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BRAZIL: An Introduction to FinTech Legal

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FINTECHS IN BRAZIL: AN OVERVIEW 

Current political and economic scenario

After a long period of administrations led by the left-wing political party PT, and amid turmoil involving corruption scandals and increasing political polarisation, Brazil elected President Jair Bolsonaro, an ultra-conservative politician, with a mandate from 2019 to 2022.

With a liberal economic agenda, the main proposals of the current government are based on broad reforms. The first of them, a labour reform aiming at modernising the highly protective labour relations in Brazil, was actually approved during the mandate of former President Michel Temer, who replaced President Dilma Roussef, who was removed from office after an impeachment process.

At the end of 2019, following intense debates in Congress, a pension system reform was approved in order to equalise the rules for granting of benefits and reduce the current fiscal deficit. Next in line are changes to the amazingly complex Brazilian tax system, including a likely tax on dividends. A first draft for the restructuring of the government administrative system and the political reform was submitted to Congress in September 2020, but still has a long way to go before a final text can be agreed upon.

Economically, Brazil is still trying to recover from the 2015-2016 recession. There was a slight improvement in 2019, and, even though economic growth was still at low levels, investments were increasing once again and expectations were optimistic for 2020 onward.

However, the pandemic brought the economy to a halt. Emergency financial aid was provided by the government to the lowest-income families and companies were entitled to stay employment contracts, in which case salaries were paid directly by the government. The Brazilian Central Bank reduced the Brazilian annual interest rate (SELIC) to the lowest ever rate of 2% p.a. from August 2020, but despite all efforts inflation skyrocketed, the Brazilian currency devalued significantly, unemployment rates increased, and GDP dropped by more than 4% in 2020.

GDP returned to pre-pandemic levels during the first quarter of 2021, and although the recovery has slowed since then, a 5% increase is expected for 2021. Unemployment rates have seen a slight improvement this year, although unemployment is admittedly still high and employment rates are still nowhere near pre-pandemic levels. Currency remained fairly stable throughout 2021, but still highly devalued compared with previous years. Inflation, on the other hand, continues to increase and should reach 7% in 2021.

FinTech activities, trends and developments

Brazilian regulators such as the Central Bank and the Antitrust Authority (CADE) began to study the FinTech market more deeply in 2010. Three years later, Federal Law No. 12,865/13 was enacted to give the Brazilian Monetary Council (CMN) and the Brazilian Central Bank – CMN’s prudential and financial institution supervision branch – authority to regulate the payments market, including FinTechs.

Since that first piece of legislation in 2013, the payments market has grown exponentially and more and more players are entering the market, bringing technological improvements, fomenting competition and promoting financial inclusion. Regulators, such as CMN, the Brazilian Central Bank, the Stock and Exchange Commission (CVM) and the CADE, have been actively engaged in supervising anti-competitive activities and are constantly improving regulation to keep up to date with the latest market developments.

In the early 2000s, card payments were basically restricted to the largest merchants and big cities. Nowadays, pretty much everyone everywhere has access to card payment equipment.

The exponential growth of the payments market was followed by improvements to the securities and financial markets. New regulations regarding equity crowdfunding and peer-to-peer (P2P) lending were issued, with a simplified structure for low-risk financial institutions aimed at increasing competition in the Brazilian credit market. Foreign investors also benefited, as the Brazilian government authorised P2P lending FinTechs to be wholly-owned subsidiaries of foreign companies.

A programme known as Inova Simples was created to facilitate the creation of startup companies, enabling them to test their products in small scale without the burdens applicable to “regular” companies, and the Ministries of Economy and of Science, Technology, Innovation and Communications created joint working committees with public and private entities to discuss the Brazilian business ecosystem and how to stimulate innovation and disruption.

The new ruling about the offering of cards receivables as security, which entered into force in June 2021, now allows each sales transaction to be registered at a central system and offered as security independently. By keeping a ledger of each registered security, that new system tends to increase the safety and reliability of the guarantees and creates a more beneficial scenario for credit granting in the following years.

The cryptocurrency market, on the other hand, is not yet subject to specific regulation. In 2017, the Brazilian Central Bank issued a public warning about the risks attached to the maintenance and negotiation of cryptocurrency, but stressed that, at that point, there were no signs that transactions with virtual currency could affect the financial system and, therefore, there was no risk to justify issuing of regulation. The CVM shows similar concerns about cryptocurrency transactions and has already stated that coin offerings cannot be directed to investors in Brazil unless approved by the regulator under the current securities public offering rules.

So far, the only rules regarding cryptocurrencies are a couple of normative orientations from the Brazilian Tax Revenue Office stating that cryptocurrencies should be treated as assets rather than as actual currency and that transactions made with cryptocurrencies must be declared and are subject to taxation. There is, however, a bill under consideration in Congress to regulate cryptocurrency.

The most significant innovation in recent years was certainly the instant payments system known as Pix, launched by the Brazilian Central Bank in November 2020, which enables real-time gross settlement among all major banks. Smaller banks and payment institutions are also entitled to participate on an optional basis, and most of them do. Even though more traditional payment methods continue to lead the market in terms of volume of operations (since the majority of Pix transactions are P2P), Pix has significantly impacted the payments market, enabling safe and cheaper instant money transfers.

Digital banks seem to be the next big thing in Brazil. This encompasses not only a more technological approach to standard bank accounts, but also a wide range of wallet apps boosted by the Pix instant payments system.

Regulatory sandboxes are also a strong trend, aiming at encouraging innovation and competition. In 2020 the Superintendence of Private Insurance (SUSEP) selected 11 projects that are likely to boost the InsurTech market in the years to follow, and new selections are currently under way. The CVM also recently selected three projects, two of which are based on blockchain technology. The Brazilian Central Bank has also set the rules for its sandbox, and the selected projects for this first cycle are expected to be known by the end of November 2021.

Another eagerly expected change is the implementation of open banking, which started in February 2021 and is expected to be fully operational by mid-2022.

What to expect in the (near) future – potential hurdles and opportunities

With broad access to financial data from clients (open banking) and the possibility of 24/7 payment transactions by simply reading a QR code on the mobile or typing out a person’s phone number (Pix), certain traditional products such as banking transfers (DOC/TED) and the use of debit cards may disappear in time.

The regulatory sandboxes are also likely to help innovative products and services flourish from FinTechs and InsurTechs to the benefit of customers and society as a whole.

The Central Bank is currently working on simplifying and consolidating its various rules, and dealing with pressure from traditional banks that claim FinTechs are being unduly favoured by regulation.

In parallel, the CVM is working on a bill to simplify the structure of Credit Rights Investment Funds, especially with regard to fund custody and administration.

All these initiatives show alignment with market trends and proactivity from regulators in Brazil, favouring an innovative environment. Added to the naturally technology-driven consumer market, we envision a pretty favourable scenario for FinTech development in Brazil in the years to come and hope for a better economic perspective for 2022.