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Banks, Financial Services, Fintechs and Digital Assets Newsletter No. 7 – July, 2023
August 23rd, 2023
Central Bank of Brazil
BCB Normative Instruction No. 402, of July 07, 2023
Amends BCB Normative Instructions No. 81, of February 23, 2021, and No. 396, of June 23, 2023, in view of the changes provided for by BCB Resolution No. 330, of June 27, 2023, to Circular Letter No. 3,748, of February 27, 2015, which addresses the methodology used for calculating the Leverage Ratio (LR), the remittance to the Central Bank of Brazil (“BCB”) and the disclosure of the corresponding information.
This normative instruction entered into force on the date of its publication.
Read BCB Normative Instruction No. 402 in full.
BCB Normative Instruction No. 403, of July 10, 2023
Releases the schedule for checkpoints regarding the ongoing process of publishing version 3.0.0 of Application Programming Interfaces (APIs) for Open Finance Payment Initiation Services.
This normative instruction entered into force on August 01, 2023.
Read BCB Normative Instruction No. 403 in full.
BCB Normative Instruction No. 406, of July 31, 2023
Provides guidelines for the institutions (multiple banks, commercial banks, investment banks, securities brokers, as well as securities distributors) authorized to operate by the BCB as regards the procedures to be adopted in the event of gold purchases. When purchasing gold, such institutions must note that there is no assumption of legality of the purchased gold, nor of good faith, in relation to the acquiring legal entity, in addition to the applicable regulations, as provided for in the following normative documents:
i. Published by the Brazilian National Monetary Council (“CMN”):
a. Resolution No. 4,557, of February 23, 2017, which addresses the risk management structure, the capital management structure and the information disclosure policy.
b. Resolution No. 4,595, of August 28, 2017, which provides for the compliance policy of financial and other institutions authorized to operate by the BCB.
c. Resolution No. 4,606, of October 19, 2017, which provides for the simplified optional methodology for calculating the minimum requirements for Simplified Reference Equity (“PRS5”), as well as the requirements for choosing this methodology and additional requirements for the simplified structure of ongoing risk management.
d. CMN Resolution No. 4,879, of December 23, 2020, which addresses the internal auditing of institutions authorized to operate by the BCB.
e. CMN Resolution No. 4,945, of September 15, 2021, which provides for the Social, Environmental and Climate Responsibility Policy (“PRSAC”) and the measures aimed at its effectiveness.
f. CMN Resolution CMN No. 4,968, of November 25, 2021, which provides for the internal control systems of financial and other institutions authorized to operate by the BCB.
ii. Published by the BCB:
a. Circular Letter No. 3,978, of January 23, 2020, which addresses the policies, procedures and internal controls to be adopted by institutions authorized to operate by the BCB, aiming at preventing the use of the financial system for crimes of “laundering” or concealment of assets, rights and amounts, as provided for by Law No. 9,613, of March 03, 1998, as well as preventing terrorism financing, as provided for by Law No. 13,260, of March 16, 2016.
b. Circular Letter No. 4,001, of January 29, 2020, which discloses the list of transactions and situations that can be deemed as evidence for crimes of “laundering” or concealment of goods, rights and amounts, as provided for by Law No. 9,613, of March 03, 1998, as well as preventing terrorism financing, as provided for by Law No. 13,260, of March 16, 2016, which can be reported to the Council for Financial Activities Control (“COAF”).
c. BCB Resolution No. 265, of November 25, 2022, which addresses the risk management structure, the capital management structure and the information disclosure policy for prudential conglomerates classified as Type 3, framed in segment 2 (S2), segment 3 (S3) or segment 4 (S4).
This normative instruction entered into force on August 01, 2023.
Read BCB Normative Instruction No. 406 in full.
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Central Bank of Brazil drafts public consultations on regulation of crypto assets
The BCB has taken responsibility for regulating the provision of virtual asset services, also known as crypto assets, since June 20, 2023. Through such, the Brazilian federal government moves forward with the regulatory process necessary to safely and efficiently incorporate the provision of these services into the national financial system. To ensure the regulation is comprehensive, public consultation notices are being drafted to be released in the second half of 2023, thus allowing for experts and the general public to present their suggestions and opinions before the implementation of the final regulation on the topic.
The initiative recognizes the potential for innovation brought by technologies underlying those virtual assets, such as decentralization, cost reduction and integration of services. However, it also addresses the risks associated with these innovations, especially regarding systems without centralized governance. To this effect, the regulation will be guided by principles such as free initiative, free competition as well as protection for consumers and users.
In addition, specific measures should be implemented in order to limit risks and ensure appropriate provision of information to investors (Disclosure). Companies that already operate in this market will have six months to adapt to the new regulatory rules. For a more efficient and coordinated operation, the BCB will work together with other regulators, such as the Special Secretariat of the Federal Revenue of Brazil (“RFB”) and the Brazilian Securities and Exchange Commission (“CVM”), since the virtual asset market and its underlying technologies are constantly evolving.
