CVM Orienting Opinion No. 40 of October 11, 2022: Cryptoassets and the Securities Market

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Seven of September Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000

ORIENTING OPINION CVM No. 40, OF OCTOBER 11, 2022 Cryptoassets and the Securities Market

Object of this Orienting Opinion
Cryptoassets are assets represented digitally, protected by cryptography, which can be the object of transactions executed and stored through distributed ledger technologies (DLTs) 1. Usually, cryptoassets (or their ownership) are represented by tokens, which are intangible digital titles.

Globally, discussions regarding the regulation of cryptoassets 2 are taking place in various countries, with the recognition that this is a cross-border challenge that demands guidance 3.

1 This definition fulfills the purpose of outlining the object of this Orienting Opinion, without restricting it taxatively. This Orienting Opinion does not propose to detail the functioning of cryptoassets or other digital assets and/or the recording systems on blockchains (distributed ledger technology or “blockchains”), which could divert the target audience from the finalistic messages of this Orienting Opinion. 2 In this Orienting Opinion, we will use the designation cryptoasset, although note is deserved regarding terminological discussions on the use of “digital assets” aiming for a technology-neutral nomenclature. 3 The Organisation for Economic Co-operation and Development (OECD) has already alerted to the urgency of this challenge, suggesting guidance instruments: “The growing application of DeFi and its increasing interconnectedness with traditional markets presents an urgent challenge for policy makers seeking to maximise DeFi’s potential efficiencies for financial markets, while managing risks” and “These efforts should be supported by the promotion of soft-law instruments, such as recommendations, to raise awareness and good practices. It is crucial that we promote greater international policy collaboration and discussion to overcome these challenges, particularly at the cross-border level, and to avoid regulatory arbitrage” (OECD, “Why Decentralised Finance (DeFi) Matters and the Policy Implications”, 2022, available at https://www.oecd.org/daf/fin/financialmarkets/Why-Decentralised-Finance-DeFi-Matters-and-the-Policy-Implications.pdf, last accessed on 26/08/2022).

This Orienting Opinion consolidates 4 the CVM’s understanding regarding the norms applicable to cryptoassets that are securities. Thus, this work clarifies the limits of the Agency’s action and the manner in which the CVM can and must exercise its powers to regulate, supervise, and discipline the activities of participants in the capital market.

Although there is no specific legislation on the subject yet, this Orienting Opinion aims to guarantee greater predictability and security, as well as to foster an environment favorable to the development of cryptoassets, with integrity and adherence to relevant constitutional and legal principles. In this way, the CVM is contributing to (i) investor and public savings protection; (ii) prevention and combating of money laundering; (iii) prevention and combating of corruption; (iv) control of tax evasion; and (v) prevention and combating of terrorism financing and/or proliferation of weapons of mass destruction 5.

The understandings contained in this Orienting Opinion are subject to subsequent modifications, to the extent that specific legislation on the matter is sanctioned, or even as a practical consequence of the permanent development of technology, the characteristics, and the functions inherent to cryptoassets.

4 In this sense, see (i) regarding the classification of cryptoassets as securities for the purposes of item IX of art. 2 of Law No. 6.385/76, as amended: CVM PAS No. 19957.003406/2019-91, Rel. Dir. Gustavo Machado Gonzalez, judged on 10/27/2020; CVM PAS No. 19957.007994/2018-51, Rel. Dir. Gustavo Machado Gonzalez, judged on 06/09/2020, CVM PAS No. RJ2017/3090, Rel. Dir. Carlos Alberto Rebello Sobrinho, judged on 05/07/2019 and PA No. 19957.010938/2017-13, decided on 01/30/2018; (ii) regarding the possibility and conditions for investment in cryptoassets by Brazilian investment funds: Circular Letters No. 1/2018/CVM/SIN, of 01/12/2018 and No. 11/2018/CVM/SIN, of 09/19/2018; (iii) regarding the characteristics and risks involving investments in cryptoassets, the “CVM Alert” available at https://conteudo.cvm.gov.br/menu/investidor/alertas/ofertas_atuacoes_irregulares.html, last accessed on 07/03/2022; and (iv) specifically regarding cryptoassets “Alert Series – Cryptoassets”, available at https://www.investidor.gov.br/publicacao/Alertas/listaalertas.html, last accessed on 07/03/2022. 5 For further reading, consult FATF, “Updated Guidance for a Risk-Based Approach - Virtual Assets and Virtual Asset Service Providers”, October 2021.

