Never mind that the price can swing $1,000 in an hour or that the economist Nouriel Roubini has called bitcoin “the mother of all bubbles,” Brazilian consumers are still mad for cryptocurrencies.

Bitcoins are heralded on advertising boards at football matches. José Lopes, who sells frozen açaí, an Amazonian fruit, on the beaches of Guarujá, uses the bitcoin logo to attract vacationers. Lopes, a former helicopter pilot who was laid off by Petrobras after the corruption scandal broke out, says he offers tourists some “informal consulting” on cryptocurrencies while selling ice cream to make ends meet.

The mania for bitcoin and other cryptocurrencies is not restricted to young investors who are looking to make a quick virtual buck. “People like the doorman in my building keep asking me about bitcoins,” says William Eid Jr., a professor of finance at the Getúlio Vargas Foundation (FGV) in São Paulo.

Eid has advised the doorman to exercise caution and adopted a more radical approach at home. When his daughter said she intended to buy bitcoin when it was trading at $18,000, he simply cut her off. “I did not let her do that!” he says. “People feel attracted to these kinds of things until they crash.”

But crypto-fever in Brazil has hardly subsided after a recent wave of volatility. Brokerage firms that specialize in virtual currencies report that they have more than 1 million individual clients, as measured by their identification numbers. The number is unaudited but it trumps the less than 700,000 investors registered with the B3 stock exchange in São Paulo.

At the height of the bitcoin fever late last year, FoxBit, one of Brazil’s leading specialized brokerages, said it had to suspend the registration of new clients because it was unable to cope with demand. “At the end of November, the number of applications increased 10-fold. At some point, we had a backlog of 10,000 applicants,” says FoxBit advisor and partner Marcos Henrique, who did not give his last name due to security concerns. “It is like a car manufacturer. No company would be able to increase output 10-fold within three months. This has happened to our industry,” he says.

FoxBit, launched by four investors at the end of 2014, now has a staff of 60 and intends to keep expanding despite market jitters. But Marcos Henrique acknowledges that FoxBit must be careful. “Our greatest concern would be to take dirty money from politicians involved in corruption or arms deals. We intend to adopt the best practices in the financial industry or even better,” he says. One such “improvement,” according to Marco Henrique, asks customers to send a photo while holding their own identification card in order to avoid fraud.

Central bankers vs cryptocurrencies
Amid the hype surrounding the launch of bitcoin futures contracts on the CME and the Cboe, regulators have warned against a coming crypto-bubble. Brazil’s central bank governor, Ilan Goldfajn, was among the early critics, even before bitcoin dropped from a December peak of nearly $20,000. “Do not sell your house to buy these virtual currencies,” Goldfajn said during an end-of-the-year conversation with journalists, calling bitcoin “a typical bubble, a typical pyramid.”

Weeks later, Agustín Carstens, previously the head of Mexico’s central bank and now the general manager of the Bank of International Settlements (BIS), warned that “the current fascination with these cryptocurrencies seems to have more to do with a speculative mania than any use as a form of electronic payment, except for illegal activities.” In a lecture at the Goethe-Institut in Frankfurt in February, Carstens observed, “Authorities are edging closer and closer to clamping down to contain the risks related to cryptocurrencies.”

Back in Brazil, some screws have already been tightened. First, some larger banks, such as Itaú, Bradesco and Santander, have shut down or refused to open some exchange brokers’ accounts. Commercial banks, along with the local banking federation Febraban, have declined to comment, but observers on both sides of the debate have said that financial institutions are being extra cautious, noting they may face financial penalties if a customer commits irregularities. “Banks are in the reputation business. They need to have a clean image,” FGV’s Eid says. “If a problem occurs due to dealing with cryptocurrencies, they are going to lose their traditional customers.”

Banks are not trying to wipe out the cryptocurrency market but rather avoid any risks involved, says Fernando Ulrich, who was hired by XP Investimentos to become its chief economist on cryptocurrencies last November. “Up to a point, financial institutions would rather shut down accounts than be exposed to this market,” he says.

Still, the brokers have fought back, going to court to try to overturn the banks’ actions. “Brokers have managed to get legal injunctions to keep their accounts open while opening accounts in other banks. This has been a constant battle,” says André Franco, a cryptocurrency analyst at Empiricus, a financial advisor in São Paulo.

“It has been a widespread offensive, not only against us, but against others in the industry,” FoxBit’s Marcos Henrique says. “It is a blatant reaction of overprotection.”

Regulatory limbo
The Brazilian government was quick to impose a levy on cryptocurrency-related trading — a tax rate of 15% is applicable to gains of 35,000 reais, around $11,000, or more. Otherwise, bitcoin and its cousins have journeyed into unregulated territory. “There is no definition from either the central bank or the legislature, whomever it may be,” says Rodrigo de Campos Vieira, a partner focusing on entrepreneurship and financial technology at the local law firm TozziniFreire.

Brazil’s security and exchange commission CVM has moved to keep regulated investment funds out of the cryptocurrency game. At the end of last year, after several financial institutions consulted the CVM about their intentions to add cryptocurrencies to their portfolios, the commission said bitcoins and altcoins could not be considered “financial assets” and prohibited funds from buying them.

“The CVM made it clear that cryptocurrency trading is not yet permitted,” XP’s Ulrich says. “But the positive point is that the CVM admits that it is not a definitive conclusion. It says it is still monitoring this innovation to improve its understanding of cryptocurrencies and initial coin offerings [ICOs] in order to adopt a definitive stance and then communicate it to the market.”

Exchange brokers escape regulations because bitcoin is not a currency or a security, says José Augusto Martins, a partner in banking and financial law at the law firm Trench, Rossi and Watanabe in São Paulo. But while authorities cannot prevent all trading in bitcoin, “the CVM can prevent its regulated entities from trading,” he says.

The next big move could come from Brazil’s congress, where some legislators have proposed turning cryptocurrency mining and transactions into a crime. But Empiricus’ Franco, for one, does not expect such legislation to come to a vote in the legislature. “Even regulators are not going down this alley of criminalizing the ownership, use and sale of bitcoins and other cryptocurrencies,” he says.

A special committee in the Chamber of Deputies is due to address the issue, but the cryptocurrency industry is confident that the lobbyists it has hired in Brasília can twist lawmakers’ arms and end up with “a positive regulation to expand the market and reduce uncertainties — to clarify things, as opposed to imposing restrictions,” Ulrich says.

“Regulations would help solve the imbroglio regarding bank accounts being shut down,” says Luiz Roberto Calado, the chief economist at Mercado Bitcoin. “Our understanding is that virtual currencies are a means of payment and therefore should be regulated by the central bank. Meanwhile, ICOs should be regulated by the CVM,” he says.

But some are wary that regulations undertaken in haste could backfire. “If you regulate without understanding the market dynamics, there is a risk that regulations will be inadequate,” says Vieira from TozziniFreire. “Any report that sounds radical or that would lead to criminalizing trade in cryptocurrencies would not be positive. You need to adopt regulations in the right way so that the country can benefit from the technology that goes with it.” LF