An extract from The Financial Technology Law Review, 3rd Edition
Digital markets, payment services and fundingi Crowdfunding
The law regulates transactions involving securities and, therefore, this market has specific rules established by the agency responsible for overseeing it: the CVM. Brazilian law adopts an open concept for security, considering as such any title or collective investment scheme that generates the right to participation, partnership or remuneration, which income is originated in the effort of entrepreneurs or third parties, including the ones resulting from the rendering of services. If any specific collective investment scheme falls under this description, it is subject to the determinations of the law and the CVM Rules, which may regulate how they are distributed, offered and commercialised inside Brazilian territories or abroad, if the investment schemes are issued by Brazilian companies. All regulations regarding the SFN apply to fintech organisations, if legally prescribed services or products are offered.
Nonetheless, Brazilian authorities have legally recognised investment-based crowdfunding as a possible fundraising option for small companies. Currently, the Brazilian innovation ecosystem benefits from CVM Rule No. 588/2017, enacted specifically to regulate the distribution of securities through platforms established for this purpose, without the need to register the offer before the CVM – which, as explained above, is the general rule and might be very expensive for small companies. The Rule came into force in 2017 following a market public consultation conducted by the CVM, and its current version establishes some requirements and responsibilities for the operation of the platforms, details the possible offers and recognises the possibility of syndicated investments, that is, those led by an investor well known in the market.ii Intermediation of loans and lending models – P2P lending and crowd-lending
The intermediation of loans is a private activity of financial institutions, as determined by the law that constitutes the SFN. Thus, any organisation that collects money from third parties for loans or intermediate transactions of this nature must be registered and authorised to operate as a financial institution according to Brazilian law and is subject to the supervision and regulation of the BACEN. In order to foster innovative lending models, in 2017, the BACEN proposed a public hearing to deal with P2P lending and crowd-lending, seeking to guarantee the safety and legality of such loans. As a result, in April 2018, the BACEN published Resolution No. 4.656/2018, which created two special types of financial institutions, allowing them to use SEPs or SCDs. Both need to request an authorisation to operate before the BACEN. Nonetheless, the authorisation procedure used by these institutions is easier and faster than the one required by traditional financial institutions.iii Payment services
Payment services are subject to the rules regarding the Brazilian payment system (SPB), created by Law No. 10.214/2001, and to the supervision of the BACEN. The SPB comprises services or systems that, subject to authorisation by the competent authorities, may:
- clear credit notes;
- clear and settle electronic debit and credit orders;
- transfer funds and other financial assets;
- clear and settle securities transactions; and
- clear and settle commodities and future transactions.
In 2018, the BACEN enacted regulations with the expectation to promote financial inclusion, as well as enabling a more competitive market through the SPB. BACEN Resolution No. 4,707/2018 and Circular No. 3,924/2018 regulate the use of payment arrangement receivables as collateral for credit transactions. This should make lending to smaller companies feasible, as such receivables usually represent a significant portion of their assets, and the creditor will be granted more protection when entering into contracts with them.
The aforementioned rules will be valid only until 3 August 2020, when Resolution No. 4,734/2019 and Circular No. 3.952/2019 will become effective, replacing the current regulation applicable to the aforementioned kind of collateralised transactions. The new rules incorporate principles and dispositions contained in BACEN Resolution No. 4,707/2018 and Circular No. 3,924/2018 while also introducing several modifications related to registration of receivables of credit and debit payment instruments. As soon as they enter into force, financial institutions will have to ensure that receivables from payment arrangements used as collateral for their credit transactions or assigned in discount transactions are recorded in registration systems, operated by a registry authorised by the BACEN. The new regulation will also impose thresholds on the use of collateral over receivables from payment instruments.
With Circular No. 3,925/2018, which amended the Annex to Circular No. 3,682/2013, the BACEN addresses the provision of payment services within the framework of the arrangements of the SPB, establishing guidelines and standards these service providers need to abide by.
Furthermore, in line with the ongoing technological revolution, the BACEN published Circular No. 3,985/2020, defining the components of the instant payment system (SPI) infrastructure and establishing the participation of financial institutions and of payment institutions under the SPI, and Circular Letter No. 4,006/2020, setting out the form of registration of participants for the process of adhering to the instant payments system (PIX) – and the SPI. This is an important step taken by the BACEN with the aim of implementing an instant payment ecosystem in Brazil. By creating the SPI, the BACEN intends to foster the creation of an infrastructure that will allow people and companies to transfer money at any time, using more accessible payment mechanisms, such as QR codes in cell phones. This type of transfer tends to be more practical than those currently used, such as the available electronic transfer (TED) and credit order document (DOC), as it allows for instant transfer, does not require an intermediary and has lower costs. The BACEN itself will operate and coordinate the PIX. This infrastructure coordinates the relationship between service providers and instant payments.
