Gustavo Filgueiras, a 25-year-old businessman in Brazil, began trading cryptocurrencies in 2019 after seeing an acquaintance’s crypto investment portfolio.

“I like high-risk investments because they usually result in higher profits. As a consequence, crypto caught my eye,” Filgueiras said. 

Filgueiras knows 15 or so crypto investors in Brazil,  the majority of whom are day traders looking for quick gains. A few use crypto for savings or as a store of value, he said.

Crypto is booming in Brazil, fueled by day traders like Filgueiras and his colleagues eager to take advantage of the ongoing bull market. Regulators, however, have yet to catch up. Save for a few tax requirements, Brazil’s crypto industry remains largely unregulated.

Brazil's largest bitcoin exchange reported record trading volumes in the first quarter of 2021. Locals say they're interested in making a profit off the asset class. This is part of a larger regional trend: Other South American countries like Colombia and Argentina are seeing an explosion of interest in crypto as retail traders take advantage of crypto as an investment, remittance tool or store of value. 

Brazil, the largest economy in Latin America, is struggling to contain the COVID-19 outbreak. It is one of the countries hit hardest by the pandemic, trailing the U.S. and India. The country’s president, Jair Bolsonaro, is facing a criminal investigation for his controversial response to the pandemic. The economy is at risk of not recovering quickly from the recession that followed the first wave of the pandemic, while experts predict a spike in the inflation rate.  

Against this backdrop of  political and economic uncertainty, institutional and retail traders alike are piling into crypto. Their interest was bolstered by the launch of two crypto exchange-traded funds (ETFs) earlier this year.

In the first quarter of 2021 alone, the country’s largest bitcoin exchange, Mercado Bitcoin, (with around 2.7 million users) traded almost $5 billion in crypto on its platform.

This year’s volume so far is larger than the volume traded on the platform between 2013 and 2020, Mercado CEO Reinaldo Rabelo told CoinDesk. Through all of 2020 the platform traded just $1.2 billion.  

Mercado Bitcoin was able to complete its first fundraising round this year, led by GP Investments and Parallax, and secured a $40 million investment to expand to other markets, Rabelo said. As part of this investment plan, Mercado agreed to buy Blockchain Academy, the largest crypto school in Brazil. 

“In the Brazilian market, the recent growth is due to the institutionalization of the subject, stimulated by the Coinbase [public listing], which led banks and even Brazil’s stock exchange B3, to make positive statements about investments in cryptocurrencies,” Rabelo said. 

Meanwhile, other big players in the region have moved in. In December, Mexico-based Bitso raised $62 million – a hefty portion of which was dedicated to expansion into Brazil. The firm launched operations in Brazil last week but did not answer specific questions about its volume in South America’s largest nation by press time. 

Argentinian crypto exchange Ripio began operations in Brazil in 2016. According to Juan Mendez, chief brand officer at Ripio, the platform had a couple of hundred users in Brazil at the beginning. Although Ripio saw impressive growth in Argentina in the last few years, adoption in Brazil was relatively slow, according to Mendez. 

But the numbers really started to pick up last year. 

“Since November 2020 we have seen an incremental growth in volume, and our user base is growing 10% month over month. That's a great sign that adoption is growing steadily in Brazil,” Mendez said. 

In January 2021, Ripio acquired Brazil’s second-largest crypto exchange, BitcoinTrade, to expand its presence in the country.

In February, Brazilian asset manager Hashdex announced the launch of one of the world’s first crypto exchange-traded funds. The ETF created by Hashdex and Nasdaq, tracks the Nasdaq crypto index, and allows investors to access a diversified crypto portfolio in one transaction. The ETF began trading on the Sao Paulo-based stock exchange B3 in late April. 

In March, the Brazilian securities and exchange commission also approved a bitcoin ETF created by Latin American blockchain investment firm QR Capital. 

“We’re seeing lots of demand for bitcoin at what is the beginning of institutional adoption in Brazil. So we have a very strong expectation about this product,” Fernando Carvalho, CEO of QR Capital, told CoinDesk, adding the ETF will start trading on B3 in late May. 

According to Carvalho,  the 2020 bitcoin price run.was one reason for the increasing demand for bitcoin in Brazil through the pandemic. The demand spiked even more as the country’s central bank brought down its key interest rate to a historic low of 2% in August, and people began looking for alternative investments. 

Further, in 2020 Brazil’s inflation rate rose to over 5% for the first time in four years as the pandemic raged. In March, the central bank began raising interest rates to try to bring inflation back to its 3.75% target.  

“In Brazil they had bad inflation numbers in 2020. This year didn’t start with very promising numbers either. Most of our staff, and also users in Brazil, chose crypto as a store of value and as an asset to invest in,” Mendez said.  

Despite the growing use of cryptocurrencies in Brazil, the regulatory framework has been inconsistent. 

In 2014, Brazil’s tax authority, RFB, declared that virtual currencies will be subject to capital gains, but only if more than 35,000 Brazilian real (US$6,670) was involved in the settlement. In 2019, the RFB published guidance, requiring crypto traders to report transactions exceeding 30,000 real ($7,600 at the time) to the national treasury. 

Shortly before publishing new tax requirements, Brazil’s financial authorities also announced a fintech regulatory sandbox. According to Carvalho, 32 projects applied for approval for the testing environment and more than six of them are blockchain-based projects. The sandbox will select seven projects to test fintech services for a period of one year, he added. 

Crypto firms in the country are open to the proactive regulation of the space, Carvalho said. Businesses have been suffering from the lack of clarity in regulations, particularly because local banks are reluctant to work with crypto firms. 

In 2018, major local banks suddenly shut down accounts connected to crypto platforms in the country, leading to an investigation by Brazil’s antitrust authority. The banks denied they had worked together to halt services to crypto firms, claiming the accounts were closed because of violations of anti-money laundering (AML) requirements. The investigation was ongoing as of last year.

Last year, Brazilian Senator Soraya Thronicke proposed a series of laws that could bring some legal clarity to Brazil’s unregulated crypto space, and could also hold scammers and fraudsters accountable. But there has been no update on the status of the proposed bill since then. 

“This is something that's moving really slow, in my opinion, it will probably not evolve at a very high speed because there's a lot of lack of knowledge about the technology,” Carvalho said. 

Filgueiras added that innovative initiatives, crypto or otherwise, tend to be viewed with skepticism in Brazil. 

“I believe we have a long road ahead of us, given that groundbreaking ventures still struggle a lot. I hope it changes soon, but I doubt it,” Filgueiras said.