This week the CVM, Brazil’s securities regulator, published a guidance note on the regulation of crypto-assets, including when a digital asset is considered a security and disclosures to be made. For tokenized securities, it is not currently planning to relax any requirements.
João Pedro Nascimento, President of the CVM said the step aims to ensure “greater predictability and security for all, in addition to contributing towards the protection of investors and popular savings, as well as fostering a favorable environment for the development of the crypto economy, with integrity and with adherence to relevant constitutional and legal principles”.
A cryptocurrency or a security token?
Brazil’s concept of a security is based on the definition of a collective investment agreement inspired by the Howey Test established by courts in the United States. Howey is the same set of tests used by the United States SEC. The Howey definition is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
We’re not sure whether Brazil’s guidance makes the Howey situation clearer. For one, it does not mention whether something is sufficiently decentralized. In some ways, broad tests make it harder to game the system. But also leave a lot of room for interpretation.
Brazil emphasized that while it monitors what is happening elsewhere regarding these tests, Brazil could take a different interpretation.
The regulators also provide a brief taxonomy of tokens, essentially splitting them into payment tokens, utility tokens and asset-backed tokens, including stablecoins, security tokens and NFTs.
Expanded disclosures for tokenized securities
Anything considered a security must comply with all current securities regulations, particularly relating to any offer documents. Relevant laws still apply regarding requirements for traditional intermediaries such as central securities depositories and settlement and clearing houses. The CVM said it might relax some of these for tokenized assets in the future.
This is where the EU and the UK are planning to run sandboxes for tokenized securities to enable some laws to be temporarily waived. For example, relating to the requirement to use brokers and the separation of exchanges from the settlement.
Brazil’s disclosure requirements for offerings have some novel elements, such as outlining the pros and cons of distributed ledger technology. Regarding the cons, it explicitly requires a statement on performance compared to traditional methods and the environmental impact. Other issues that must be disclosed include protocol governance and rules for identifying token holders.