Regulation of crypto market: the start of a journey
On July 11, 2023, our partner, Fabio Braga, in an interview published by Valor Econômico, discussed the rise of the regulatory level of the Brazilian virtual assets market within the international context, and considered the entry into force of the legal framework for crypto assets, on June 20, 2023. Among its effects, the regulation of this market will provide a more careful selection of virtual asset service providers (VASPS) as well as the need to achieve the minimum levels of operational adequacy and technical qualification.
In turn, cryptocurrencies will be classified as virtual assets whenever they are classified as digital representation of value that can be traded or transferred by electronic means, and use for payments or for investment purpose. In addition, new products and services are developed according to this legal conceptualization, thus enabling the identification and elimination of pseudo products that, in fact, involve crimes supported by false references to virtual assets.
Also, the criminal consequences for those who engage in illegal activities backed by fraudulent use of virtual assets will be subject to the regulations addressed in the Criminal Code, and will lead criminals to more severe penalties, for example, for the crime of money laundering, now qualified by the use of virtual assets. Besides, in order to combat the use of virtual assets in crimes and as a prevention measure, the VASPS will have to identify their clients and maintain transaction records, as well as link them to their corresponding administrators.
According to Braga, the Brazilian crypto market, the largest in Latin America, should receive maximum attention from the BCB, especially towards preserving market stability. Globally, Brazil ranked seventh among the markets in which cryptoeconomics has developed the most in recent times. Therefore, from the experience accumulated as regards the application of the legal framework, Brazil will eventually be legitimized as a source of development for the regulation of other markets – especially the Latin American market.
Despite the great challenges involving this market, the amendment to the federal decree (which vests competence to the BCB for amending rules and procedures) is likely to give greater reliability, security and transparency to virtual asset transactions, which are core factors within the context of the balanced and constant development of the Brazilian virtual asset market.
Finally, it’s worth highlighting the importance of the Brazilian legal experience in the virtual asset market at the international level – which is under the oversight of a government administration with almost six decades of regulatory activities –, thus enabling the creation of parameters for best regulatory practices, including the future publishing of draft regulations for public consultation in order to collect opinions (both from the general public and experts) about more specific themes relating to the new regulation.
CVM provides further clarifications on the characterization of receivables and fixed income tokens as securities
On July 05, 2023, CVM’s Superintendence of Securitization Oversight (“SSE”) published CVM/SSE Circular Letter 6/2023, which complements the SSE statements contained in CVM/SSE Circular Letter 4/2023, about the so-called fixed income tokens (“TR”).
The CVM guidelines are divided into:
(1) characteristics and purposes of a circular letter and the context of CVM/SSE Circular Letter 6/2023;
(2) differences between securitization transactions and collective investment contracts;
(3) foreign exchange securities held by financial institutions; and
(4) interpretations of the provisions of CVM Resolution No. 88, of April 27, 2022, as amended (“CVM Resolution No. 88/22”), for the TR offerings, as addressed briefly below.
Characteristics and purposes of a circular letter and the context of CVM/SSE Circular Letter 6/2023
From the perspective of CVM Resolution No. 01, of August 06, 2020 (“CVM Resolution No. 01”), it should be noted that the guidelines of CVM/SSE Circular Letter 4/2023 are not regulatory in nature, but aim to disclose the SSE interpretations about the possibilities of framing TRs as securities, in addition to listing essential characteristics to possibly characterize them as securities.
It is also worth highlighting that the clarifications submitted through CVM/SSE Circular Letter 4/2023 are underpinned by CVM Opinion No. 40, of October 11, 2020 (“CVM Opinion No. 40”), in which the CVM consolidated the position that, although crypto assets are not expressly included among the securities mentioned in the subparagraphs of article 2 of Law No. 6,385, of December 07, 1976 (“Law No. 6,385/76”), market agents must analyze the characteristics of each crypto asset as to determine whether it can be classified, or not, as a security. This event would be constituted as follows:
(1) when there is express reference to the digital representation of any of the securities provided for in items I to VIII of article 2 of Law No. 6,385/76, and/or provided for in Law No. 14,430, of August 03, 2022 (“Law No. 14,430/22”) (certificates of receivables in general); or
(2) when it suits the open concept of securities, addressed in item IX of article 2 of Law No. 6,385/76, provided that it is a collective investment contract.
Differences between securitization transactions and collective investment contracts
In CVM/SSE Circular Letter 6/2023, the SSE highlighted that CVM/SSE Circular Letter 4/2023 did not distinguish when the TR categories offered characterize either a securitization transaction, a collective investment contract, or both. To this effect, certain types of TRs may be considered as a collective investment contract, without being framed as a securitization transaction. In this case, compliance with the CVM standards is required, however, without the need for a securitizing company.
It is also worth highlighting that, according to CVM Opinion No. 40, the fact that an asset is developed or offered digitally by cryptographic means or based on distributed ledger technology is minor to its framing as a security.
