Why the Blockchain Industry Should Pay Closer Attention to Brazil

As the ninth-largest economy in the world and the most populous country in South America, Brazil is the gateway to South America and deserves closer attention from the blockchain industry.

Gateway to South America

Brazil is the largest and most populous country in Latin America.

As the ninth-largest economy in the world, Brazil is slowly recovering from its 2015/16 recession. Its GDP growth rate is projected by the IMF to be 2.2% in 2020. Its inflation rate is a moderate 3.5%, lower than a global average of 3.6%, and much lower than its neighboring countries such as Venezuela and Argentina.

Under the administration of President Jair Bolsonaro, the Brazilian Congress passed the highly anticipated pension reform in November 2019, which boosted the country’s credibility in financial markets. A stable political environment and steady economic growth will attract more foreign investment to Brazil.

Brazil has a high crypto penetration rate.

A survey conducted by Hootsuite and We Are Social in January 2019 showed that the percentage of internet users who reported owning any form of cryptos in Brazil was 8.7%, ranking No5 globally.

According to a similar survey conducted by Statista Global Consumer Survey in June 2019[1], Brazil ranked second in the share of respondents who claimed to own cryptocurrencies, only lower than Turkey.

If  the survey may have a limited sample and hence present a distorted reflection of the real adoption, a peek into the traffic of leading exchange websites can help us have a better understanding.

According to a website analytic tool Similar Web, in the past three months, for the total website traffic flow of Coinbase.com, Binance.com, Huobi.com, Okex.com, and Bitinex.com, traffic from Brazil ranks No8 among all the countries, contributing 2.64% to the total traffic of arguably the five largest spot exchanges.

Granted, traffic flow is not equivalent to trading volumes. But it’s safe to say that Brazil is a crucial market globally with high market awareness of crypto and a large volume of users.

A Unique Market

Brazil is a unique market. It has strict tax regulation on crypto trading. The country also has a robust payment system, which renders a low demand for crypto-backed retail payment. And its comparative low savings rate opens opportunities for crypto-backed savings.

Harsh Tax Requirements

On March 31st, 2020, Brazilian crypto exchange XDEX announced to shut down its services, stating market forecast, competition, and regulations as reasons for its closure. XDEX was no small player as it was owned by the largest stockbroker in Latin America and aimed to capture institutional traders.[2] Its closure made headlines to all crypto media.

XDEX is the fourth crypto exchange that has shut done in the wake of the strict tax laws. Prior to this, OmniTrade, Latoex and Acesso Bitcoin have announced to close business.

The tax requirements that led to this is the Normative Instruction №1888 (IN. 1888) issued by Brazilian Federal Revenue. The instruction took effect in August 2019. It requires exchanges to report users’ transactions monthly or the exchanges will face a fine. The enforcement has caused a significant decrease in trading volume and forces smaller exchanges to close shop.

Global Giants Eyeing P2P Trading

On the other hand, Binance has made multiple moves to increase exposure in Brazil.

Binance first partnered with Latamex in December 2019. Latamex works as its fiat gateway in Latin America and enables users to buy and sell four cryptos with Argentine Peso (ARS) and Brazilian Real (BRL).

In March 2020, Binance rolled out p2p crypto trading with five Latin American fiat currencies including Brazilian Real (BRL), Argentine Peso (ARS), Colombian Peso (COP), Mexican Peso (MXN) and Peruvian Sol (PEN) [3], a move to attract users and squeeze the market share of the p2p platforms such as LocalBitcoins.

Competitive Edge of Major Local Exchanges

NovaDAX is a major local exchange in Brazil, with a 24 hr volume of over $ 8 M on April 9th, 2020 EDT. NovaDAX supports crypto to crypto and Brazil Reals to crypto trading pairs for 17 tokens. NovaDax also provides institutional users with OTC and API access. The exchange has seen significant growth in the past two years.

