A bill that is under consideration in the Senate provides for companies to be able to buy machines and software for mining cryptocurrencies, such as bitcoin and ethereum, without paying taxes. The benefit, which would be available until the end of 2029, provides for a zero rate for various taxes, as long as the mining activity uses energy from renewable sources. But what is the use of this for Brazil?
For professionals in the field, the exemption can contribute to the country becoming a global mining center. There is an analyst who sees the possibility of generating employment, but warns of the risk of virtual assets competing with traditional exchange instruments, such as real.
The exemption is part of a bill currently being processed by the CAE (Commission on Economic Affairs) of the Senate. Reported by Senator Irajá (PSD-TO), the project seeks to regulate the virtual assets market in Brazil.
The senator’s expectation is that the project will be approved by the CAE as early as February, after the parliamentarians return from the legislative recess. After that, he will still need to go through the Senate plenary and, then, through the Chamber, before going to President Jair Bolsonaro for sanction. In the market, there is expectation that this will happen in the first half of the year.
Virtual assets are those that can be traded or transferred electronically, as well as used for payments and investments. Among them are cryptocurrencies such as bitcoin and ethereum, which use blockchain technology and encryption in transactions.
Although cryptocurrencies are traded in dozens of countries, their market has no regulation in Brazil. In practice, brokers that trade these currencies are not regulated by any public body nor do they follow specific rules, which the project seeks to correct.
Coin mining incentive
Mining is linked to the issuance of virtual currencies.
In the case of traditional currencies, such as the Brazilian real, the issuance is carried out by the Central Bank, according to the country’s needs.
Virtual currencies such as bitcoin are programmed to have an issuance limit. They are emitted as programmers decipher blocks of code posted on the internet. This is the mining process, which requires the use of computers and software that work on the codes.
Whoever carries out the mining —which requires time and energy—receives the virtual currency as a reward. It’s like the old gold mining, but in a virtual environment.
In the project that is in CAE, there is a forecast that companies that work with processing, mining and preservation of virtual assets will be able to buy machines (hardware) and computational tools (software), until the end of 2029, with a zero rate on the following taxes:
In the case of import of equipment
- PIS (Social Integration Program)
- Cofins Import (Contribution to Social Security Financing – Import)
- IPI (Tax on Industrialized Products)
- Import tax
For purchase on the domestic market
The benefit will be available to companies that use 100% of their electricity needs from renewable sources. According to the EPE (Energy Research Company), linked to the Ministry of Mines and Energy, hydro, solar, wind, biomass, geothermal and ocean renewable energy sources are considered.
In Brazil, 65.2% of electricity is generated from hydroelectric plants, according to EPE data for 2020. Therefore, most of the available energy is already renewable.
Energy is expensive
In his initial opinion, Senator Irajá mentioned the high cost of energy in the mining of virtual currencies – something that, according to market professionals, has kept enterprises away from Brazil. Thus, tax exemption on the purchase of equipment would be a way of encouraging mining.
For the CEO (executive director) of Coinext, José Arthur Ribeiro, the exemption is a stimulus for mining activity in Brazil, but the success of the initiative depends on lowering the price of electricity. Coinext is an exchange (broker) that trades virtual currencies such as bitcoin, ethereum and litecoin, among others.
According to Ribeiro, mining activity today is more concentrated in countries like China and the United States — in the second case, there are states that offer discounts on the price of electricity to attract mining ventures.
It is interesting to notice the legislator’s initiative, to try to favor the crypto-assets market, which is one of technological innovation. Brazil has incredible renewable energy resources, with wind and hydroelectric towers. In the future, this could allow for massive mining investments. But equipment exemption does not solve the problem of expensive energy.
José Arthur Ribeiro, CEO of Coinext
According to Foxbit’s legal director, Victor Gomes, few companies today want to venture into mining virtual currencies in Brazil, because the cost of energy is one of the main factors for the investment decision. With seven years of existence, Foxbit is another Brazilian exchange focused on crypto assets.
It is worth remembering that mining companies usually use dozens of computers, connected 24 hours a day, 7 days a week, so that their activity is viable.
A study by EPE shows that the average cost of electricity consumption in 2020 by industries in Brazil was R$ 476.95 per MWh (megawatt-hour). Five years earlier, in 2015, it was R$374.93 per MWh. That is, in five years the cost rose 27.2%.
Few companies today want to venture to explore the market. Energy cost is one of the preponderant factors for decision making. The zero rate, in addition to satisfactorily reducing costs, can encourage mining in Brazil, making entrepreneurs return to the country or see it as a favorable jurisdiction for this business model.
Victor Gomes, legal director at Foxbit
Gomes also assesses that the exemption can generate a kind of cascading effect. “With lower costs, entrepreneurs will be able to buy more equipment, increasing computing power for mining”, he says. “In this way, there is a possibility that large mining farms will be created in Brazil, generating jobs”, he adds.
problem for the future
Economist Otto Nogami, a professor at Insper in São Paulo, recognizes that the tax exemption could move the market for virtual assets in Brazil. Asked if this exemption interests society, he acknowledged that it can generate jobs, but raised a possible problem to be faced by the Central Bank in the future.
Nogami argues that cryptocurrencies are just assets and not to be confused with a conventional exchange instrument, such as the real, whose issuance is in charge of the BC. “It’s like a painting, like keeping a nugget of gold or other noble metals”, he says.
According to the economist, to the extent that legislators encourage the mining of these assets, through tax exemptions, competition can be created for the traditional exchange instrument. “People will be able to start treating the result of mining not as a mere asset, but as an instrument of exchange”, he warns. The exchange instrument would be, for example, the country’s money, the real.
Expectation for regulation
The main objective of the project is to regulate the activity of brokers and other companies that work with virtual assets. In theory, this would provide greater security, including for Brazilians who invest in cryptocurrencies.
Today, investors are more susceptible to the loss of money in the event of a broker’s bankruptcy, for example, because there is no specific supervision of companies.
Under the project, market supervision would be the responsibility of the Central Bank and the CVM (Commission on Securities Affairs).
“The regulation will be positive”, says Gomes, from Foxbit. “That’s because it will be through the general rules that investors will identify companies that faithfully comply with them, and regulators will understand who the serious market participants are.”
Arthur Ribeiro, from Coinext, recognizes that currently the average investor is still very afraid of virtual currencies. According to him, one of the reasons is that the market is not regulated. “But Congress understood that it is not a case of banning cryptocurrencies, as happened in Bolivia or Bangladesh. They realized that they could regulate actors and agents.”