workforces be trained on cybersecurity issues. This training should form part of a larger compliance plan covering other potential risks – such as privacy, data protection and anti-money laundering – which are directly related to cybersecurity, as they usually serve as a ‘backdoor' for cyberattacks. Clients should also be educated and informed on these matters. Clear and transparent communication on the risks of a given product or service, and the user's role in reducing them, should be included in any legal documentation. Any breach event should be taken very seriously and managed carefully, following a comprehensive compliance strategy. Finally, partners should be wisely chosen and required to adhere to a compliance programme, as they can be a weak link in any cybersecurity strategy.
7 Intellectual property
7.1 What specific challenges or concerns does blockchain present from an IP perspective?
The National Institute of Industrial Property (INPI) is the official government entity responsible for intellectual property in Brazil. It governs trademarks, patents, industrial designs, software registration and similar rights. As a member of the World Intellectual Patent Organization, Brazil has aligned its IP framework with international practices.
Due to a lack of resources – both financial and human– at INPI, there is a significant backlog of patent applications, which is a major hurdle for businesses that are seeking patent protection for their innovations. This will be a concern if a specific blockchain application requires patent protection. However, blockchain applications may also be regarded as software, which is also protected by INPI (see question 7.2). Other relevant concerns include the steep learning curve among patent officials with regard to blockchain applications. It is hoped that international cooperation may help to mitigate this.
Another common concern in the Brazilian IP ecosystem is enforcement. Any IP infringement is considered a private matter and requires the rights holder to seek a court decision ordering cessation of the infringement or the payment of compensation. However, the courts' ability to decide on complex technical matters is limited, which can affect the speed of proceedings. As blockchain is still a very new technology, additional difficulties may be faced in enforcing IP rights relating to blockchain applications.
7.2 What type of IP protection can blockchain developers obtain?
Developers can protect blockchain-based products under Brazil's IP system in a similar way as software. Software is not patentable in Brazil, but developers can obtain copyright protection, equivalent to that granted to literary works. In this case, the applicable legislation grants protection for 50 years. That said, we understand that a major credit card company has obtained a patent in Brazil for a transactions system based on blockchain, through a Patent Prosecution Highway process.
7.3 What are the best open-source platforms that could be used to protect developers' innovations?
At this point, it is unclear which open source platforms would provide the best protection for developers' blockchain innovations.
7.4 What potential advantages can blockchain offer in the IP context?
Blockchain applications can benefit the IP ecosystem in several ways. They may be used to:
- improve the efficiency of the patent authorities' operations;
- reduce information storage costs;
- facilitate communications between government agencies through secure database sharing; and
- accelerate processes in general.
Blockchain could also afford the advantages of transparency and immutability to official registers, ensuring greater security for all players in the sector. In this regard, entrepreneurs, creators and companies in general could use blockchain-based services to protect their intellectual property, in anticipation of or in parallel with (or even regardless of) developments at INPI.
Blockchain also affords advantages in terms of monetisation. Many blockchain platforms already facilitate the monetisation of IP rights by marketing works directly to consumers, with no intermediary. This could be a cheap and efficient way for content creators to generate income. In a poor country such as Brazil, this could help numerous persons and companies to be properly compensated by their work in a simple, cost-effective manner.
8 Trends and predictions
8.1 How do you think the regulatory landscape in your jurisdiction will evolve in the blockchain space over the next two years? Are any pending changes currently being considered?
The regulatory authorities that are directly involved in blockchain regulation – that is, the Central Bank of Brazil, the Brazilian Securities Commission and the Superintendence for Private Insurance – remain very open to innovative products and services. They are likely to expand initiatives such as the regulatory sandbox and public consultations to foster competition and innovation in their respective sectors. Blockchain will be part of many new applications and the regulators will develop proper regulations accordingly, which will direct other authorities and agencies on how to deal with blockchain in their respective sectors.
The tax authorities will continue to pay close attention to cryptocoins and cryptoassets. The effectiveness of Ordinance 1.888/19 as an instrument to monitor the crypto market will be put to the test and new ordinances may be enacted as needed. Brazil is in a fiscal crisis: the tax authorities are under constant pressure to deliver revenue and they will not miss any opportunity to do so in relation to a promising new application such as blockchain.