Financial institutions with more than 500,000 active customers are now required to participate in the instant payment infrastructure and, consequently, of SPI, in order to settle instant payment transactions whenever they involve a transfer between instant payment accounts from different SPI participants. On the other hand, participation in the SPI is optional for entities that provide clearing and settlement services exclusively for the purpose of settling private liquidity supply operations carried out among SPI participants within the instant payment infrastructure.
The SPI provides for two forms of participation: direct and indirect. The first involves a direct connection of the participant institution to the SPI. Institutions that do not hold an operating permit from the BACEN are not allowed to participate in the direct form. The indirect participation form applies to institutions that do not hold a direct connection to the SPI and that do not have an SPI account. These institutions will operate through an intermediary, which must be a direct participant of the SPI infrastructure and will be responsible for registering and settling the operation entered under the SPI. Commercial banks, multiple banks with commercial portfolios, clearing and settlement service providers, among others, are not allowed to participate indirectly in the SPI.
The new rule is a step forward in BACEN's initiative of establishing an SPI in Brazil, following the Bulletin No. 32,927 of 21 December 2018, in which the authority recognised the validity of instant payments and addressed the fundamental requirements for its environment within the Brazilian payment system regulatory framework. The implementation of the instant payments ecosystem in Brazil is expected to happen in November 2020. This model is favourable to the emergence of fintechs whose purpose is the development of innovative solutions to ease payment transactions. As announced by the BACEN, fintechs will be able to act as payment institutions, supplying customers with payment accounts, or as payment initiation service providers. They may also offer other services such as insurance, credit, investments and tax payments, among others, fostering the development of innovative and competitive models and allowing for the reduction of social costs related to the use of paper-based instruments. The measures enable the inclusion of new players in the financial market, which is of extreme significance in a country with high rates of banking concentration such as Brazil.
Finally, there are currently no rules obliging institutions to make client or product data accessible to third parties. They are allowed to share with other financial institutions some information that can make the settling and clearing of payments faster, safer or more efficient. Nevertheless, this process must observe the applicable legal limits, as the Brazilian Federal Constitution (and specific laws such as the Supplementary Law No. 105/01) protects and assures the inviolability of banking secrecy, in most cases. With respect to clients' personal data, under the LGPD, the process shall also be grounded on one of the legal bases provided for in the law. In this sense, possible legal bases that could be used to justify sharing are the consent of clients, the protection of credit and the legitimate interest of the financial institution. As already mentioned, the LGPD is still not effective, so the exact content and limits of the legal bases above are yet to be tested by Brazilian courts and further regulated by the Brazilian Data Protection Authority, which, as detailed in Section V below, was created by the LGPD, but will only initiate activities when the LGPD comes into force.iv Marketplaces
A marketplace is a platform that connects buyers and sellers of goods or services with each other, providing an infrastructure with the purpose of facilitating a transaction. They are used in some business models as payment settlers to the extent that they receive the full amount paid by the costumer and then pass the paid value on to sellers, which are their business partners, upon remuneration. In this kind of operation, marketplaces play the role of sub-accreditors, also called sub-acquirers or payment facilitators.
BACEN Circular No. 3.886/2018, which modifies Circular No. 3.682/2013, defines the role of the sub-accreditors and how they interact with payment arrangement providers. It also defines objective criteria for requiring the participation of sub-accreditors in a centralised settlement system in a single grid, which is also regulated by Circular Letter No. 3,872/2018. Circular No. 3.886/2018 categorises sub-accreditors that facilitate the acceptance of a payment instrument by the recipient, without being part of the transaction as a creditor, thus being the link between the end user and the accreditors, as participants in the payment arrangement infrastructure.
Moreover, the Circular determines that the intermediation of payments under the sub-accreditor model, which might include marketplaces, must comply with the payment arrangement infrastructure regulatory framework. Not all marketplaces are considered sub-accreditors. In cases where the transaction is carried out directly between the payer and the marketplace's business partner, the marketplace will not be considered a sub-accreditor. In these cases, the seller itself will be the end user receiving the transaction payment.
Sub-accreditors are obliged to participate in the centralised settlement system. The centralised settlement system involves the centralisation of settlement of transactions performed by the payment arrangements that integrate the SPB in one neutral clearing and settlement service provider, defined by the institutions instituting those payment arrangements. The current clearing and settlement service provider is the Interbank Payment Chamber.
The marketplace participation in the centralised settlement system is mandatory, regardless of the volume of the transactions, if the sub-accreditor is the recipient of the flows relating to transaction in payment arrangements subject to centralised settlement. Nonetheless, the participation is optional if the marketplace acts as a payer to end users who receive flows related to transactions in payment arrangements subject to centralised settlement, and the volume of the operations accumulated in the last 12 months is lower than 500 million Brazilian reais. Brazilian legislation does not provide for special rules relating to digital or cryptoassets in marketplaces.