Part of a series of deeper dives on BRICS members to see their individual economic and political trends to try to imagine how they will move forward on crypto and how this may affect the BRICS perspective on crypto.
Today, we focus on Brazil in BRICS, often called the “Jaguar”.
-Brazil ranks 9th globally in economy size and 5th in land area.
-Switches regularly between extreme opposing views, like a pendulum, due to political instability.
-A strong man centralized political system persists throughout the constant changes.
-A very centralized economic system with high inequality.
-Expect strong government regulation or perhaps even banning cryptocurrencies.
-Expect strong interest in CBDCs with extremely centralized control.
-Expect the opposition to support the opposite.
Historical Background – Chaotic Beginnings and Resource Economy:
In 1500, Portuguese arrival marked the start of a resource-extraction-to-export economy. Early exports included brazilwood. The pace accelerated with sugar plantations, gold mines, and diamond mines, spanning the 1800s. Harsh conditions prevailed: 6 million slaves were brought from Africa to replace native slaves that died doing the hard labor. Conflicts with other natives, other Europeans, pirates, and slaves, complicated matters. Centralized control from afar, through wealthy landowners and the Church, fueled disunity. Autocratic rule continued even after independence in 1825. Wars with neighbors followed, affecting Brazil’s aversion to external interference. Most wars involved Argentina on the opposing side making the addition of Argentina to BRICS in 2024 an interesting situation.
By 1850, coffee made Brazil a major global supplier, but land degradation forced shifts. Rubber enriched the Amazonian regions. In 1889, a coup ended the monarchy, initiating diverse leadership phases – military coups, communists, and juntas.
Industrialization began in 1930, seeking ties with the US due to security concerns about Argentina’s militarization. WWII shifted Brazil to the Allies. A military regime ruled (1964-1985), curbing freedoms, fostering economic growth, but causing inequality and unrest.
Democracy returned in 1985, facing hyperinflation. Successive leaders privatized, managed crises. In the 2000s, Lula da Silva won support from the poor by continuing some policies, but also improving lives with initiatives around healthcare, poverty, and quality of life. Despite controversies, poverty reduction secured his re-election in 2005.
Lula’s successor, Dilma Rousseff, faced protests over spending and recession. During this time Lula was imprisoned on corruption charges.
Jair Bolsonaro won in 2018, prioritizing security, infrastructure, and economic openness. Despite controversies, especially keeping the country open during Covid blamed for many deaths, he fought corruption and expanded connectivity through infrastructure during his tenure.
In 2022, Bolsonaro supporters clashed with Lula backers. A stark divide exists with no common ground in sight:
Left rule: chaos and insecurity, poverty and inequality reduction, healthcare gains, economic instability, high inflation and government spending.
Right rule: enhanced infrastructure, security, economic growth, but poverty and healthcare challenges.
Over two centuries, blending these approaches has proved elusive due to powerful ideological divisions. South American leftism is very anti-American and very pro-Soviet, historically, which makes Lula’s support for BRICS no surprise. The country is currently facing the problems that come from virtually every left-leaning government in Brazil’s history, causing a stir that could see power shift back to a right-leaning government again. As usual, Brazil remains unstable. In these conditions thousands of businesses have fled the country to rebuild somewhere else, some even in the high tax and high social safety net center of Europe as they see the costs of higher taxation to be less harmful to their business than economic uncertainty and government corruption. Brazil has a long way to address this balancing act challenge seeing its history of jumping back and forth between two extremes on every economic issue.
Brazil – Definition of an Emerging Economy
On top of having an unstable political and thereby unpredictable regulatory system, Brazil also meets other criteria of an emerging market economy. Namely, most of the country’s production and exports are raw materials such as iron ore, Soybeans, Crude Petroleum, Raw Sugar, Poultry Meat, and Gold. This would be indicative of a non developed market economy if not for some industrial production sneaking into the mix with Refined Petroleum products, Cars, Pig Iron being exported as well. While a developed economy still produces and may export large amounts of raw materials, it makes most of its trade balance income from exporting industrial products. For a good view of the make-up of Brazil’s current exports see the OEC visualization of Exports in 2021 by percentage of exports.
Then compare it to its main imports; nearly all processed and industrial high end goods such as Refined Petroleum, Motor Vehicles, Integrated Circuits, Semiconductors, Cars, Vaccines, Fertilizers, Pesticides. The last two being essential to keep production levels of Soybeans and other agricultural production.
If this was all the information we had we would say Brazil is a non developed market economy but it does have some industries such as Embraer that produces planes, that produce higher technological products. Not nearly on the level of China, Russia, or India, but still much more than most economies in South America, Africa, Eastern Europe, or South-East Asia.
Brazil’s Trade Partners: BRICS or the West?
The following visualization from OEC is the percentage of Brazil’s exports by destination country and continent.
And then the percentage of imports by country and continent of origin:
From these we see that Brazil trades mostly with Asia and Europe, China and the US. In exports Argentina comes third, a new BRICS member. While in imports Germany comes third, a definitely Western country. And it goes down the list between BRICS aligned and Western countries, each taking their turn in the list like two sports captains choosing their team’s players, each taking their turn. This may be a side effect of Brazil’s political leanings jumping back and forth, or a coincidence caused by the international market’s supply and demand meeting up with Brazil’s economy in just this almost perfectly balanced manner.
