The economic and social development of any country, especially those which follow the capitalism model, is closely related to its capacity to promote productive activity and entrepreneurship. Available capital needs to flow into enterprises requiring cash, through investment and fundraising mechanisms, so that the market can develop. Recently, such mechanisms have presented fertile ground for new technologies.

Crypto-assets have emerged as an investment alternative for various projects, through the issuance and commercialisation of tokens, whose veracity and ownership are assured by blockchain technology.

Blockchain technology is based on a decentralised network and register structure called distributed ledger technology (DLT). Information is stored in blocks (protected by an encrypted code), that when validated by the network participants are added to the existing blockchain in a linear, chronological way. This guarantees the immutability of the operations, working as a ledger, without the need for intervention by a central entity.

Despite the transparency of operations, it is possible to know that a certain transaction has occurred, but without knowing the identity of the parties involved. Although blockchain technology has existed since 1991, its use in the financial sector only started in 2009 with the creation of Bitcoin. Since then, the commercialisation of crypto-assets has consolidated in the global market.

Brazil is no different. Between January and August 2021, the crypto-asset market increased to about $4.3bn. However, in Brazil, as in the rest of the world, there is a lack of specific regulation covering this market.

A token can be understood as a digital, encrypted and transferable representation of value, rights and assets. Whether these exist in the real world (physical assets) or in the digital world (digital assets), the process of representation and issuance is known as tokenisation.

In this sense, the International Organization for Securities (IOSCO) defines tokenisation as “the process of digitally representing an asset, or ownership of an asset. A token represents an asset or ownership of an asset. Such assets can be currencies, commodities or securities or properties”.

Although there are several classifications of tokens, the most common are: (i) a payment token (cryptocurrency), when its function is intrinsically as means of payment; (ii) a utility token, when its purpose is to grant access to goods or services; and (iii) a security token, which performs functions inherent to securities or investment contracts.

Token classification is directly related to its purpose, though a single token may have more than one characteristic, and therefore more than one classification, such as being both a security token and a payment token. Given the diversity of potential uses by entrepreneurs and investors, it is imperative to analyse each instrument specifically, for the purpose of regulation.

A relevant aspect concerns whether or not tokens should be classified as securities within the scope of the regulation of the Brazilian Securities and Exchange Commission (CVM) under Law no. 6,385/1976. In this sense, CVM used the precedents and understanding of the US Securities and Exchange Commission (SEC) to determine when crypto-assets issued in an initial coin offering (ICO) can be classified as securities.

An ICO is a method of public fundraising achieved by issuing crypto-assets with the aim of raising funds for a project based on blockchain, whether for the creation of a new currency, goods or even a service. It is similar to an initial public offering (IPO) of securities, but less costly and, as a rule, less regulated.

In Brazil, in addition to the list of securities provided in article 2 of Law no. 6,385/1976, any other securities or pooled investment agreements which generate participation, partnership or remuneration rights, including those resulting from the provision of services, whose income is derived from the entrepreneur’s or a third party’s efforts, will also be considered securities when offered publicly.

This understanding is similar to the US understanding, arising from the Supreme Court’s decision in US Securities and Exchange Commission v. W.J. Howey Co. To determine the existence of a security, inspired by the Howey Test, it is necessary to verify the following requirements: Is there an investment? Has this investment been formalised by a security, or by a contract? Has the investment been collective? Has there been any form of remuneration to investors? Does the remuneration offered originate from the efforts of the entrepreneur or of third parties? And have the contracts been publicly offered?

Below, we use bitcoin as an example to verify whether or not it would be considered a security in an ICO in Brazil.

Bitcoin is the result of a pool investment, formalised by a digital currency, offered publicly, but with no guarantee of any remuneration to investors other than the appreciation of bitcoin, which relies on external factors and is unrelated to the creators of the currency. Thus, bitcoin is not considered a security in Brazil, and does not fall under the purview of the CVM.

On the other hand, bitcoin would be considered a security if the entrepreneurs offer investors a fixed remuneration or remuneration based on the efforts of the issuer or a third-party other than the investor, or if the offerors were found to actively participate in crypto-asset trading or influence share prices.

In cases like these, tokens will be considered securities and consequently, similar rules for an IPO would apply to the ICO, such as the requirement to register the offering with the CVM and to provide a prospectus to potential investors. Thus, to define whether a token is a security or not, it is necessary to analyse each case, checking whether the above requirements apply.

Finally, it is important to highlight that even if ICOs are offered on websites by entities that are not in Brazil, if they are directed to the Brazilian public, they may be subject to supervision and regulation by the CVM.

Therefore, analysing the characteristics of each asset, and the contract signed between the parties involved, is fundamental to their potential regulation under the supervision of the CVM.


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