New Technologies and Regulation
This Agency is receptive to new technologies that contribute and positively influence the evolution of the securities market. The adoption of technologies should be done as a way to expand horizons, and not as a limitation of the extent to which rights can be exercised.

Although these technologies are not, in themselves, subject to regulation within the securities market, it is important to highlight that, depending on their nature and characteristics, the services or assets developed through them may be subject to specific regulatory regimes, in accordance with applicable legislation. In this sense, the fact that a service or asset is developed or offered digitally, through cryptography or based on distributed ledger technology, is irrelevant for the classification of an asset as a security or for the submission of a certain activity to CVM regulation 6.

In this context, although tokenization 7 itself is not subject to prior approval or registration with the CVM, if securities are issued for public distribution, both the issuers and the public offering of such tokens will be subject to applicable regulation 8.

6 In line with this understanding, see (i) CVM PAS No. 19957.003406/2019-91, Rel. Dir. Gustavo Machado Gonzalez, judged on 10/27/2020; and (ii) CVM Resolutions No. 785/2017, 821/2019, 826/2019, 828/2019, 830/2019, 831/2019, 837/2019, and 839/2019.
7 IOSCO defines tokenization as the process of digitally representing an asset or ownership of an asset. International Organization of Securities Commissions – IOSCO, IOSCO “Research Report on Financial Technologies (Fintech)”, p. 51. Madrid, 2017, available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf, last accessed on 07/05/2022. 8 In this sense, see decision of the CVM Collegiate Body within the scope of PA No. 19957.010938/2017-13, of 01/30/2018.

Likewise, even if new technologies are used, the administration of organized markets for token trading, as well as the services of intermediation, bookkeeping, custody, centralized deposit, registration, clearing, and settlement of operations involving securities will be subject to the rules applicable to these activities.

Functional Criterion for Token Taxonomy
Cryptoassets are usually designated as tokens and can perform various functions, which is why academics and regulators have sought to formulate a taxonomy, still without a uniform understanding of the classification 9.

Without prejudice to following the conceptual debates on the subject, the CVM will adopt a functional approach for classifying tokens into a taxonomy that will serve to indicate their legal treatment. Initially, the taxonomy will follow the following categories:

(i) Payment Token (cryptocurrency or payment token): seeks to replicate the functions of currency, notably as a unit of account, medium of exchange, and store of value; (ii) Utility Token (utility token): used to acquire or access certain products or services; and

9 Cf. Financial Conduct Authority, Consultation Paper 19/3, January 2019, available at https://www.fca.org.uk/publication/consultation/cp19-03.pdf, with last access on 09/10/2022.
10 Cf. Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937, available at https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:52020PC0593, last accessed on 09/10/2022.

(iii) Asset-Referenced Token (asset-backed token): represents one or more assets, tangible or intangible. Examples include “security tokens”, stablecoins 11, non-fungible tokens (NFTs), and other assets subject to “tokenization” operations.

The categories mentioned above are not exclusive or isolated, so that a single cryptoasset may fall into one or more categories, depending on the functions it performs and the rights associated with it.

The CVM understands that an asset-referenced token may or may not be a security, and its characterization as such will depend on the economic essence of the rights conferred to its holders, as well as may depend on the function it assumes throughout the performance of the related project 12.

In this sense, it is worth mentioning that market practice has shown that a token can represent not only assets, but also rights to remuneration for enterprise, right to receive related to structures similar to securitization, or even voting rights 13. Regarding this, we note that some of these models bring the issued tokens closer to the concept of security, and keeping this in mind, we reinforce that this taxonomy does not propose to consolidate a taxative definition of each classification, nor to limit the scope of this Agency, whose action will depend on the analysis of cases in concreto.

