Brazilian central bank overhauls fintech regulation

The Central Bank of Brazil (BCB) issued a new set of fintech regulations covering payment firms on March 11, its first update to key rules for the sector in nine years.

The BCB intends for the new rules to spur competition in the space and rein in riskier business structures.

The central bank said the new regulations had become necessary in the years since the bank’s major regulatory update, issued in 2013. Fintech firms have since extended into novel lines of business accompanied by new risks “without proportional prudential requirements”, said the BCB.

Payment institutions are now regulated such that lower-quality capital that has “little or no value” in absorbing losses doesn’t count toward capital requirements, the bank said.

Brazil has created a waiver system such that for the first two years of operation, firms are exempted from deducting intangible assets from their capital – a 100% exemption in year one, and 50% in year two.

“A characteristic of fintechs is the high initial investment in technology, systems and software, which constitute an important portion of intangible assets,” said the central bank. Fintech firms’ high costs can be prohibitive to entrants, the bank believes. Measures such as the waiver system are intended to keep the market diverse and competitive.

The bank added that although the new fintech regulations would be introduced in 2023, firms will have until 2025 to comply. “This gradual introduction was inspired by the introduction of Basel III for [financial institutions], which took place until 2019,” the central bank said.

The bank created three classifications for fintech firms and payment institutions, each with accompanying regulations based on their perceived risk. Conglomerates with simpler structures will face simpler regulation.

The changes come as part of a wider regulatory push in Brazil. Recently, the economic affairs committee of the Brazilian Senate unanimously approved legislation to regulate crypto assets. The law would regulate and create a licensing process for crypto brokers. The BCB is one of the primary intended regulators of the market.

In a bid to encourage market development, the proposed law would give a tax exemption for all software and hardware purchases for carbon-neutral firms.