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On April 7, the former 35th President of Brazil Lula da Silva, was the nation’s first president ever to be jailed, for charges stemming from Brazil’s Operação Lava Jato (Operation Car Wash) corruption investigation. Lula’s incarceration followed after police in Rio de Janeiro uncovered a first-of-its kind Bitcoin-based money laundering scheme in which state officials misstated the budget spent on food for state-run prisons to the tune of $22.4 mln. Luíz Henrique Casemiro, superintendent of the Internal Revenue Service (IRS) in Rio, said “this was the first-time cryptocurrencies were used in such an operation to fly below the radar of the Central Bank and the IRS.”

Operation Car Wash began as an investigation into money laundering four years ago, which quickly turned into something much greater, uncovering a vast intricate web of political and corporate racketeering involving the heads of states of Brazil, Peru, Guatemala, Ecuador, Mexico, Argentina, Venezuela, Colombia and Panama. It is the biggest corruption scandal in global history that exposed a culture of systemic graft in Brazilian politics and provoked a backlash from the establishment fierce enough to bring down the 36th President of Brazil Dilma Rousseff’s government and leave the 37th President Michel Temer’s administration on the brink of collapse.

Govtech

As the country prepares for the upcoming elections this year, citizens deeply upset by Lula’s incarceration have initiated a petition “Election without Lula is fraud” which is promoted by intellectuals and artists like Noam Chomsky and Chico Buarque, that has garnered over 292,000 signatures so far. In Brazil, popular petition is a form of electoral initiative with its essence in people selecting and signing petitions on relevant issues. If the petition has the necessary 1 percent of the country’s voting population behind it, it is submitted to Congress and the government is bound to review it.

To bring transparency to the popular petition process, the Brazilian government is supporting an innovative Ethereum Blockchain solution with a mobile app that will allow people to register to the system via their smartphones online and place their signatures on petitions they support or submit a petition. The system will allow anyone to view the actual number of signatures for a certain petition, ensuring that no signature is lost or forged.

Another state run Blockchain initiative is a platform for property registration - for the world’s fifth largest country occupying half of South America's land mass - to protect millions of trees in the Amazon rainforest “Selva”. The aim of the initiative is to spare illicit development of the biggest, most bio-diverse nature reserve in the world. The southern city of Pelotas is among the first in Brazil to experiment with a fully computer-based Blockchain-based land-titling system.

Fintech & national cryptocurrency

Several large Brazilian banks that have been caught up in the cross hairs of the Operation Car Wash investigation for money-laundering and tax evasion have begun exploring implementing Blockchain technology in their banks. This includes Banco Santander, SA which on the one hand, due to the lack of cryptocurrency regulation has shut down or refused to open some cryptocurrency exchange brokers’ accounts, while on the other hand recently has launched the first Blockchain-based cross border payment service for end consumers in Brazil.

Brazil’s Central Bank governor, Ilan Goldfajn explained that cryptocurrencies are not “electronic currency” under Brazilian law as “Cryptocurrencies lack the stability needed to be a safe and legitimate exchange of value.” He prefers to think of them as “crypto-assets” along with the rest of the G20. Goldfajn serves as a Director of the Bank for International Settlements which in a report examined some of the possible implications of central bank issued digital currencies (CBDC). He indicated that the Brazilian Central Bank and the Brazilian Banks’ Federation (FEBRABAN) have already conducted different tests on the use of Blockchain technology.

So far, the Brazilian National Bank for Economic and Social Development (BNDES) wants to prove that documenting government funding through a visible public ledger based on Ethereum’s Blockchain will prove an efficient way to ensure transparency, as well as a deterrent to fraud and corruption. BNDES is tokenizing the Brazilian real for these purposes. Brazil is also involved in the BRICS - Brazil, Russia, India, China and South Africa - a multinational cryptocurrency initiative lead by the Central Bank of Russia which recently indicated that it could eventually be deployed atop an Ethereum-based platform as well.

Cryptocurrency regulation under securities laws

Cryptocurrency exchanges escape regulations in Brazil because cryptocurrency is not a currency nor a security. As a result, cryptocurrency exchanges are forced to take legal action against banks’ account closures and seek legal injunctions to keep their accounts open. After a recent wave of extreme volatility, crypto-fever in Brazil has hardly subsided. At the height of it, late last December when Bitcoin’s price peaked at $20,000, FoxBit, one of Brazil’s leading specialized brokerages, said it had to suspend the registration of new clients because it was unable to cope with demand.

“At the end of November, the number of applications increased 10-fold. At some point, we had a backlog of 10,000 applicants,” said FoxBit advisor and partner Marcos Henrique. Brokerage firms that specialize in cryptocurrencies report that they have more than 1 million individual clients, some 0.5 percent of the population, the largest investor base in the continent, as measured by their identification numbers with twice as many cryptocurrency traders in Brazil compared to stock traders.

The lack of regulation has prompted Brazil’s largest cryptocurrency exchanges to create two separate cryptocurrency associations - the Associação Brasileira de Criptoeconomia (ABCripto) and the Associação Brasileira de Criptomoedas e Blockchain (ABCB) with seemingly different approaches to potential cryptocurrency regulations.

Brazil’s Securities and Exchange Commission (CVM) in Jan. 2018 announced that local investment funds are prohibited from purchasing cryptocurrencies – owing to a CVM determination that cryptocurrencies are not legally considered financial assets. The CVM also recently suspended the operations of a cryptocurrency mining investment scheme, Hashbrasil for violating securities laws by conducting an unregistered public offering. However, the CVM is set to give the green light in early May for fund managers to “indirectly” invest in cryptocurrencies, according to local news reports.

The next big move is expected to come from Brazil’s congress, where some legislators have proposed turning cryptocurrency mining and transactions into a crime.

Cryptocurrency taxation

There was intense debate on digital taxation at G20, with Brazil holding out that it might not follow the G20’s recommendations concerning cryptocurrency regulations. The Brazilian IRS has created a working group on electronic transactions to assess further action and possible changes in the tax legislation.

Walter Stuber partner at Walter Stuber Consultoria Jurídica explained that currently the Brazilian IRS classifies cryptocurrency as a financial asset subject to capital gains taxation like any other security at a tax rate of 15 percent to gains of 35,000 reals or more. (article, 153 III and in Brazilian Tax Code, article 43).

Foreign investors’, whether individuals or legal entities, income, capital gains, and other proceeds paid, credited, delivered, employed, or remitted by a source located in Brazil are subject to withholding tax at 15 percent or at 25 percent for tax havens. (articles 682 and 685 of the Income Tax Regulation).

There are no specific corporate cryptocurrency taxation rules. Cryptocurrency capital gains are subject to the corporate tax rules applicable to companies in general and added to the taxable profits.

Tax returns are due by the end of April for individuals and end of July for corporations for the tax year ending on Dec. 31, 2017.

The views expressed here are the author’s own and do not necessarily represent the views of Cointelegraph.com