Why Brazil Is the Big Latin American Bet for Global Crypto Exchanges

A cocktail of inflation and devaluation is generating a crypto boom that players such as Binance, Coinbase and Crypto.com do not want to waste.

Amid a crypto boom in Brazil, several global exchanges see the country as Latin America’s main market in 2022.

Binance, Coinbase, Crypto.com and other exchanges’ interest in Brazil has been growing as the region’s largest economy wrestles with significant economic imbalances.

Brazil registered a 10% inflation rate in 2021 and a steady depreciation of the Brazilian real against the U.S. dollar, which pushed the local currency from $0.25 in January 2020 to $0.18 this month.

This article is part of CoinDesk Brasil, a brand-new partnership between CoinDesk and InfoMoney, one of Brazil's leading financial news publications. Follow CoinDesk Brasil on Twitter.

That cocktail of macroeconomic imbalances fed the crypto boom in recent years. In 2020, crypto exchanges began to notice that Brazilian stablecoin traders were quadrupling in number.

Between January and November 2021, locals traded $11.4 billion in stablecoins and almost tripled the total traded in 2020, while bitcoin trading reached $10.8 billion over the same period, according to Receita Federal, the Brazilian tax authority.

Brazilians have incentives to purchase crypto instead of U.S. dollars to hedge against inflation or devaluation. When acquiring foreign currency, Brazilians are forced to pay a tax on financial operations – IOF is its acronym in Portuguese – that ranges between 1.1% and 6.38%. The tax does not apply to stablecoins.

Moreover, the Brazilian Central Bank prohibits locals from saving U.S. dollars in a domestic bank account. To be sure, the monetary authority abolished that prohibition by approving a new exchange rate framework in December 2021, but it hasn’t implemented it yet.

Brazilians also prioritize crypto over other more traditional investments. According to data from the Central Bank of Brazil (BCB), as of August 2021 Brazilians held $50 billion in crypto, compared to $16 billion held in U.S. stocks.

Locals are familiar with digital money, as the country leads the way in digital payments in Latin America. In October 2020, the BCB launched a real-time retail payment system, Pix, which by November 2021 had more than 104 million users – in a country of 214 million – and concentrated more than 70% of total transactions.

In the crypto arena, the BCB plans to carry out the first tests of its CBDC in 2022, while the local senate will discuss three bills seeking to set the rules for the crypto ecosystem in the country.

Binance, the world's largest crypto exchange, has a special interest in Brazil. “It is a key strategic market for Binance, for sure. It is the largest market in Latin America in all metrics and with enormous potential; and it is also very important for the company globally,” the company told CoinDesk in an email.

Over the past three years, Binance has focused on hiring Brazilians to strengthen its support team, the company said. Now, the exchange is looking for a general manager to lead its Brazilian business, according to one of eight job openings it has in the country.

In November 2020, Binance started accepting Brazilian reals through a fiat gateway, which boosted the number of active transacting users by 125% in 2021 compared with the previous year, the company told CoinDesk.

In that same month, crypto exchange Coinbase announced the creation of an engineering hub in Brazil, for which it has nine open positions on its careers page. The company appears to have a particular interest in payment services.

Singapore-based crypto exchange Crypto.com is another heavyweight looking to expand into Brazil.

According to Guilherme Sacamone, Crypto.com’s head of growth in Brazil, the company has been operating in the local market for "a few months" and is currently working to integrate its fiat wallet with the government's payment system, Pix. In addition, Crypto.com plans to launch a Visa debit card in Brazil, Sacamone told CoinDesk, without providing an exact launch date

Crypto.com is also looking for a country manager to lead its Brazilian operation, in addition to strengthening its institutional customer base through hiring a director of institutional sales.

“Latin America is an important region for Crypto.com and Brazil, being its largest market, has become a global priority for the company,” Sacamone said.

Brazil is also starting to attract European exchanges. Bit2me, a Spanish crypto exchange that raised EUR 20 million via an initial coin offering in 2021, plans to land during the first quarter of 2022, Bit2Me's CEO, Andrei Manuel, told CoinDesk.

Bit2Me plans to allow users to buy and sell crypto with fiat and provide crypto to crypto trading. It has a team of 20 in Brazil and plans to hire 20 more employees in 2022 to boost its marketing, compliance, product and support teams, the executive added.

But the fervor for the Brazilian market is not limited to exchanges. The global payments company Ripple considers Brazil the key trigger to growth in Latin America. It is currently looking for a business development manager to coordinate "strategic relationships" that include “payment and fintech companies, financial institutions, and digital asset infrastructure players,” among others.

A regional fight

Regional crypto exchanges already operating in Spanish-speaking markets are also eyeing Brazil. But they face the challenge of competing with Brazil’s dominant local player, Mercado Bitcoin.

