Fintech In Brazil

GENERAL CLIMATE AND TRENDS 

General innovation climate

What is the general state of fintech innovation in your jurisdiction, including any notable trends, innovations, innovators and future prospects?

Fintech is a rapidly growing sector in Brazil, drawing the attention of global investors and analysts; consequently, the country is becoming one of the world's main fintech hubs. Goldman Sachs estimates that Brazilian fintech companies should generate revenues of around $24 billion in the next 10 years.

As a result of major bank crashes in the 1980s and 1990s, local banking regulations and controls have evolved to become among the most stringent in the world, with some regulatory requirements surpassing those set out in the Basel regulatory framework. While these rules provide much stability, they also create serious hurdles for setting up and maintaining financial institutions in the country. The financial sector is thus heavily concentrated, and the five major banks hold around 84% of total loans and 90% of retail branches. However, nearly 35% of Brazilians above the age of 18 do not have a bank account. The market for payments is one on the largest in the world: there are over 100 million valid cards in circulation in the country, with over $300 billion worth of transactions in 2016.

After he shockwaves of the 2007/08 financial crisis and the global trends of unbundling of financial services, disintermediation and customer-centric products, Brazil has experienced a boom in fintech companies in the past five years, with over 300 companies acting in payments, financial management, lending, investment, funding, insurance, debt renegotiation, cryptocurrencies, distributed ledger technology (DLT) or blockchain, foreign exchange and other services - more than the rest of Latin American countries combined. Nearly three-quarters of such companies have already received funding from third-party investors (including major foreign venture capital funds) and some are often listed among the most disruptive in the world.

Incumbent banks have taken on different initiatives to preserve their market share: open innovation programmes, corporate venture capital funds, co-working spaces and accelerators, purchases of innovative companies and the creation of new, exclusively digital subsidiaries. Competition and collaboration have been marching hand in hand.

Key technologies

Have there been any particular developments - regulatory or commercial - in any of the following fintech sectors? Distributed ledger technology and digital currencies (eg, blockchain, smart contracts and Bitcoin)?

As in most countries, the regulation of cryptocurrencies in Brazil is still in its infancy, with the regulators watching closely the development of the market in Brazil and abroad, but bewildered by a cloud of uncertainty on some issues.

As is also the case in other jurisdictions, while cryptocurrencies are feared or misunderstood, blockchain/DLT is lauded as the future and welcomed with open arms in Brazil. The Central Bank of Brazil has been developing different studies in DLT and its application in the issuance of currency, identity verification and transaction settlement.

As of the beginning of 2018, no rules or official guidance have been issued with respect to DLT. However, both the Central Bank of Brazil and the Brazilian Securities Commission (CVM) have formally positioned themselves with respect to initial coin offerings (ICOs) and cryptocurrencies.

CVM

On October 11 2017 the CVM issued an official note regarding its position on the issue, which is somewhat similar to the one taken so far by the US Securities and Exchange Commission. The CVM's view is that ICOs are public offers for raising funds that have, as counterpart, the issue of virtual assets - tokens or coins. Such assets may, depending on the economic context of their issue and the rights conferred on the investors, represent securities under Article 2 of Law 6385/76 and, therefore, be subject to the supervision of the CVM.

The CVM's note also stated that where the assets have the characteristics of securities, both the offers and the issuers are subject to specific regulations and penalties in the event of non-compliance with the existing rules. The CVM also acknowledged that certain ICOs fall outside its remit as they do not constitute public offerings of securities.

The note also clarified that securities offered through ICOs cannot be legally traded on specific virtual currency trading platforms (virtual currency exchanges), as such platforms are not authorised by the CVM to facilitate trading environments of securities in Brazil. This position limits these exchanges' ability to trade in Brazil virtual assets issued abroad that could be included in the definition of 'securities' for the purposes of Brazilian law. The note also contains warnings to potential investors in ICOs about the risks inherent to such investments.

In November 2017 the CVM published online frequently asked questions (FAQs) on the subject. The FAQs clarify others issues:

tokens or coins that grant the investor rights to participate in capital or in pre-fixed remuneration agreements on capital invested or voting in assemblies that determine the direction of the business of the issuer will likely be treated as securities; utility tokens that give access to a platform or service (as if they were a licence to use or credits for services) may not, in principle, be treated as securities, provided that they do not have other characteristics of securities; if a token or coin is classified as a security, its issue or negotiation will be subject to the normal rules applicable to other securities; cryptocurrency exchanges will be subject to licensing with the regulators if they trade coins or tokens that are considered securities; and white papers on the crytpoasset being offered are generally deficient and do not provide the level of disclosure or guarantees given in a regulated prospectus - and, as such, confer very little safety to investors. In January 2018 the CVM issued a directive forbidding most investment funds from having direct exposure to cryptocurrencies, and asking market agents to avoid indirect exposure until new rules are issued. A regulatory framework for investment vehicles in cryptoassets should be issued later in 2018.

Central Bank

Similarly to the CVM, the Central Bank issued a statement and launched a FAQ webpage in November 2017, with warnings on the risks involved in dealing with such assets, stressing that:

the companies that negotiate or keep cryptocurrencies on behalf of users are not regulated, authorised or supervised by the Central Bank of Brazil; and transactions with cryptocurrencies involving international transfers referenced in foreign currencies do not exclude the obligation to observe foreign exchange regulations, in particular the execution of transactions exclusively through institutions authorised by the Central Bank of Brazil to operate in the foreign exchange market. This note conveys a clear message that the Central Bank considers the cryptocurrencies market as falling under the remit of the regulatory authorities, and that the Central Bank will exert its powers whenever it sees risks to the financial system. However, the second point above creates uncertainty as it implies that payments made with Bitcoin or other cryptocurrencies to international counterparties could, in theory, be considered international transfers. The practical application of such guideline remains to be seen.

Alternative lending platforms?

Fintech companies dedicated to offer credit...