Investment funds that are regulated by the Securities and Exchange Commission of Brazil (CVM) are authorized to invest directly into cryptocurrencies. They can do so through the acquisition of “shares of funds, derivatives and assets traded in third jurisdictions,” as long as the regulation in those markets allows for it, according to the regulator cited in reports.
In practice, an investor could buy shares in a fund, for example, comprised of 60% Bitcoin, 20% Ethereum and 20% Litecoin. This fund would administer the transaction for a commission, similar to a stock fund.
Proceed with Caution
But the securities regulator in a document warns of some concerns. They express concern about the fight against money laundering. According to the CVM, the best way to combat fraud is to invest through cryptocurrency exchanges, which are “subject to the supervision of regulatory bodies that have powers to restrain such illegal practices,” the document states. Nevertheless, there are no restrictions on investments made in another way as long as legal and regulatory requirements are met.
Brazil’s Crypto Landscape
The regulatory agency also warned potential fraud in light of recent scams surrounding initial coin offerings, or ICOs, offering six basic precautions to consider:
- Whether the software is free and open source
- Whether the technology is public, transparent, accessible and verifiable by any user
- Whether there are any arrangements that raise conflicts of interest or the concentration of excessive powers on the issuer or promoter of the cryptocurrencies, or the use of aggressive sales techniques
- Trading liquidity of the cryptocurrencies
- The nature of the network, the consensus and validation protocols as well as the software used
- The profile of the team of developers as well as their degree of involvement with the project
Among the points of concerns of the Brazilian regulator is the difficulty involved with evaluating the right price for each product. The regulatory document states:
“One possible parameter, in this sense, is the investment in crypto that contains the permanent disclosure of globally recognized price indices prepared by third parties independent,”
The CVM addressed the unique features of the cryptocurrency market, commenting on events like airdrops and blockchain hard forks, for instance. Considering that these activities are outside the scope of traditional financial assets included in
the portfolios of investment funds regulated by CVM, fund managers with such strategies should be transparent about their policies related to such events in the fund’s documents.