11 For an analysis of the concept of stablecoin and its relationship with the concept of security, cf. INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS – IOSCO, Global Stablecoin Initiatives. Madrid, 2020. Available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD650.pdf, last accessed on 10/10/2022. 12 In this sense, see CVM PAS No. 19957.003406/2019-91, Rel. Dir. Gustavo Machado Gonzalez, judged on 10/27/2020. 13 Cf. CVM, “Initial Coin Offerings (ICOs)”, Rio de Janeiro, 11/16/2017, Available at: https://www.gov.br/cvm/pt-br/assuntos/noticias/initial-coin-offerings--icos--88b47653f11b4a78a276877f6d877c04, last accessed on 07/05/2022.

Furthermore, we reinforce that this division is initial. Thus, it may be expanded or subdivided whenever necessary to not restrict the evolution of regulation, especially considering the permanent development of technology and the creation of new structures or operations for the issuance of tokens.

Characterization of Cryptoassets as Securities
The concept of security has an instrumental nature and aims to delimit the securities regime and, consequently, the competence of the CVM 14. Thus, in cases where a certain cryptoasset is a security, issuers and other involved agents are obliged to comply with the rules established for the securities market and may be subject to CVM regulation.

Although cryptoassets are not expressly included among the securities cited in the items of art. 2 of Law No. 6.385/76, market agents must analyze the characteristics of each cryptoasset with the objective of determining if it is a security, which occurs when:

(i) it is the digital representation of any of the securities expressly provided for in items I to VIII of art. 2 of Law No. 6.385/76 and/or provided for in Law No. 14.430/2022 (i.e., certificates of receivables in general); or (ii) it fits into the open concept of security of item IX of art. 2 of Law No. 6.385/76, insofar as it is a collective investment contract

14 See PA CVM No. RJ2003/0499, Rel. Dir. Luiz Antonio Sampaio Campos, judged on 08/28/2003.

Regarding cryptoassets that fit the requirements provided for in item IX of art. 2 of Law No. 6.385/76, this Agency has already manifested itself on some occasions 15 to clarify that the characterization of a certain asset as a collective investment contract would not depend on prior manifestation of the CVM.

It should be noted that, even if they invest in or assume exposure to cryptoassets that are not securities, collective investment contracts are securities.

Furthermore, derivatives are necessarily characterized as securities, regardless of whether their underlying asset is a cryptoasset or not, in accordance with art. 2, item VIII, of Law No. 6.385/76.

4.1. Collective Investment Contract
The open concept of security provided for in item IX of article 2 of Law 6.385/76 has inspiration from a precedent of the United States Supreme Court, from which the premises of the “Howey Test” 16 are extracted, which has been used by the CVM to evaluate whether a certain asset is a security.

Aware, therefore, that the Brazilian legal definition of collective investment contract has inspiration in American law, the CVM closely follows the interpretation in that jurisdiction of cases where cryptoassets are classified as securities. Notwithstanding, it is noted that the domestic understanding may be distinct from the foreign one in concrete cases, since the origin and inspiration do not determine conceptual identity, nor interpretative.

In this sense, the CVM Collegiate Body has repeatedly considered 17 the following characteristics of a collective investment contract to decide whether a certain title is or is not a security:

(i) Investment: contribution of money or property susceptible to economic valuation; (ii) Formalization: title or contract resulting from the relationship between investor and offeror, regardless of its legal nature or specific form; (iii) Collective nature of the investment; (iv) Expectation of economic benefit 18: either by right to some form of participation, partnership, or remuneration, resulting from the success of the activity referred to in item (v) below; (v) Effort of entrepreneur or third party: economic benefit results from the predominant action of a third party who is not the investor; and (vi) Public offering: effort to raise resources from the public savings.

The last 3 (three) requirements deserve detailing when we analyze cryptoassets 19.

15 See, in this sense, (i) CVM PAS No. RJ2017/3090, Rel. Dir. Carlos Alberto Rebello Sobrinho, judged on 05/07/2019; and (ii) CVM PAS No. 19957.003406/2019-91, Rel. Dir. Gustavo Machado Gonzalez, judged on 10/27/2020.
16 SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

In this sense, the CVM Collegiate Body has repeatedly considered 17 the following characteristics of a collective investment contract to decide whether a certain title is or is not a security:

The last 3 (three) requirements deserve detailing when we analyze cryptoassets 19.

