Brazil kicked off 2023 with a bang. A week after the inauguration of Luiz Inácio Lula da Silva as president, supporters of his predecessor, Jair Bolsonaro, stormed the headquarters of the three branches of government in Brasilia, on Jan. 8. But what does the change of government and the current political and economic climate mean for the country’s digital finance and crypto markets?
According to experts interviewed by iupana, the fintech sector will continue to develop and mature but will have to compete for the attention of policy makers in an environment marked by political confrontation and slower economic growth.
Diego Perez, president of the Brazilian Association of Fintechs (ABFintechs), says that the fact that the sector does not depend on a specific piece of legislation but rather several sets of regulation means that firms need clarity from the Central Bank of Brazil (BCB), the Securities and Exchange Commission (CVM) and the Superintendence of Insurance (SUSEP); and not directly from the executive branch of government. "Regardless of the plans, the BCB has an ongoing agenda that is supra-governmental," he says.
There are important challenges for 2023, such as the regulatory framework for crypto assets, which was approved in December and is due to take effect before middle of the year. Also, a bill approved in June by the Chamber of Deputies and currently being discussed in the Senate, is expected to give fintechs and digital banks a bigger role in the loans market. The industry is also working to overcome obstacles to expanding the participation of fintechs in compulsory rural credit.
In addition, the industry has to contend with disruption from global macroeconomic forces Global growth is projected to slow to 1.7% in 2023, the weakest pace of the last three decades, excluding the recessions of 2009 and 2020. And then there are the repercussions of Jan. 8.
“As an association, we issued a strong statement rejecting what happened, because we really believe that these acts were unacceptable in a society like ours," said Bernardo Srur, director of the Brazilian Cryptoeconomics Association (ABCripto).
Brazil’s new government is still finding its feet less and it could take roughly six months to adapt and complete its transition. “What we understand is that cryptocurrencies are on the government's agenda, but it is one of the agendas that isn’t yet a priority. The priority is to remedy the key issues from the electoral process,” says Srur.
Along the same lines, ABFintechs’ Perez argues the shocking events in the Brazilian capital will end up influencing the industry, albeit tangentially. “More in the sense that now the political focus will be on clarification —the campaign to hold those responsible to account. The political movement in Brasilia will be very focused on this issue and the agendas that are waiting for a vote remain in the background. You compete with the time of parliamentarians, which can slow down the pace,” he says.
Cryptolaws in progress?
A lot has been achieved in terms of digital finance in Brazil in recent years, such as the approval of laws to make crypto services and trading activity more flexible. During the course of the pandemic, fintechs were also included in the aid effort for businesses.
But now, following the approval of the legal framework for cryptocurrencies, regulation —and a decision on who will regulate the sector— is needed. ABCripto’s Srur says he hopes that a decree governing regulation will be published in the coming months, and although some delays could be expected in the wake of Jan. 8, he expects it to be ready within the 180-day implementation period.
By contrast, Bruno Diniz, an MBA professor at USP/ESALQ, a unit of the University of Sao Paulo, and a partner at the consulting firm Spiralem, has doubts about whether the regulation will advance as planned. “There is talk that it will progress slowly this year, with the definition of more specific rules and licensing processes. Specialists say these issues need a broad consensus but that will not happen so soon, perhaps at the end of the year. They’re not at the top of the list of priorities and there could be an extension of another 180 days or more public consultation,” he says.
Where the experts agree is on the importance of the regulatory framework’s approval, because it establishes the initial rules for the exchange of virtual assets.
But who will regulate the market? The expectation is that when cryptocurrencies function as a means of investment, the responsibility will fall on the CVM. And if they are adopted as a means of payment, they’ll likely remain in the hands of the BCB. It sounds simple, but there are grey areas.
Financial and economic inclusion
In a recent speech, Brazil’s new president, known as Lula, said he wants the state-owned Banco do Brasil (BB) to act as an engine for banking the country’s low-income population. “He wants to use a public bank as a protagonist instead of encouraging new participants” such as fintechs, says the head of ABFintechs. He points out that credit fintechs, which have benefited from solid regulation in recent years, didn’t exist when Lula was first in government from 2003-2010.
“BB could be used in collaboration with fintechs, because they already have a wide, diverse digital platform, and Brazilians already use apps for their finances,” Perez says.
Still, the official sees good prospects for the new government. “The previous government was more about economic freedom and this one is more about social issues, inclusion and social development. The more people have access to credit, the more society develops,” he points out.
During Lula's two previous presidential terms, Brazil enjoyed a powerful economic boom thanks to high commodity prices, which allowed the charismatic president to create social assistance programs. Poverty figures fell by half, giving way to a new middle class.
Today, however, the Brazilian economy isn’t in such great shape.
The year will be challenging in macroeconomic terms and the global context continues to be turbulent, Spiralem's Diniz says. Startups —in Brazil and elsewhere— face funding problems and layoffs, which will represent a true litmus test for many fintechs.
“It’s moments like this that set apart the projects that can survive. We’ll probably see movement in mergers and acquisitions (M&A), either with banks buying fintechs or with further consolidation in some sectors,” he says.
However, Diniz remains upbeat about the Latin American market. “If we manage to maintain the rate of progress we’re seeing in the financial innovation segment —which is good— that will be something,” he says.
Looking forward
Among the other key regulatory development pending this year is the legal framework for loan guarantees, which promises to expand the credit market for fintechs and digital banks. The bill has already passed through the lower chamber of Congress and is now in the Senate. If approved, it will be sent to the president, who can sign it into law or return it to Congress with his objections. The industry is keen to see the bill become law since it modernizes the use of goods and assets in lending, from the largest contracts to the simplest ones.
The ABFintechs representative sees the bill going through since there is already a consensus on its most controversial aspect, which relates to pledging a family’s only asset as guarantee.
At the same time, Perez says the association is working to make rural credit more widely accessible through fintechs. “All financial entities have the regulatory obligation to allocate part of their credit to agriculture. Some don’t and prefer to pay a central bank fine for non-compliance. However, there are many fintechs operating in this segment. We want to change the rule so that fintechs can access this resource through FDICs [credit rights funds] of banks that are not interested in structuring [a rural credit model],” he says.
Environmental issues, which have come back into focus with the nomination of the ecologist Marina Silva as minister of the environment and climate change, represent a focal point for fintechs involved in the carbon credit trade.
Indeed, the tokenization of carbon credits is seen gaining more prominence, says ABCripto’s Srur, as more companies will have to enter this market. “Last year, we had a flood of companies coming in, many with tokenizers, and this year we’ll see the first products launched,” he says.
Diniz, the Spiralem consultant, says the market is experiencing an important shift in the transformation of assets to an economy that works based on blockchain. “The economy is moving towards a tokenization moment and we will also have the digital real that generates movement in the industry as a whole,” he adds.