In general, the government will increasingly explore the use of blockchain applications, seeking cheaper, more efficient processes in all areas and sectors. The government has a set of organisations and departments that are exclusively devoted to developing its own proprietary IT solutions.
Congress and local legislative bodies will continue to pursue legislation to combat fraud. There is a real risk that inadequate, overly restrictive legislation may be enacted. Sector associations will have to find ways to persuade Congress to pursue less intrusive legislation. Possibly, as with other disruptive technologies, the force of innovation may become so powerful that society will demand access to it – as happened with Uber in Brazil.
The judiciary will continue on its slow learning curve. More questions relating to the protection of consumers and investors will come before the judiciary, which will take forceful action to combat fraud schemes and money laundering. At this point, it seems that it will take longer than two years before major issues such as the validity of smart contracts and the privacy issues associated with blockchain will come before the judiciary. We expect that many sensitive aspects of the use of blockchain – both known and as yet unknown – will be resolved within the regulatory space, due to their technological nature.
8.2 What regulatory changes would you like your jurisdiction to implement to further advance the blockchain industry?
A clear legal definition of the main elements of the blockchain ecosystem, such as cryptocurrencies, cryptoassets, cryptocoins, smart contracts and initial coin offerings. This would promote greater interaction between blockchain-based solutions and the existing legal framework, thus making it possible for new business models to thrive under a proper regulatory framework.
The definition in law of which agencies regulate specific types of blockchain products would also help to foster the development of the industry. Knowing which regulator has jurisdiction and its views would give developers greater confidence in developing products and services.
Another important initiative would be to formulate and present a clear strategy for the development and implementation of blockchain services in the public sector. As government and state-owned companies represent a significant part of the Brazilian economy, their capacity to influence the market is considerable.
Finally, rather than reinventing the wheel, regulators should learn from successes in other jurisdictions, particularly civil law jurisdictions such as those in as continental Europe. Opening the market to foreign companies focused on blockchain products and encouraging those companies to set up shop would also prove advantageous.
8.3 What is the largest impediment within your jurisdiction to the adoption of blockchain technology?
The absence of comprehensive regulations on blockchain is preventing its broad adoption by companies and individuals in Brazil. The high level of uncertainty is discouraging investment in the technology – especially by corporations and government, but also by entrepreneurs. At the same time, to be effective, any regulations should be smart, reducing uncertainty without imposing unnecessary burdens.
Both the Brazilian Congress and local legislatures are very susceptible to lobbying from powerful interest groups. A variety of markets and sectors will be affected by blockchain applications, which may present cheaper, faster, more efficient solutions to many problems faced by society. Those interest groups will work hard to prevent blockchain from disrupting their sectors and markets; they might include players in the financial sector, public notaries and certain professional associations whose businesses could be disrupted by blockchain-based solutions. The lack of proper regulation makes it possible for such groups to press for rigid rules in a bid to protect their businesses.
9 Tips and traps
9.1 What are your top tips for effective use of blockchain technologies in your jurisdiction and what potential sticking points would you highlight?
- The novelty factor of blockchain presents significant opportunities. Plenty of companies and individuals are looking for new solutions to existing problems; developers should focus on these to begin with.
- Partner with local companies with a good reputation. But do your due diligence, as there are still many unreliable players in the blockchain environment.
- Developers of applications focused on individual consumers should take extra care to provide clear and transparent information, as this will help to mitigate the risk of consumer complaints.
- Be resilient – like any other emerging country, Brazil is economically and politically unstable. Government is complex and bureaucratic. Consumers, though numbering in the millions, are mostly low income. However, companies that persist and learn how to navigate this environment can be rewarded with high returns.
- Local governments (cities and states) – despite their limited jurisdiction over areas which can impact most significantly on blockchain – have plenty of latitude to take action to discourage blockchain-based solutions.
- Be aware that specific interest groups will oppose blockchain products that might affect their position in the market. These groups will doubtless use their access to federal and local authorities to try to block innovative new products.
- Taxation is a nightmare, and services or products based on a new technology will face a high level of uncertainty. Be sure to get good advice in this area.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.