The legal implications of cryptocurrency ownership have become significant, particularly with the rising popularity of digital assets for investment purposes.
Cryptocurrencies, being valuable assets, can be used as collateral in legal proceedings, but their decentralized nature and the lack of established regulations in Brazil present unique difficulties.
This article will discuss the functioning of cryptocurrencies, their unique aspects in legal proceedings, and provide useful advice for attorneys managing cryptocurrency transactions.
How does the concept of pity of goods function under Article 835 of the Civil Procedure Code?
What do cryptocurrencies entail?
Cryptocurrencies are virtual assets built on blockchain technology, offering transaction security and transparency without the involvement of conventional financial entities.
Common examples include Bitcoin, Ethereum, and other alternative cryptocurrencies.
Cryptocurrencies are not centrally registered like mobile phones or real estate; instead, they are stored in digital wallets that require private keys for access.
This characteristic creates complications in its positioning and legal confiscation.
A vehicle can be used as collateral for a loan when it is in the possession of a third party.
Can cryptocurrencies be converted?
The process for using cryptocurrency as collateral is akin to traditional pawn transactions, but with adjustments because of blockchain technology.
Observe its functionality.
- The initial task is to identify the debtor’s digital assets by obtaining details on their cryptocurrency holdings through a court order for exchanges, inquiring about registered accounts and balances.
- The judge can decide to block cryptocurrency on exchanges after identifying it, which stops the debtor from transferring the assets.
- Cryptocurrencies are sometimes exchanged for currency to make it easier to carry out loans, taking market fluctuations into account.
- The pledge is executed by transferring the acquired values to the judicial account or directly to the creditor, as decided by the judge.
In Brazil, although there is no specific regulation, Article 835 of the Civil Procedure Code allows for the pledging of debtor assets, including cryptocurrencies.
The pawn must adhere to the following sequence in priority under Article 835 of the Civil Procedure Code.
Cash can be in the form of money, goods, or deposited in a financial institution.
Bonds from the national debt of the Union, States, and Federal District with market value.
Securities and securities with market value are discussed in Section III.
IV – land vehicles;
V – real estate;
VI – various mobile items in general;
VII – taking out;
Ships and airplanes – VIII
Shares and stocks of basic and commercial corporations.
X represents the proportion of company revenue that is comprised of debt.
XI – valuable gems and metals;
Purchasing rights from promise of purchase and sale and fiduciary alienation in guarantee.
XIII – additional entitlements.
What is the duration of cryptocurrencies?
The cryptocurrency pledge is mainly based on the Civil Procedure Code (CPC) guidelines, but it also relies on judicial interpretations.
The borrower has 5 working days to challenge or raise concerns about the asset, similar to cryptocurrencies, as per Art. 854, §3o of the CPC, due to its financial nature.
Compliance levels can differ, particularly for international or unregulated exchanges in Brazil, which may face challenges in promptly fulfilling court orders.
Therefore, even though there is still inconsistency in the process, the legal foundations of the Civil Procedure Code offer broad guidelines for the execution of pawning assets.
What difficulties are associated with cryptocurrencies?
- Digital wallets do not have a centralized registry, unlike bank accounts, which makes it challenging to trace assets.
- Many borrowers opt for external wallets not within the jurisdiction of regulated exchanges for privacy reasons.
- Cryptocurrencies’ unstable value can complicate the assessment of collateral value.
- Blockchain technology ensures a level of secrecy and anonymity, making it challenging to determine the identity of the asset owner.
- Despite the progress made by PL 4.401/2021 in regulating cryptocurrencies in Brazil, there are still gaps in the law that impede implementation.
CPC provides a comprehensive guide for enrolling in benefits.
Practical advice for lawyers on managing cryptocurrency transactions.
Practical advice for attorneys on managing cryptocurrencies.
Include particular provisions in agreements.
Advise your clients to include clauses in contracts specifically addressing the use of cryptocurrencies in the event of a breach.
This makes legal arguments easier and shows the parties’ past intentions.
Identify exchanges that are under regulation.
Ask the judge to request letters to be sent to the exchanges operating in Brazil, such as Binance, Bitcoin Market, or other exchanges registered with the Central Bank, to confirm the presence of cryptocurrencies.
Utilize tracking instruments.
Consider utilizing specialized blockchain tracking tools to find cryptocurrencies outside of regulated exchanges.
These solutions assist in tracking transactions and pinpointing portfolios associated with the borrower.
Ask for the transfer to a legal portfolio.
Ask the judge to transfer the blocked funds to a digital portfolio managed by the Judiciary Branch to safeguard the assets’ integrity.
Assess the financial feasibility
Assess if the expected value of the cryptocurrency justifies the costs and time involved before initiating the pawn process.
Monitor rules consistently.
The cryptocurrency market is always changing. Stay alert for legal and court decisions that could affect digital currencies.
Out-of-court agreements
The potential for a delay in cryptocurrency transactions can motivate debtors to negotiate an agreement, thereby sidestepping the expenses and complexities of a legal enforcement procedure.
The significance of having expertise in technical aspects of cryptocurrencies
The cryptocurrency commitment is a legal innovation that demands lawyers to have technical and strategic readiness.
The increasing regulation of cryptocurrencies and utilization of advanced technology are enhancing the viability and efficiency of the process despite the obstacles.
Staying current on new laws and industry standards is crucial for effectively working in this area, guaranteeing the safeguarding of creditor rights and efficient debt collection.
Check out another blog post: Understanding how the protection of family assets works under Law no. 8.009/90.