17 PA CVM No. RJ2007/11593, Rel. Dir. Marcos Barbosa Pinto, judged on 01/15/2008.
18 It is worth noting that it is discussed to what extent the expectation of appreciation or liquidity gain of a certain cryptoasset, due to the effort of the entrepreneur or third parties (and not external factors beyond their control), would be relevant for the nature of said product as a security. Regarding this, we highlight the understanding established by the Collegiate Body in CVM Administrative Process No. 19957.009524/2017-41, in which it is affirmed that this type of expectation may be relevant for the characterization of a product as a collective investment contract. On the other hand, international regulatory debate is still maturing the theme, especially the question of to what extent the effective use of cryptocurrencies and utility tokens would be relevant for their characterization as securities. 19 For the sake of objectivity and conciseness, we will not address the first three requirements, in the certainty that the CVM’s position on them is already clear and does not demand specification to the peculiarities of cryptoassets.

4.1.1. Expectation of Economic Benefit
The expected economic benefit results directly from the result of the enterprise (e.g., participation in the enterprise’s results), being certain that the result ultimately derives from the efforts of the entrepreneur or third parties, and not from external factors, which are beyond the entrepreneur’s control 20.

Thus, cryptoassets that establish the right of their holders to participate in the enterprise’s results, including through participation or redemption of capital, remuneration agreements, and receipt of dividends, will, in principle, have fulfilled this requirement.

4.1.2. Effort of Entrepreneur or Third Party
Item (v) of the collective investment contract concept requires that remuneration be predominantly derived from the efforts of the entrepreneur or third parties. Therefore, the nature and extent of this agent’s action for the success of the enterprise must be evaluated. This requirement will be fulfilled, for example, in situations where the creation, improvement, operation, or promotion of the enterprise depends on the action of the promoter or third parties.

4.1.3. Public Offering
The public offering for the distribution of securities is regulated, in Brazil, by Law No. 6.404/76 and Law No. 6.385/76 and, as a general rule, regulated by CVM Resolution No. 160/22, which aim to ensure the protection of the investing public in general and promote the efficiency and development of the securities market.

Given that the offering of tokens is mainly carried out through the internet and without geographic restriction, it is necessary to analyze the theme in light of Orienting Opinions No. 32/05 and No. 33/05, which deal, respectively: (i) with the use of the Internet in offerings of securities and in the intermediation of operations; and (ii) with the intermediation of operations and offering of securities issued and admitted to trading in other jurisdictions.

According to the aforementioned Orienting Opinions, the CVM will analyze concrete cases to evaluate if there is an offering of a security subject to its competence, and for this purpose, it will take into account the existence of effective measures to prevent the general public from accessing the page containing the offering.

The current context justifies complementing the guidelines of said Orienting Opinions, considering the popularization of the use of social networks for the offering of securities and the regulation of electronic platforms for participatory investment (crowdfunding), governed by CVM Resolution No. 88/22.

The CVM notes that it is possible to display a page containing offerings of securities only to users identified by login and password. Although such an access prevention mechanism is mentioned in CVM Orienting Opinion No. 32/05, these offerings are not necessarily private.

In this sense, the existence of mechanisms to prevent access to pages containing offerings of securities and the lack of specific disclosure about an offering, in isolation, do not have the effect of removing the public character of an offering. Other aspects of the concrete case must be taken into consideration to evaluate the effectiveness of the measure, such

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 as well as the number of investors reached and the number of subscribers, among others, with the certainty that there are numerous tools available to block access to the page (such as “geoblocking” mechanisms).

Furthermore, offerings of derivatives intermediation to Brazilian investors also deserve note, in complement to the aforementioned Orientation Opinions.

In this regard, it is noted that the offering of securities issued abroad may be considered irregular if it does not have registration with the CVM. According to CVM Orientation Opinion No. 33/05, the use of communication means “intended to reach the general public residing in Brazil” is a relevant criterion for verifying irregular public offerings. Furthermore, the existence of text to attract investors residing in Brazil is also relevant, even if in a foreign language. Finally, it must be evaluated whether effective measures are employed with the intent to prevent investors residing in Brazil from accessing the content of the page.