The SSE has defined the term “tokenization” as the “process of digitally representing an asset or its ownership, which facilitates its distribution to investors”. Thus, when offered and publicly determined as “token”, provided that it represents a collective investment contract through receivables or a securitization transaction, it can be framed as a security backed by credit or credit law. However, the circular letter under discussion does not exhaust all the possibilities and differences between a collective investment contract and a securitization transaction, nor the specificities that entail the TR categories.
Foreign exchange securities held by financial institutions
CVM/SSE Circular Letter 4/2023 was considered not suitable to public offerings of Bank Credit Notes (“CCB”), Bank Credit Note Certificate (“CCCB”) or Real Estate Credit Note (“CCIC”) (Liability Bonds held by Financial Institutions), whenever these bonds meet the requirements of article 45-A of Law No. 10,931, of August 02, 2004. The law under discussion provides for the segregate estate of real estate incorporations, Real Estate Credit Letters, Real Estate Letters of Credit and Bank Credit Notes, among other measures (“Law No. 10,931/04”), since these securities are under the responsibility of financial institutions or entities authorized by the BCB; and, therefore, according to art. 2, paragraph 1, of Law No. 6,385/76, these securities are excluded from the competence of the CVM.
However, when offered an opportunity to invest in a “basket” backed by securities of financial institutions, one can be faced with a collective investment contract or securitization transaction (that is, securities), subject to the competence of the CVM.
Interpretations of provisions addressed by CVM Resolution No. 88
Finally, the CVM/SSE Circular Letter 6/2023 comprises positions and interpretations on the use of the crowdfunding model, in accordance with CVM Resolution No. 88/22. In public offerings of bonds or securities representing securitization transactions through crowdfunding platforms regulated by CVM Resolution No. 88/22, the SSE understands that the issuer can be considered as separate assets for all purposes, including:
(1) the revenue limit of BRL 40 million or BRL 80 million (according to article 2, VII and paragraph 2);
(2) the cap amount of BRL 15 million (according to article 3, I);
(3) the sum of the total fund available (according to article 3, paragraph 3); and
(4) the 120-day interval between offerings (according to article 3, paragraph 5).
Thus, the SSE has rectified the position of paragraphs 38 and 39 of CVM/SSE Circular Letter 4/2023, and clarified that, even in a concentrated issuance, the concept of the issuer’s gross revenue can be applied to the separate assets and not to the debtor. In short, separate assets issuing securities through a closed-capital securitization company can be equated to a small-sized company, for all purposes of CVM Resolution No. 88, and raise up to BRL 15 million annually for the same separate asset.
Access CVM/SSE Circular Letter 6/2023.
ALSO CHECK OUT: REGULATION | ADMINISTRATIVE AND LEGAL DECISIONS
ADMINISTRATIVE AND LEGAL DECISIONS
Superior Court of Justice
Court considers 1,296.72% annual interest as abusive
The 22nd Chamber of Private Law of the Court of Justice of São Paulo (“TJSP”) upheld the decision of the 2nd Civil Court of the city of Franca, which ordered a bank to redraft a loan contract because it considered the interest rate applied, of 1,269.72% annually, as abusive. The case arose from the demand of a client of a financial institution who filed a suit aimed at limiting the interest applied in its financing contract and seeking the simple return of the discrepancies in the amounts already settled.
Despite the fact that the bank claimed that the applied rate was legal, the reporting officer pointed out in his vote that the percentages applied in the hiring of the loan exceed manifold the average rate applied across the market at the time. To this effect, he stressed that: “For the purpose of identifying interest abuse, in similar cases, the caselaw considers double the market average (for similar transactions) as a substantial discrepancy, as determined by the Central Bank.”
In addition, the court considered that the signed contract did not follow the principles of reasonableness and proportionality. The adequacy of the contractual instruments discussed at the average market rate, as regards the contracting dates, is, therefore, applicable. Also, due to the regularity of such practice by the financial institution in question, the court verified there was not only pecuniary, but also social damage. The financial institution holds more than 50 decisions of the TJSP due to the exorbitant collection of interest in comparison to the market average.
Bank held liable to compensate victim of scam after system security failure
The 13th Chamber of Private Law of the TJSP upheld the decision submitted by the 1st Civil Court of São Vicente, which ordered a bank institution to indemnify a client who was the victim of a scam due to failure in the defendant’s security system, thus ruling the institution liable for moral damages in the amount of BRL 10,000, as well as for material damage, estimated at more than BRL 8,400.
According to the case records, the claimant confirmed the fraudulent transactions under discussion in the form of loans and a transfer by Pix. Although the institution claimed that it did not engage in any crime, in addition to denying the absence of security breaches, the judging panel highlighted that frauds are part of the risks entailed by the activity carried out by the defendant and, for this reason, the institution’s liability for third-party fraudsters cannot be withdrawn.
The reporting judge of the appeal, Justice Nelson Jorge Júnior, also emphasized that: “It is clear that the banking activity risk cannot be transferred to the consumer. The financial institution must train its representatives and provide greater security to its system so that potential frauds are detected.”
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