International financial institutions are acknowledging the size and relevance of the cryptocurrency market in Brazil and have sounded the alarms on the impact of ignoring regulations on these flows.

In its latest Financial System Stability Assessment report, published this month, the International Monetary Fund (IMF) highlighted the massive growth of crypto financial rails and called for defining the regulatory framework to increase oversight on them.

The report found that crypto-based cross-border flows have been steadily growing since 2017, outpacing volumes of traditional capital. Most of these flows are driven by stablecoins, which have become a favorite among companies and retail due to efficiency and tax-related advantages.

Stablecoin flows are largely dependent on international and national investment indexes, just like the S&P 500, VIX, and even bitcoin prices, suggesting that these are influenced by investor reactions to these fluctuations. National numbers, including exchange rate fluctuations, interest rates, policy uncertainty, and changes in tax policy, also affect demand.

While the IMF recognizes that the Central Bank of Brazil has taken action to regulate the virtual asset service provider (VASP) industry, it still lacks proper protections in several key fields, including legal protections for customers and segregation of assets held in custody.

In the same way, while there have been efforts in the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) field, international standards, such as the full enforcement of travel rule regulations, have still to be implemented.

The implementation of such measures is more relevant than ever, as the report also stresses that the Brazilian crypto system is interconnected with the traditional financial system. Regulators will need to set advanced reporting protocols in place with cooperation from national and foreign supervisors to mitigate risks.

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