Earlier this year, the mayor of Rio de Janeiro, Eduardo Paes, announced that the municipality would invest percentages of the city’s Treasury in crypto assets and create its digital currency. In addition, the city government announced incentives for the population to pay taxes with bitcoin. The idea is to transform Rio into an innovative environment, a pioneer in the country.
The project, called Crypto Rio, is considered a significant victory for the idea of developing a digital and creative economy in the city. The opinion is that of lawyers Kone Prieto Furtunato Cesário and José Domingues da Fonseca, who sign an article on the subject, in which they point out that the proposal “is a significant step towards the consolidation of Rio de Janeiro as an important hub of technological innovation and as a result, it can attract countless opportunities for resources and jobs to the city.
But, according to them, “despite the unprecedented (in Brazil) interest of Mayor Eduardo Paes in the topic, municipal regulation and the way the Crypto Rio project will be implemented will be the crucial factors for its success”.
Check out the following exclusive interview that Kone Cesário, PhD professor at the National Law School of the Federal University of Rio de Janeiro, and José Domingues da Fonseca, partner at the law firm Firmo, Cardozo Moreira Advogados, founder of Universo Cripto and host of Bitcast, gave to PanoramaCrypto.
As the regulation of crypto assets is still under discussion, how will Rio de Janeiro enable the announced initiatives, such as payment of property taxes (IPTU) in crypto?
Although bill PL 4.401/2021 has not yet been approved by the House of Representatives, we understand that its provisions do not affect the initiatives of the City of Rio de Janeiro. That’s because the bill deals more with the definition of concepts and delegation of competence for the inspection and supervision of companies that provide the service of virtual assets.
The lack of specific regulation for the crypto market in Brazil does not prevent people from investing, receiving, or paying for products and services with crypto assets.
We understand it is necessary for the municipality to delimit, for example, how the custody of crypto assets will take place (who will do the custody, what the cost will be, how it will be done); if a third party will provide a service for automatic conversion of cryptos into reais when paying taxes (or vice versa); and if the Municipal Organic Law will be changed to provide for the possibility of the municipal Treasury acquiring crypto assets, and even how they will be acquired (if directly, with the custody of the crypto assets, or through financial institutions).
In your view, are the population and the companies based in the city prepared for this innovation?
All new technologies require a bit of learning from their new users. However, with Pix and introducing the concept of keys/addresses in people’s routine (which includes reading a QR Code), we understand that the Brazilian population is more prepared to use a crypto asset wallet, for example.
By the way, crypto asset wallets are becoming increasingly simple and widespread.
However, it is imperative that the public authorities, as they did with Pix, also promote awareness and enlightenment campaigns about crypto assets.
And what about the public safes, since crypto assets face high volatility? Can this influence the city’s finances?
Mayor Eduardo Paes has signaled his intention to acquire up to 1% of the municipal Treasury in crypto assets – a measure that, in our understanding, mitigates possible impacts of volatility typical of the crypto market.
But nothing prevents investors from using mechanisms that are well known in the traditional market (such as hedges) to protect themselves from possible pressure on crypto asset prices.
Can a stablecoin be a solution to balance the high volatility of digital currencies?
We do not think so. Although the BRZ is already the largest stablecoin not pegged to the dollar in the world (which reinforces the potential of the Brazilian market), we believe that it (BRZ) is an excellent mechanism for cross-border transfers (with the agility required by today’s world) and immediate access to other crypto assets markets – including decentralized ones.
How would it be possible to deal with transparency regarding the amounts collected in taxes and their uses?
First, we must remember that the legislative framework requires the Public Administration to act with total transparency. This principle is established in the Federal Constitution, in its articles 5, XXXIII and XXXIV, 165, § 3, 31, § 3, and 74, § 2.
Moreover, blockchain, in our view, provides even more transparency in the routine of the Public Administration since, as it is a public and auditable ledger, it allows any citizen to analyze its transactions and make the questions it deems pertinent.
Blockchain should provide even more transparency in Public Administration spending.
What about the issue of security/cybersecurity?
As in any financial universe, security will depend on the way the public administration chooses to store and operate crypto assets.
For example, the municipality does not have the expertise to manage its own money, so it transfers this responsibility to a third party (a bank). This would be, in our view, the best way forward for crypto assets owned by public entities: hiring custodians.
There are already companies in Brazil that provide this service, such as Bitrust, and abroad – such as Coinbase, listed on NASDAQ.
What is your opinion about the possibility of creating the city’s currency?
All initiatives that aim to increase the process of technological innovation in Rio should be supported. However, we understand that massive use of crypto assets will depend on how the municipality, and the commission created by it, will regulate the theme.
The taxation of crypto assets is a relatively recent topic with divergent interpretations. However, the tax law requires that the good or service produced by the taxpayer be valued in Brazilian real (Brazil’s legal tender). In this sense, even if the consumer pays for the good/service with a crypto asset, the producer of such a good still has an obligation to assign a value in BRL for taxation purposes.
We emphasize that by opening the possibility of a good to be purchased with a crypto asset, the government is not removing the real as a form of payment (and its characteristic of official means of exchange) but rather adding a possibility of receipt.
Could this possible carioca (Rio’s) currency coexist, in a harmonious way, with the digital real?
We understand this will be the great challenge of an eventual Rio cryptocurrency. However, for us, both cryptocurrencies (CBDC and Rio cryptocurrency) may survive in harmony since the CBDC will be, at the end of the day, a “digital real,” acting – mainly – as a means of exchange and store of value.
On the other hand, a Rio cryptocurrency might have different functionalities, such as pre-programmed income, governance, and other features.
Opening the city to decentralized finance brings what benefits to the population? Can this be a factor in stimulating innovation and creating new opportunities for job and income generation?
We understand that it does. By encouraging the population to learn about the universe of cryptocurrencies, the public authorities also encourage the production of goods and services for this industry.
It is worth remembering that the CEO of the largest crypto asset exchange in the world, Changpeng Zhao, chose Rio de Janeiro as the headquarters for the exchange’s Brazilian operation.
Indeed, the municipality’s favorable position towards crypto assets, in addition to hosting the Brazilian operation of the largest crypto asset exchange in the world, will enable other companies and complementary activities to emerge or be established here.