CVM Orientation Opinion No. 33/05 points out that the CVM “may also consider, to evaluate whether the offering was directed at investors residing in Brazil, the use of the Portuguese language and the physical location of the provider”.

This Orientation Opinion reiterates these recommendations and signals that the use of the Portuguese language in the offering and customer support may be considered sufficient to characterize a public offering or intermediation of operations with securities issued abroad, including derivatives.

Capital market regulation adopts the principle of full and fair disclosure as the cornerstone of the informational regime, in line with the regulatory model established in the United States, since the Securities Act of 1933 21.

In the same vein, this Agency adopts the understanding that even today: “sunlight is said to be the best of disinfectants; electric light the most efficient policeman”. Therefore, the CVM’s initial focus is on honoring transparency regarding cryptoassets and ensuring compliance with the information disclosure regime.

This will be the CVM’s initial approach regarding securities, including those represented in the form of cryptoassets, without prejudice to the evaluation regarding the need to complement its actions with other measures to be combined with this approach.

It is not the CVM’s role to interfere in the merit examination of investment opportunities offered to the general public, for example, by pre-selecting those deemed more promising, safe, or deserving of other praiseworthy attributes. Instead, it is the CVM’s duty to protect security holders and market investors, as well as to ensure public access to correct, clear, and complete information about the securities traded, available equally to all.

21 The Securities Act of 1933 ended up being nicknamed in the United States as “the Truth in Securities Act”. In this sense, see, for example, (i) COHEN, Milton H., “The Truth in Securities Revisited” in Harvard Law Review, v. 79, n. 7, 1966, pp. 1340-1408; and (ii) HAZEN, Thomas Lee, The Law of Securities Regulation, Minnesota: West Academic Press, 2020, p. 19. 22 As stated by Louis Brandeis in his editorial “What Publicity Can Do” in the December 20, 1913 edition of Harper’s Weekly: “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman” and “But the disclosure must be real. And it must be a disclosure to the investor. It will not suffice to require merely the filling of a statement of facts”.

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 Thus, the information disclosure system is not an end in itself, but is an instrument intended to achieve the purpose of allowing investors to decide in an informed manner, by their own merit judgment, regarding the acquisition, maintenance, or alienation of securities.

For this purpose, transparency must be a commitment of issuers and, beyond them, to the extent possible, it should also be sought and valued by all members of the securities distribution system in their respective activities.

In this sense, CVM regulation is applicable and must be observed when carrying out public offerings of cryptoassets that are considered securities, highlighting, primarily, the norms that provide:

(i) regarding the registration and the provision of periodic and occasional information by issuers of securities admitted to trading in regulated securities markets – CVM Resolution No. 80/22; and

(ii) regarding public offerings of primary or secondary distribution of securities and the trading of the offered securities in regulated markets.

In addition to these two (2) regulatory regimes, which complement each other and fulfill the legal commands provided for in arts. 19 and 21 of Law No. 6.385/76, specific regulations dealing with special regimes based on the characteristics of the issuers and the public offering stand out, such as:

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 i) CVM Resolution No. 88/22, which provides for the public offering of distribution of securities issued by small business companies carried out with exemption from registration through an electronic investment platform; and

ii) CVM Resolution No. 86/22, which provides for the public offering of distribution of collective hotel investment contracts.

Without intending to exhaustively list all regulations that may be applicable to a specific type of cryptoasset that is a security, due to its characteristics and those of its issuer, it is fundamental to highlight that the existing regulatory regimes already foresee the need for information provision to investors, whether directed to the moment of investment decision-making or subsequently, in order to allow monitoring of the business progress and for the purpose of complying with the principle of full and fair disclosure, a presupposition for a security to be admitted to trading in an organized market.

Furthermore, the admission to secondary trading of any security, including those represented in the form of cryptoassets, must occur in organized markets that have CVM authorization, in accordance with CVM Resolution No. 135/22.

One must also observe the applicability of norms related to: (i) provision of centralized deposit services for securities; (ii) provision of compensation and settlement services for securities; and (iii) provision of securities bookkeeping services and issuance of securities certificates.

Thus, considering the existing framework, the CVM advises those seeking to carry out public offerings under the current regulation to consider the relevance of including, in the context of preparing the documents provided for in the applicable norms, as the case may be, a minimum set of specific information related to the securities.

This information will influence the CVM’s judgment on the requests and may guide the creation of a more flexible regime in the future, with the certainty that this is an initial approach, subject to evolutions and the development of technology, characteristics, and functions inherent to cryptoassets.

In this sense, the following list is exemplary, with the certainty that it does not replace existing regulation. We reinforce that part of the information suggested below serves strictly for information of the target audience, and it is not the CVM’s role to impose minimum parameters regarding the functioning of cryptoassets that are not securities.

5.1. Information on Token Holders' Rights

It is recommended, among others, the provision of the following information, in language accessible to the public and the market in general:

a) Identification of the token issuer who will be the beneficiary of the offering resources and all participants in the offering procedure and their roles, explicitly stating the existence of related parties;

b) Description of the activities of the token issuer or third parties whose effort is relevant to the expectation of economic benefit, especially regarding new emissions, management of assets serving as collateral for tokens, hiring of liquidity providers, management of the software lifecycle (e.g., decisions regarding forks), response to cyber incidents, redemption and amortization of payments,

c) Description, if any, of the rights conferred to token holders, especially payment of remuneration or participation in results, right to participate in deliberations, right to remuneration conditioned on the performance of certain activities;

d) All information that underpins expectations of economic benefit as a result of acquiring the token, as well as eventual expectation of appreciation in the secondary market, to the extent resulting from the entrepreneur's efforts, especially if there is a commitment by the issuer to list the tokens in trading environments;

e) Consensus mechanism and adequate description to the general public regarding the token issuance process, especially price stability controls, if applicable;

f) Investor support materials on functions and risks related to technology, in order to mitigate information asymmetries resulting from technical insufficiency, especially in the hypothesis where the asset involves complexities (by way of example, in tokens received as consideration for deposits in DeFi solutions, when the protocol imposes criteria for compulsory liquidation, if there are risks of inflation bug, impermanent loss, and others), if applicable;

g) Identification of investor support channels and minimum quality service terms (SLA – service level agreement), if applicable;

5.2. Information on Trading, Infrastructure, and Ownership of Tokens

It is recommended, among others, the provision of the following information, in language accessible to the public and the market in general:

a) Clear identification of the advantages of using distributed ledger technology;

b) Description of the disadvantages of using distributed ledger technology, especially regarding performance compared to traditional mechanisms and possible adverse effects on the environment;

c) Applicability of centralized deposit services for securities, compensation and settlement of securities, custody of securities, and securities bookkeeping and issuance of securities certificates;

d) Description of the management of token ownership (especially if the investor can have control of the private key, if custody will be delegated, if there will be a service provider contracted for the offering, such as an intermediary in subscribing to an offering, custodian, or depositary) and of the assets serving as collateral for the tokens (whether real assets or purely digital, such as NFTs - Non-Fungible Tokens);

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 e) Protocol governance rules, indicating the different roles of network participants, public or private nature of the network, criteria and responsible parties for defining and assuming these roles, and identification of relevant participants;

f) Description of the rules for identifying token holders and handling their personal data;

g) Indication of the entities operating the organized market authorized by the CVM or other trading platforms on which the token will be or may be admitted to trading;

h) Controls on the origin of resources used to acquire tokens and commitment to reporting suspicious transactions of money laundering, terrorism financing, and/or financing the proliferation of weapons of mass destruction; and

i) Planning for new functionalities and alteration of governance rules and consensus mechanism, if applicable.

Role of Intermediaries

Intermediaries in the secondary market who act, directly or indirectly, in the offering of cryptoassets must observe CVM regulation, regarding the trading of securities. The carrying out of offerings or intermediation of cryptoassets must take into account the possible repercussions of this activity and its framing within the applicable current norms, in general, regarding its performance in the securities market.

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 Similarly, the intermediary cannot exempt itself from guaranteeing, in the offering of such cryptoassets, an adequate level of transparency and information regarding the characteristics and risks associated with such assets, particularly when offered directly, i.e., not through a regulated product (investment funds or exchange traded fund - ETF, for example), which already has its own minimum transparency rules.