Founded in 2014, Mercado Bitcoin is the largest crypto exchange in Brazil, with 3.2 million users. It also raised $250 million in a Series B funding round from Softbank in 2021, making it the first Brazilian crypto unicorn.

Mercado Bitcoin's main competitor in Brazil is Bitso, a Mexico-based crypto exchange that raised $250 million in a Series C funding round that made it the first crypto unicorn in Latin America.

José Molina, Bitso’s vice president of marketing, told CoinDesk that the company plans to become the largest exchange in the country in 2022. Although it did not disclose its customer base in Brazil, Bitso told CoinDesk that its Brazilian business unit grew 97% in the last six months.

Bitso currently has more than 30 job openings in Brazil with the aim of “growing rapidly,” Molina said. The company hired Facebook veteran Vaughan Smith in August 2021 to boost its expansion in the country.

Bitso has more users than Mercado Bitcoin – 3.7 million versus 3.2 million – when accounting for Argentina, Brazil, Colombia and Mexico, which are the markets in which it currently operates.

But the numbers may change in 2022, since Mercado Bitcoin is looking to expand into the Spanish-speaking part of Latin America through acquisitions in Argentina, Chile, Colombia and Mexico, 2TM CEO Roberto Dagnoni told CoinDesk in June.

Bitso is not the only Latin American crypto exchange targeting Brazil. In January 2021, Argentina-based crypto exchange Ripio acquired BitcoinTrade, the second-largest crypto exchange in Brazil.

For 2022, it plans to launch its corporate trading desk, Ripio OTC, aimed at institutional investors and high-net-worth traders, Ripio Brazil's country manager, Enrique Teixeira said. In parallel, the company is working on "various payment products" with Visa Brazil, including a crypto card and several projects with local fintech companies.

Crypto Prices Drop After Russia Calls for Ban

The price of bitcoin and other cryptocurrencies dropped Friday (Jan. 21) following a sell-off in speculative assets amid the news of Russia’s call to ban crypto in that country.

As the Financial Times reports, the price of bitcoin fell as much as 7.4% against the dollar in Asian trading, while ether dropped nearly 9%, wiping away about $140 billion off the market capitalization for some of the market’s largest cryptocurrencies.

The bitcoin selloff picked up steam on Wall Street late Thursday after Netflix warned that it had seen flagging subscriber growth. Shares in the streaming giant dropped about 20% in pre-market Nasdaq trading Friday.

Andrew Sullivan, managing director at Outset Global in Hong Kong, told the Financial Times Asia was seeing “huge volumes going through in a number of markets as investors move to cash” on Friday, as technology shares in the region fell.

The price drop came one day after Russia’s central bank issued a report that compared cryptocurrencies to a pyramid scheme and rallied for their abolition.

The move made Russia — the world’s third largest crypto miner — the latest nation to propose either banning cryptocurrencies or imposing stricter regulations on the digital coins.

In its report, the Bank of Russia said the growth of cryptocurrency was driven primarily by speculative demand and could cause a market bubble that threatened financial stability.

The bank said financial institutions should be forbidden from carrying out operations using crypto and proposed a ban on crypto exchanges. The bank says Russians are active crypto users, buying and selling roughly $5 billion per year.

Also on Thursday (Jan. 20), U.S. Securities and Exchange Commission Chairman Gary Gensler said cryptocurrency exchanges will be a chief focus of his agency this year.

“I’ve asked staff to look at every way to get these platforms inside the investor protection remit,” Gensler said. “If the trading platforms don’t come into the regulated space, it’d be another year of the public being vulnerable.”

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Tether refutes allegations that it's operating as a fractional reserve bank

A quiet update to Tether’s website suggests the stablecoin is playing fast and loose with its fragile ‘dollar reserves.'

[UPDATED AT BOTTOM OF ARTICLE WITH RESPONSE FROM TETHER]

So-called stablecoin Tether has been diversifying its dollar reserves like a traditional bank, according to a beguiling update on its official website (credit to redditor AtlasRand1, the alter-ego of legendary Tether-skeptic BitFinex’ed). This is less than ideal because it is not a traditional bank—it is a fragile, high risk cryptocurrency ecosystem whose very functioning depends on one basic principle: the IOU.

We call Tether an IOU stablecoin because it (supposedly) derives its dollar-peg from the assurance that each tether is backed by a fully redeemable dollar—i.e. a debt. Yet the following quote raises questions over how well-equipped Tether is to repay that debt:

“Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.”

So, what’s going on?

In general, the suspicion surrounding tether has focused most heavily on the liquidity of its reserves—whether all tethers are backed. Several factors have compounded the confusion: Tether shares an executive board with BitFinex, an exchange accused of using the tether cryptocurrency to fraudulently pump the price of bitcoin; Tether has never conducted a full audit, relying instead on amateurs and a Bloomberg journalist and, finally, Tether’s liquidity rests heavily on banks with patchy track records.

