EN | New Rules, New Rails Can Brazil’s Framework Unlock Better Payments | MERGE São Paulo

Well, good good afternoon. Thank you very much for for attending this session. We have um a diverse crowd today with a leading service uh providers in the crypto space. We have uh Gigamin from Transfer. We have Katarino from Beni.

We we have Iasu that uh does not need a last name because he's the only only one um from Trace Finance and we have Nicholas from Bit and today we're going to speak about u we're going to discuss a little bit about regulation and payment rails in under the light of the new regulation in Brazil. Brazil as you well know has um brought brought new regulation in 2022. uh law, federal law 14,478 has created the the basic legal framework that was uh quickly followed not so quickly but was later followed by uh resolutions from the central bank uh 59 519 520 and 521 that has deeply regulated a space that was previously totally virtually unre unregul ated and provided a lot of freedom and has allowed uh the Brazilian crypto space to evolve. Brazil now is uh I would dare to say a a space that is very um it's it's a place where fast can really thrive because it's a it's the largest market in in Latin America. uh uh the crypto has more clients than the the Brazilian stock exchange.

So the the question is what will this new regulation do to the market? Will it uh hinder its uh growth or will it foster uh its growth by attracting uh institutional capital especially due to uh certainty brought by regulation. One of the the main features of the of the federal law that was introduced uh and that has in my opinion been a key point in this uh in this new legal framework is the fact that the the law has allowed regulated institutions mainly financial institutions ma major banks to enter uh safely the crypto space. So this is what uh we are about to see. Uh the central bank has enacted several pieces of regulation.

The main uh the main ones uh are the ones that I cited but also others that have u increased dramatically the amount of capital that is required for Brazilian vas to to operate. So the question is will this new regulation uh be positive in the long run uh in the way in the sense that will it foster growth without uh hindering you know uh innovation or will it uh suffocate the market to a certain extent. So this is uh I think the the main the main driver of uh our discussions today. So I will um start with a question to Gigamino. Well, now Brazil has a very strong uh crypto adoption adoption as you well know especially for well digital assets as a general and stable coins.

Uh and it's very much used for remittances uh trade settlement and dollar axis. Uh from your perspective as an operator where do crypto rails actually improve payment today? So uh thank you very much for everybody that is attending uh the session. Thank you Merge for the event. Congrats and thank you for my colleagues here for this uh uh amazing exchange.

So in my personal opinion uh what is happening right now is uh there are two sides basically one side is with the regulation that is necessary for sure and we in transfer definitely we believe and we understood this uh uh uh necessity uh to be regulated since the beginning and but at the same time we started as a first payment gateway to process crypto transactions in Brazil in 2015. 15. So the Brazilian central bank basically they didn't rule this market uh at the time and let the market to evolve itself. So this let a lot of space to companies like transfer in the beginning to grow and to uh uh gain maturity and we could deliver more solutions to the market in general and because of that because of the lack of the regulation in certain aspect this uh helped for the innovation to come with this new framework that the Brazilian central bank is uh put in place. This is definitely will provide a a a strong cut in the market.

So only a few providers will stay and but we need to keep a balance and how to also embrace the the the innovation. Imagine that the regulation would be in place in 2015. Probably we wouldn't have this event. We wouldn't have transfer and we wouldn't have a lot of companies here. So I believe we should also uh do our part, follow the law and especially with the the movements of stable coins.

We are seeing a lot of companies using the stable coins as a movement to internationalize their operations and for sure the banks they avoid this market for a long time ago and now they want to participate because we are seeing 40 billion uh uh US dollars movement monthly and they definitely they want to participate and they don't want to be out and okay that's super fair but let's try to find balance and I believe the the the most challenging part is how can we coexist where we embrace innovation and also we can coexist with the banks bringing new solutions, new technology and new uh and more efficiency to small and medium companies that were completely ignored by the the the big big players. That's my my take.

Thank you. Thank you very much. That's a very good point of view. Um and taking following that question maybe a question for Ibasu. Um well in many places crypto is used as a payment instrument.

In Brazil as you well know uh we have the Pix arrangement that is fantastic and it's absolutely in my opinion it's something really uh very very good for for the population. It has uh uh promoted financial inclusion uh bankarization. It's it I think it's it was one of the most strategic uh uh movements that the central a central bank has ever made in the world. Um and it's being copied by by many many other central banks in around the world. uh and as it was made possible by by several uh factors that uh I don't think we have time to to discuss here but my question to you is in light of the fact that Pix is absolutely instantaneous reliable uh deeply regulated and works wonderfully.

Can crypto um compete with uh with Pix or do you think it's um it's something that will happen to a certain extent or it is it just complimentary?

Hello everyone. Thank you for the question. I think it's uh very provocative. Uh just before I answer, can I have a show of hands of who's not Brazilian here please? Okay, perfect.

All right. Because I guess the the answer is very different uh if you're talking to those acquainted to picss or not. But um I let me try to summarize the way I see picss, right? So um banking systems they are walled gardens, right?

So uh the nature of banking system is basically to have trust in uh the unit of account that one can hold, right? That's what Bitcoin solved by being decentralized and not having one holder of a ledger where it says uh uh Niko has $10. Uh instead of relying on one centralized actor as for instance central bank or the fed or etc. Uh blockchain made it possible for you to trust a decentralized slash not one person holding the truth. Right?

So the problem of uh banking systems is that they are walled gardens in that in that sense. they cannot uh interoperate uh with other systems unless there is an intermediary actor for it. For instance, uh you cannot have the Brazilian central bank issuing dollars, right? It would be a little bit impossible for uh the Brazilian central bank to convince the Fed that they want to issue dollars,

right?

Um so the problem that uh we see with banking systems is that they are not touching each other. So they can be as uh uh as seamless as frictionless as you want in instant payments and uh you have to remember that it's not just a matter of settling right it's a matter of making it in a way that you do not harm the liquidity of this the financial system right so at the back of the p system there is uh reserves that the financial institutions have to post over there they have to manage those reserves there is a lot of friction that goes into making a an instant payment system work. Um so Pix it has its limitations and we have seen already right. So for instance for large number uh large transactions then there is the vulnerability of fraud. So one must create some uh friction around it to make it uh less vulnerable.

So there are problems already with pix. It's not the fact that it's instant that it's already ultimate solution. But to your point right so um can stable coins enhance or compete right. I guess it enhances the interoperability with other countries and with other banking systems, right? So, uh what's the point of having an instant system instant payment system in one country when you are transacting with another country that doesn't have an instant payment system?

Now, this is the critical question, right? So, if you want to pay say a supplier uh in China, uh you can process your payment instantly by a pix, right? Um but typically this supplier doesn't have uh an account in BRL in Brazil. So doesn't matter that you can move money instantly with pix because the settlement of this uh transaction will not happen instantly. The problem is on the other side there is someone holding values in another banking system and that doesn't communicate with stable coin and I think that's the critical point here.

It's also instant and it it's easy to overreach the jurisdiction of the banking system. So you can have a Chinese merchant for instance holding accounts in stable coins. Those stable coins they can be on and off ramped against instant payment solutions for instance pix meaning that it's easy for anyone anywhere in the world to be connected to pix via crypto. So I think it's more an enhancement making it interoperable with other banking systems rather than just competing. I guess competing with PICSS here in Brazil it's a goner.

Yeah it's

Yeah.

Yeah. I I fully agree. I fully Well, thank you very much. Thank you very much. I think this is uh it's very interesting and it's very good for also our uh international audience uh in here in the audience.

Uh now I have a question for you Nicholas. Uh now Brazil has introduced this uh new uh regulation that is quite comprehensive is uh quite secure. It's quite good. It has of course some uh uh shortcomings that we're trying to to discuss with the regulator and to improve and uh we'll only be fully able to to know uh to what extent it's um it will work when it's put in contact with reality. But my question to you is uh what opportunities do um does does the do the rags bring for a company like Bitso uh very uh well-known internationally uh worldclass uh exchange like Bitso?

Um will it how do you see this? Do you see do you see as it as an opportunity or not? And also will exchanges be eventually the same as banks? Will they will there be a conversion and a meeting points?

Marcos. Um well, two very very interested interesting questions. Allow me to to try to be as specific as possible with the short time I have regarding the first one. From Bitsu's perspective, it's really really interesting because h for for us it's an absolute game changer for benefit meaning we were waiting for the regulations to be issued several months ago and we were we had the benefit to help the central bank discuss those regulations in the drafting of the norms and I just don't say that as a sales point. I sell that as a pure principle in which Bitso is built.

We don't sell per se crypto or stable coins just for someone to acquire that asset. It's because they need to do something and it's usually a financial service, a payment, an investment, uh movement of treasury. So at the end of the day if you stop to think companies are moving money to use financial services but we are using stable coins as the infrastructure to allow them to use those services faster. So with that particular example my concrete answer to you guys is we are very happy that the regulations are here in Brazil. In fact, we are fostering other central banks or other jurisdictions to help us enact the regulation in each of the other countries in which we operate because for us for us that is clarity in the rules of the game and second that help us provide a ver service to our customers.

You can't imagine how many customers we were struggling to close because they were afraid of the fact that there was no regulation. Even though we were certain that our compliance officer were working well, even know that we were compliant with the travel rule, even know where we were working, we were doing well the onboarding blah blah blah blah blah. But just the fact that the regulation doesn't think the big companies will not be willing to enter into this. So

they say it's too good to be true and where's the catch, right?

Exactly. Exactly. Now that it's that we are able to show that it's really very good and it is true they are coming back to knock at our doors and hey I apologize now I want to speak again with you which are the services that you can offer. So for us that's possible regarding the second question well I am not a magician I cannot read the future but I let me let me share an an example and an interesting idea. BTS is already a group of financial institutions all over Lat in all the jurisdictions in which we operate.