Finally, the intermediary institution must conduct adequate due diligence on the internal controls of commercial partners, including regarding service providers in the cryptoasset industry that do not trade securities, with the objective of mitigating the possible materialization of risks that may impact the intermediary.

It is also the intermediary’s duty to evaluate whether the investor should be informed about the nature and extent of the commercial partnership. Similarly, the segregations and operational, structural, and regulatory protections that the intermediary possesses to prevent possible problems arising from cryptoasset trading environments that are not securities from impacting its own business must be evaluated.

Furthermore, when establishing a partnership with a service provider offering cryptoassets that are not securities or services related to the crypto economy, the intermediary must inform about the risks involved in this type of application, in language accessible and appropriate to the intended audience, so that the recipient can evaluate whether the product is compatible with their risk profile.

Investment Funds

As new assets are incorporated into the regulated universe, the CVM expects that, in a reasonable and proportional manner, new criteria and diligence will be adopted aiming for higher levels of transparency, in order to preserve the efficiency and integrity of the markets.

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 In this sense, the fund administrator and manager must evaluate the adequate level of disclosure of potential risks related to assets, in the fund’s mandatory disclosure materials, especially regarding assets based on innovative technologies.

By way of example, this guideline must be applicable to investment funds that explore the possibilities of digitalization of creative content (the aforementioned NFTs).

In conformity with the above, index funds in particular must adhere to and preserve the principles provided for in article 2 of CVM Instruction No. 359/02 when offering cryptoasset indices, such as their replicability, fidelity, and representativeness.

The CVM has already manifested itself regarding the possibility and terms for direct investment in cryptoassets by investment funds constituted in Brazil 23. This Orientation Opinion does not innovate the CVM’s understanding regarding this matter, which requires more in-depth study and specific interactions with the market for the adequate evolution of the treatment of the subject by the Agency.

Regulatory Sandbox

The CVM issued in 2020 CVM Instruction No. 626/20, subsequently replaced by CVM Resolution No. 29/21, in order to regulate and implement a Regulatory Sandbox regime.

In its first admission process, the CVM received 33 project proposals seeking to develop innovative business models. The majority of the proposals involved

23 Circular Letters No 1/2018/CVM/SIN, of 12/01/2018 and 11/2018/CVM/SIN, of 19/09/2018.

After the conclusion of this admission process, four projects were approved, three of which directly involve the activity of tokenization of securities.

In this sense, the functioning of cryptoassets representing securities has already been tested by the CVM. The authorized projects obtained temporary authorizations to operate, through regulatory exemptions, as entities operating organized securities markets and providers of securities bookkeeping services, as well as were authorized to conduct public offerings, with exemptions from specific regulatory requirements.

The Regulatory Sandbox is an initiative to welcome new technologies and innovative business models. Furthermore, it is a tool for the Agency to evaluate the need to review and update its regulatory framework in light of the practical experience of the approved projects.

Final Considerations

The CVM will continue to deepen its study and analysis of new technologies and their application to the capital market, and may, if it deems necessary, regulate this new market, within the limits of its competence, including in light of its experience within the Regulatory Sandbox.

In parallel, the Agency is attentive to the marginal market of cryptoassets that are securities and will adopt all legal measures available for the prevention and punishment of possible violations of Brazilian securities market laws and regulations, including the issuance of suspension alerts (“Stop Orders”), initiation of administrative sanctioning proceedings, as well as communication to the Federal or State Public Prosecutor’s Office and the Federal Police, regarding the existence of possible crimes of public penal action, in accordance with applicable legislation.

The Agency remains available for consultations from market participants.

Finally, it is reiterated that the orientations contained in this opinion are intended to consolidate understandings, but do not exhaust the debates on the subject, as this is in constant innovation and its legal regime is currently under discussion.

Approved in the Collegiate Meeting of October 11, 2022.
Electronically signed by
JOÃO PEDRO BARROSO DO NASCIMENTO
President

CVM Orienting Opinion No. 40 of October 11, 2022: Cryptoassets and the Securities Market

Lineage: In force