The adjusted statement above only serves to complicate these liquidity issues further. What used to be a clear statement outlining the simple IOU model/mechanics—that each Tether is backed 1:1 with “dollars” in Tether’s reserves—has been replaced with the more nebulous assurance of “our reserves.” These “reserves” include “traditional currency” (dollars not specified), and—crucially—“from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.” (Emphasis ours.)

Let’s unpack this. The clearest implication is that Tether is operating like a fractional reserve bank. Fractional reserve banks loan out customers’ assets to a range of trusted third parties/investors, who return the funds—hopefully—in the form of interest. This is all very well for banks, which customers expect to generate interest. Tether, on the other hand, promises the exact opposite—that customers’ investments will remain stable. (Not to mention that it just replicates the existent, hated financial system.) 

That Tether diversifies its stock with “other assets” could amplify this instability. Other assets, of course, fluctuate at different rates to the dollar. Let’s say Tether is backed partially by gold, for instance. If the gold’s notional value increases at a faster rate than its dollar-value, the tethers will be backed in excess. If the gold depreciates, the peg will be at risk of collapse.    

Now imagine these “other assets” are in fact cryptocurrencies, specifically the highly volatile bitcoin. Confidence in Tether’s stability would plummet.

And now we get to the heart of it. The sources of “other assets” may include “affiliated entities.” What is Tether’s best known affiliated entity? BitFinex, the largest crypto exchange by trading volume, which, as we have mentioned, shares its executives with Tether. (Revealed originally via a leak in the Paradise Papers.)

If Tether’s reserves are partially backed by other assets supplied by BitFinex, in exchange for “loans and receivables made by Tether,” that effectively means that Tether is loaning out funds to itself, in exchange for assets from itself, meaning it is running as a sort of bizarre perpetual-motion sham. Even worse is if those assets are bitcoins, which would imply—provided the allegations that Tether buys bitcoins with unbacked tethers are true—that Tether is backing its reserves with assets bought far below their notional dollar value. 

Or, as “PaloAltcoin” wrote on Reddit:

“If I read this correctly, [tethers] are actually backed by cryptocurrency. So, when the price drops and people flock to Tether, it increases the amount of Tether and it decreases the funds it’s backed by. This is just Bitconnect with extra steps.”

Gosh, perhaps we ought to look at Tether’s “proof of funds” link and check the reserves ourselves?

Ah—the link is dead.

UPDATE:

We pressed Tether on the nature of the underlying assets, its relationship with BitFinex, the dysfunctional "proof of funds" link and when the update was made. A spokesperson named "Kaspar Bitfinex" told us this:

"From time to time, Tether reviews its Terms of Service and Risk Disclosures to ensure that they remain appropriate and up to date. Our most recent revisions were intended to update our disclosures to reflect Tether’s growth and operations and to be consistent with the types of disclosures used by other institutions.

These changes were made several weeks ago and were directly communicated to Tether’s customers logging into the site. This was done by way of scrollwrap with new terms of service that required active consent.

Tethers remain completely stable and 100% backed, so Tether’s reserves always equal or exceed the number of issued Tethers. The only change is that the composition of the assets that provide that backing includes a combination of cash, cash equivalents, and may also include other assets or receivables from loans issued by Tether."

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Bitcoin Sinks Below $35,000 Overnight

The crypto crash worsened on Friday night. Now Bitcoin is on the way back up—was $34,420 the bottom?

Bitcoin continued to plunge overnight—briefly dropping below $35,000 to a low of $34,420 on CoinMarketCap—before beginning a slow rebound on Saturday morning. 

It's still down almost 10% over the past 24 hours, according to CMC, and is currently priced at just under $35,000.

Bitcoin's 24-hour low of $34,020.27 saw the cryptocurrency tumble to levels it hadn't previously touched for six months, back in July 2021. 

After hitting an all-time high on November 10 last year of $69k, Bitcoin’s price has slowly slipped, picking up its sell-off in recent weeks. 

And it's not just Bitcoin, either. Ethereum, the second-largest cryptocurrency by market cap, is also suffering: its price has taken a 15% hit in the past 24 hours, trading at just under $2,400 at the time of writing. 

Ethereum, like Bitcoin, is well off the all-time high it touched back in November of $4,878.26—by 49%. Popular tokens that run on the Ethereum network have not been able to avoid the sell-off in the past 24 hours. 

Meanwhile, Ethereum competitor Solana, which had a mighty boom last year, and seemingly sprung out of nowhere to land in the top 10 cryptos by market cap, is down 23% in the past day, trading at just under $94.

When will the bloodbath end?