What does all of this have to do with Crypto?
Considering Brazil’s complex political, legal, economic history, and cultural background, several potential regulations and market trends can be anticipated for cryptocurrencies and Central Bank Digital Currencies (CBDCs).
Political tendencies push certain economic ideas. With Brazil having somewhat of a dual-personality disorder history in the political, legal, and economic sphere this would cause regulations for crypto to change drastically with every shift. And fiat currency would not be considered a safe haven as government strategies can change overnight. This would be a great market for gold or Bitcoin to catch on as alternatives to the local fiat currency.
Brazil’s history of political instability suggests a cautious approach to cryptos and CBDCs, emphasizing a balance between fostering innovation and ensuring robust regulatory oversight. Comprehensive regulations addressing concerns such as money laundering, fraud, and consumer protection are likely to be established for cryptos-related activities. Taxation policies could be implemented to cover cryptos transactions under Brazil’s intricate tax system, including capital gains taxes and income reporting requirements.
Considering Brazil’s economic inequality, CBDC initiatives might prioritize financial inclusion, utilizing digital currencies for direct benefit transfers to underserved populations. Collaborative efforts between the government and financial institutions could shape cryptos and CBDC frameworks that align with existing monetary policies and regulations. Furthermore, the integration of blockchain technology might extend beyond currency applications, offering solutions for supply chain management and public service transparency.
In light of Brazil’s diverse population and digital divide, public awareness campaigns could play a crucial role in educating citizens about cryptos and CBDCs, ensuring responsible usage. Brazil’s historical skepticism towards external intervention might lead to a focus on domestic regulatory development before engaging with international standards.
Given Brazil’s history of currency volatility, measures to manage cryptos price fluctuations could be explored, drawing from its experiences with economic instability. Consumer protection regulations might be strengthened to safeguard against cryptos-related scams and fraudulent activities, reflecting Brazil’s intricate social fabric.
Ultimately, Brazil’s approach to cryptos and CBDC regulations would be shaped by a delicate equilibrium between embracing innovation, maintaining financial stability, safeguarding consumers, and ensuring economic inclusion, all while accounting for its unique historical and cultural context. And any CBDC will be very centralized, so as to concentrate power in the hands of whoever is in charge at the time, just like everything else has been in the country since we have records of its economy and political systems.
Only time will tell if this is what will happen, but it does seem like these predictions are on track. What effect, if any, will Brazil have on BRICS policies towards currency? For now, not much.
The history of Brazil’s laws about cryptocurrencies and CBDCs can be summarized as follows:
Cryptocurrencies:
- Law No. 14,478 of December 22, 2022. This law establishes a licensing regime for virtual asset service providers (VASPs) and sets penalties for fraud using digital assets. It also defines cryptocurrencies as legal payment methods in Brazil.
- Decree No. 11,563 of June 14, 2023. This decree establishes rules for the implementation of Law No. 14,478. It defines the responsibilities of the Central Bank of Brazil (BCB) and the Comissão de Valores Mobiliários (CVM) in regulating VASPs.
Here are the bills that are in the process of being passed:
- House Bill of Law No. 3,908/21. This bill establishes that workers from the private and public sector may receive part of their compensation in cryptocurrencies, if so agreed by the parties.
- House Bill of Law No. 462/22. This bill provides for the crime of embezzlement specifically related to crypto assets.
- House Bill of Law No. 743/22, 1600/22, and 462/22. These bills intend to amend the Civil Procedure Code to include provisions and procedures related to cryptocurrencies within the scope of law suits.
CBDCs:
- Decree No. 10,661 of February 17, 2022. This decree establishes the Central Bank of Brazil’s (BCB) Digital Real initiative. It defines the goals and objectives of the project, as well as the responsibilities of the BCB and other stakeholders.
The BCB is currently working on a pilot project for the Digital Real. The pilot project is expected to start in 2023 and will involve a limited number of financial institutions. The BCB plans to launch the Digital Real to the general public in 2024.
The BCB has said that the Digital Real will have several benefits, including:
- Increased financial inclusion: The Digital Real could make it easier for people who do not have access to traditional financial services to participate in the economy.
- Reduced costs: The Digital Real could reduce the costs of payments and financial transactions.
- Greater efficiency: The Digital Real could make the financial system more efficient.
- Enhanced security: The Digital Real could be more secure than traditional forms of money.
However, there are also some risks associated with CBDCs, such as:
- Privacy concerns: Some people are concerned that CBDCs could be used to track people’s spending habits.
- Financial stability risks: If CBDCs become too popular, they could pose a risk to financial stability.
- Operational risks: There are also operational risks associated with CBDCs, such as the risk of fraud and cyberattacks.
The BCB is aware of these risks and is taking steps to mitigate them. For example, the BCB is considering using a permissioned blockchain for the Digital Real, which would limit access to the network and make it more secure.
The BCB is also working with other central banks and financial institutions to develop international standards for CBDCs. This will help to ensure that CBDCs are interoperable and can be used seamlessly across borders.
Overall, the BCB is taking a cautious approach to the development of the Digital Real. The bank is working to address the potential risks while also maximizing the potential benefits of CBDCs.
For trade graphs:
