This week, the CVM, the Brazilian securities regulator, published a guidance note on the regulation of crypto assets, including when a digital asset is considered a security and the disclosures that must be made. For tokenized securities, it is currently not planning to relax any requirements.

João Pedro Nascimento, president of the CVM, said that the measure aims to guarantee “greater predictability and security for all, in addition to contributing to the protection of investors and popular savings, as well as fostering a favorable environment for the development of the cryptoeconomy, with integrity and adherence to the relevant constitutional and legal principles”.

A cryptocurrency or a security token?

Brazil’s concept of value is based on the definition of a collective investment agreement inspired by the Howey test established by the United States courts. Howey is the same test suite used by the US SEC. Howey’s definition is an “investment of money in a common enterprise with a reasonable expectation of profit from the efforts of others.”

We’re not sure if the Brazil guide clarifies Howey’s situation. For one thing, he doesn’t mention whether something is decentralized enough. Somehow extensive testing makes it harder to fool the system. But it also leaves a lot of room for interpretation.

Brazil emphasized that while monitoring what is happening elsewhere regarding these tests, Brazil could take a different interpretation.

The regulators also provide a brief taxonomy of tokens, essentially dividing 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 applicable securities regulations, particularly in connection with any offering documents. Relevant laws still apply regarding the requirements for traditional intermediaries, such as central securities depositories and settlement and clearing houses. The CVM said that it may relax some of these for tokenized assets in the future.

This is where the EU and UK plan to run sandboxes for tokenized securities to allow temporary exemption from some laws. For example, in relation to the obligation to use intermediaries and the separation of exchanges from liquidation.

Brazil’s disclosure requirements for offerings have some novel elements, such as outlining the pros and cons of distributed ledger technology. As for the cons, it explicitly requires a statement about performance compared to traditional methods and environmental impact. Other issues that need to be disclosed include the governance of the protocol and the rules for identifying token holders.