Mercado Bitcoin is the largest Bitcoin trading exchange in Brazil. It only supports five fiat-to-crypto trading pairs, with a 24 hr volume of around $ 2 M on April 9th, 2020 EDT.

BitCoinTrade is another major exchange in Brazil, supporting five fiat-to-crypto trading pairs, with about a $ 0.5 M 24 hr volume on April 9th, 2020 EDT. In addition, it also provides OTC services.

Major international crypto exchanges somewhat dwarf the trading volume of local players. Despite the high liquidity of international exchanges, local players like NovaDax that meet the compliance requirement have the advantage of their banking relations. In many cases, big global players will need to work with local exchanges as their fiat gateways.

No Fertile Soil for Crypto-backed Payment

There are well-functioning payment and POS solutions in Brazil.

Brazil also has a robust fintech industry with payment startups like Nubank, providing mobile app-based digital accounts, credit card services, and lending.

In addition, the Brazil Central Bank (BCB) has recently announced to roll out its instant payment system called Pix System. According to the announcement, “It is mandatory for all financial institutions and payment institutions licensed by the BCB, with more than 500,000 active customer accounts … to participate in PIX. These institutions must provide their customers with all the functionalities for initiating and receiving instant payments.”

The comparatively high cost and barrier for user onboarding of crypto-backed retail payment will not see high demand from Brazil.

Opportunities for the Blockchain Industry

Crypto-backed Savings

Facing the coronavirus-fueled recession, lawmakers around the world have responded with new economic policies. On March 18th, the Brazilian Central Bank decided to cut its benchmark interest rate from previously 4.25% to 3.75%. There is a forecast that “the central bank’s benchmark Selic interest rate will be cut to 2% this year from the current 3.75%. In Brazil, with its history of hyperinflation and high-interest rates, 2% is practically zero.”[4]

This will provide opportunities for crypto-backed savings, as the interest rates for cryptos could be as high as 15% on platforms like Binance. It will be a good alternative to traditional savings.

Buidl with Blockchain Technology

For blockchain platforms with working products, Brazil presents a huge opportunity.

Many public and private entities in Brazil have started to use blockchain in the financial sector, real estate, and agriculture. For sample, Brazil’s central bank, Banco Central do Brasil (BCB) has developed a blockchain platform Pier to facilitate information exchange among financial regulators.[5] In Brazil, the State of Bahia has reportedly launched a blockchain application to track to process of public bidding in July 2019.[6] Brazil’s IRS, known as Receita Federal, announced the detail of a blockchain project called bCONNECT, which enables Brazil to share a customs related database with its partnering countries such as Argentina, Uruguay, and Paraguay. [7]

This is just a glimpse into the adoption of blockchain technology. As an innovation hub in South America, Brazil will see more teams build with blockchain.

To conclude, Brazil is a vital economy in South America and poses as a gateway to the market. Although crypto has massive exposure to Brazilian users, they are interested in arbitrage of mainstream tokens. The market does not have a huge demand for crypto-backed retail payments. In contrast to the savings interest rates almost the same as the inflation rate, Crypto-backed savings will be appealing. In addition to that, blockchain platforms will see real adoption in the public and private sectors in various industries.

Thanks to NovaDax for useful discussions and their feedback on this article.

[1] https://www.statista.com/chart/18345/crypto-currency-adoption/

[2] https://beincrypto.com/brazilian-exchange-xdex-shuts-down-amid-regulatory-uncertainty/

[3] https://cointelegraph.com/news/binance-p2p-adds-five-new-fiat-currencies-in-latin-america

[4] https://www.nasdaq.com/articles/analysis-brazil-headed-for-whatever-it-takes-qe-as-coronavirus-crash-looms-2020-03-27

[5] https://www.pymnts.com/news/international/2019/brazil-blockchain-digital-payments-advances/

[6] https://cointelegraph.com/news/brazilian-state-launches-blockchain-platform-for-government- contract-bids

[7] https://www.contxto.com/en/brazil/brazil-build-customs-connectivity-blockchain/

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