We have a fully licensed institution. Again, this is not a sales pitch. It's because we are in the intersection between moving technology to the traditional banking and financial system to offer better services to our customers. That's item number one. Item number two, we're thinking a little bit two trying to think two or three steps ahead.

For example, we were the first ones in issuing a stable coin completely back to the Mexican peso and plugging that into our infrastructure both from a regulated perspective and a crypto perspective. You at the end of the day receive a one-stop shop platform in which you can access to several crypto services or several financial services in only one compliant solution. So I don't know if banks are going to are willing to be vast or vast are willing to be banks or if they are going to end up being one. What I can say is for us blockchain and crypto is the technology and the infrastructure that can help offer better financial services and that's what we're trying to do and we're doing at Bit.

I I fully agree. I think uh in my opinion eventually everything will the the infrastructure of the financial and capital markets will eventually migrate to to blockchain and since we're speaking about uh regulations and and especially compliance uh my question to to Katarina uh as we just heard uh regulation is opening a lot of opportunities however it inevitably raises a lot of compliance burden and this is is a drag to many many companies especi especially small companies and so like licensing uh AML CFT reporting travel rule uh and and so on so forth. So, Katina, how how do you from your perspective as working in the leading um not being the the the leading travel rule uh solution uh compliance solution in the world? Uh what's what are the hidden opportunities in compliance infrastructure that companies are building today?

Thank you so much, Marcus. Um yeah, that's a that's a great question. So I've been in the travel space for almost five years now and I can tell you that it's not the most popular requirement. Um so there's a lot of resistance uh when when we work on travel implementation in different jurisdictions there's the first reaction is a lot of resistance but uh I think the even opportunity is that uh we can really use it as a catalyst to build a trust layer that is absolutely essential for uh crypto rails to be um used in real world payments. So when you look at how payments work today, first you see all payment systems are underpinned and empowered by a trust layer, right?

That is true for peaks. Uh a trust layer means institutions that are part of the payment system have shared uh data standards to communicate about about transactions. There's a certain a certain um vetting process for uh entities to be part of the payment system. Um there's dispute resolution mechanisms. there's fraud prevention.

When I say trust layer, I mean all of these components that makes payments work. Um, and the second thing is when we look at payments, uh, payments move move value, but they're very crucially they move information and payment context. This is what allows you to understand um, if you get a payment, you understand where it comes from, what counterparty sent you that payment, uh, what invoice that payment is settling. So for instance, if you pay if you buy something to Amazon um before they ship it to you, they have a reconciliation process and they are able to see that this customer pay their invoice, we cannot ship the product, right? Um so it's very important that information moves with payments.

Um and if we if you get to the core of the travel rule uh you start to see that um you can really use it as a catalyst to build this elements for digital asset transactions and stable coin payments. Travel is essentially about verifying the counterparty on the on the other side of a transaction. um it forces institutions to collaborate about the transaction to um to create authorization uh to coordinate on the authorization of the transaction which is another core piece. So in payment settlement is preceded by an authorization step. In crypto we start the flow with the settlement.

So it leaves the beneficiary of payments very exposed to uh receiving funds that they may not want to receive. So uh when it comes to compliance obligations, it's always very important to uh understand how you can turn it into a competitive advantage. And when it comes to the travel rule, it essentially gives us a really good opportunity to build the trust layer that we've been missing to integrate crypto rails into real world payment use cases. C

can I add to that?

Sure.

In in 10 seconds, I guess, right? Uh I think if you want to be a player and be taken seriously in the in the space and work with institutional players, you have to have it uh extremely well implemented the travel rule solution. So if you want to be lagging on implementing it, there is definitely a market for that. But if you want to take the big money and you want to be a big player, uh there is not a doubt you have to have the travel rule solution extremely well. uh in production running while in production

because there's no space for

Yeah. It's not a matter of choice.

Exactly. Exactly.

It's no longer optional.

Yeah. And Marcus from my side maybe one one final comment as a Colombian that feels like as a Brazilian what the central bank did with the regulations with the veas is really impressive. Try to have this same panel in Chile, in Argentina, in Colombia, in Mexico. Try to have the same conversations that your companies have with the central bank in those jurisdictions. In Bitsu, we joke, for example, that in sometimes it's easier to be the country manager of Brazil because you can launch more products and you can go a behind bigger fishes as customers than in other jurisdictions.

And that's because the regulations are running faster as technology is. So this is something Brazilians should be very proud of and Brazilians should take care of a lot of the central bank and the work that they are doing. I wish I had was born in Brazil. I'm not. And I wish the central bank of Colombia learns a lot from the central bank in Brazil.

Maybe to close a little bit in connection with the title of the of the of the panel.

That's a great statement. Thank you very much. Thank you very much.

Thank you so much.

Thank you very much for the audience. Uh it was great. Thank you very much for the panelists. Um

thank you Marcus.

Let's continue this great.

Thank you everybody. Enjoy. Thank you.