The business case for international cryptocurrency exchanges to move into Brazil and the opportunities for growth and expansion in that country
With Facebook’s announcement this week that it’s building a stablecoin that will allow WhatsApp users in India transfer money, this is a good time to examine the proliferation and future growth of cryptocurrency in Brazil. The intention here is not analogous to the Facebook announcement in the sense of their specific forthcoming offering, but with that company’s push to promote money transfers via their WhatsApp business, this is an opportune time to check in with the Brazilian market (of course the same is true for India, but that’s for another day). Facebook is a top 8 worldwide company by market cap and this announcement is thunderous, adding even more credibility to value of alternative money transfer and cryptocurrency adoption in emerging countries.
What are the market opportunities, what do the key exchange offerings look like, what are the volumes, is this market is ripe for growth, etc.? With Brazil’s population of 210 million (and by-the-way, a community of 120 million WhatsApp users, almost 60% of the population), a deep banking industry and form taking place in the regulatory environment, there is a strong case for the international firms to enter this market.
Just for a moment, to continue the Facebook story as it relates to Brazil, let’s look at some country statistics — GDP and currency values of these two countries. Brazil’s GDP is $2.06 trillion vs. India’s GDP of $2.60 trillion. These compare to the UK’s $2.62 and the US’s $19.40. All numbers are through 2017. Both the INR and BRL has depreciated significantly against the USD this year (US Fed tightening one reason), though Brazil’s losses have outpaced the INR’s. Both have double digit losses. With regard to crypto, over 90% of total daily trading volume takes place against the USD and JPY. BRL and INR rank 9th and 11th respectively, though the volumes numbers in both are still small (about $3 million I turnover per day) (coinhlls.com).
Moving the conversation now just to Brazil, while the daily turnover number is presently small, there is very strong anecdotal evidence that demonstrates the Brazilian consumer is committed to investing in this new asset class. More people open cryptocurrency accounts in Brazil than traditional brokerage accounts and about 3 million Brazilians have exposure to Bitcoin (across over 15 exchanges, of local origin) compared to only about 600,000 that invest in the stock market. In 2017, Brazilians moved $2.4 billion in and out of Bitcoin, up 15 times from 2016. While nominally these numbers may seem small, they clearly point to continuing growth and represent a trend toward further countrywide adoption in a region that is well suited for and benefits by the use of cryptocurrencies. Some reports show that at least 30% of Brazilians have some level of interest in cryptocurrency. And there are some other positive developments in Brazil. For example, Oásis Supermercados, a supermarket chain based in Rio de Janeiro, has started to accept cryptocurrency as a means of payment. Customers in Rio will be able to pay in Bitcoin, Bitcoin Cash and Litecoin.
Currently, the regulatory environment is evolving and while not definitive, there are early signs that the government is serious about understanding and moving forward in the adoption of cryptocurrency whereas some other Latin American countries, like Argentina and Chile, are not so favorable. One sign that I view as positive, though some might disagree, is that the Brazilian tax regulator, The Department of Federal Revenue of Brazil (RFB), has requited that Brazilian based crypto exchanges send to them monthly detailed reports on all crypto-related buys and sales. Legal entities and Brazilians also have to report all their transactions if they are done on foreign exchanges and are larger than BRL 10,000. This regulation is aimed at preventing money laundering and increasing revenue from taxes and is a clear indication that this market needs to be taken seriously. In 2017, the RFB raised BRL 8 billion in revenue from Bitcoin trading. And of course, in Brazil, like many other places, the debate exists as to whether these are securities or currencies.
Whereas Facebook will create a stablecoin for WhatsApp users in India, Brazil still relies on the traditional banking system. There certainly is much room for improvement in having good faith that the players responsible for handling the fiat side of things, deposits/withdrawals. That too is showing some positive signs. In two lawsuits, Banco do Brasil and Banco Santander were ordered to reopen bank accounts at Bitcoin Max. These are not regulatory wins, but with some small victories and the tremendous interest throughout the country, the banking system will have to come to terms with how they will participate.
Lastly, many exchanges already exist in Brazil, so why have another? The current offerings all have many positive attributes, but some of the most critical components to a successful platform are the ability to attract liquidity, provide custody and insure security. There have been some security issues with the local platforms, hacks and a government subpoena that took a hard look at these issues. An exchange that brings to market sophisticated trading tools and the ability to create deep liquidity in their order books will gain a sizeable advantage. When these factors come together, the sincere and growing interest among Brazilians in cryptocurrency will be properly addressed, and this market will have the launchpad it needs to see it adherence, credibility and volumes grow dramatically.
Have a great Holiday Season and Happy New Year
