a mouse pointing to an image of a padlock
Image: PopTika/Shutterstock

Fewer rules to test out new businesses, products, and services. Here comes the Brazilian sandbox

The United Kingdom will be the base for the Brazilian model, which is in a public consultation in the CVM until September 27th

Ler em português

Even the big banks in Brazil will be able to enjoy the benefits of the sandbox—a regulated environment to test innovations—that the Securities and Exchange Commission (CVM) placed in public consultation until September 27th.

The sandbox is a set of simpler rules and a reduced supervision from regulators that allows companies to develop and test an innovative business models, products, or services.

After the termination of the public consultation, contributions will be analyzed and the definitive regulation will be edited. Immediately after, a committee will be established that will remain accountable for making the necessary calls to entrepreneurs interested in participating in the sandbox. The deadlines for the entire process have yet to be fixed.

The definition of the sandbox aims at covering all the projects developed by startups, fintechs, and entrepreneurs in general, as well as projects developed by large companies that are well established in their markets. The objective, according to the autarchy, is to ensure the equal treatment of entrepreneurial initiatives, independently of the sector or size.

“There is no limitation and neither is it addressed to a specific type of company,” explains Antonio Berwanger, superintendent of market development for the CVM to LABS. He explains that what will be tested are the business models for services provided in a regulated activity by the autarchy, and not the companies themselves.

The definition of what is innovation includes the adoption of new technologies such as artificial intelligence, distributed ledger, machine learning, algorithmic negotiation, augmented reality, big data and analytics, Internet of things, and wearable devices. But not in an exclusive manner.

ALSO READ: Amazon is making possible the use of biometric information alone to pay for purchases in Whole Food

The sandbox will also be accessible to business models that intend to develop innovations geared primarily to the market, be it through the launch of new products and services, be it through the improvement of products and services already offered in the market.

Initially, the tests may have a duration of up to a year. At the end of that period, the company will have three options: receive a definitive license; terminate the project, if it is no longer viable; or extend the testing period for an additional year, if the CVM considers necessary.

The Brazilian model will have the British one as its benchmark and will take place in cycles

The sandbox is relatively new, even globally, having begun to be implemented by the United Kingdom, Australia, and Singapore in 2016. The United Kingdom, which will serve as the benchmark for the sandbox model, opted for cycles or cohorts promoted by the Financial Conduct Authority (FCA). The initiative is on its 5th cycle. Announced in April of this year, this cycle received the highest number of participation requests until now: 99 interested participants.

In the first cycle, 75% of accepted companies managed to complete the test; 90% of those that completed the test were intent on continuing with the launch of their product or service in the market; and the majority of participants that received provisional authorization ended up obtaining definitive registers. In addition, 40% of participants received contributions during and after the tests.

ALSO READ: Brazil is ready to reduce the bureaucracy of its omnichannel operations

There are several sandbox models being tested around the world. In Singapore, for example, the model is continuous, not in cycles, and does not have public calls for proposals. The process is led by the Monetary Authority of Singapore (MAS).

In Mexico, the National Commission of Savings System (CONSAR), the tests and pilots environment (sandbox) was launched in March of this year and is geared towards fintechs.

In Hong Kong, the objective is to promote trans-sectoral innovations. For that reason, the initiative was launched in 2017 by the Securities and Futures Commission (SFC) with an operational integration with the sandboxes of the Hong Kong Monetary Authority (HKMA) and the Insurance Authority (IA).

“We are inspired by the model of the United Kingdom, with a specific time for receiving proposals, analyzing, and selecting participants. Within the number of participants that we are capable of monitoring, and we will benefit from the sum of experiences in relation to the activity that is taking place,”says Berwanger. Protocol does not define the number of participants.

We will leave the Committee in charge of making the decision of defining or not the number or waiting to receive the proposals, before making eventual cuts.

Antonio Berwanger, superintendent of market development for the CVM .

The autarchy will also seek to coordinate with the rest of the regulators. Since the end of 2017, the four primary financial regulatory institutions in Brazil—the Central Bank, CVM, Superintendence of Private Insurance (Susep) and the National Superintendence of Complementary Retirement (Previc)—have been evaluating the regulation of a sandbox. Beyond the CVM, which took the lead, the Central Bank and Susep are preparing to launch their models in the next few weeks.

“That coordination has already been happening within the scope of the Financial Innovations Laboratory [LAB]. A document with protocols was created and distributed to the regulators, and we have spoken with the Central Bank and Susep to align with them. Yet each regulator has their perimeter of competency in which only it can offer authorization,” emphasizes Berwanger.

From crowdfunding to Initial Coin Offering (ICO) of digital currencies

Between startups and fintechs, the atmosphere is one of optimism. Bruno Diniz, the director-president of the Fintech of Abstartups Committee, says that the representative entities will actively participate in the discussions concerning the sandbox, in the work group of the Financial Innovation Laboratory (LAB), created by the Interamerican Bank of Development (BID), the Brazilian Association of Development (ABDE), and the CVM.

“The CVM became the leader and we positively valued the document that went on to the public consultation. Susep and the Central Bank also participate of LAB. The idea was to create mechanisms, so that the three sandboxes communicate between each other, because it is possible that businesses might overlap in the spheres of the three regulators,” observes Diniz.

Diego Perez, the director-executive of the Brazilian Association of Fintechs (ABFintech) and co-founder of crowdfunding Start Me Up (SMU), considers that the protocol is very complete. A positive fact is the following of the model in the United Kingdom, which has had major success. The ABFintech created to work group among the associates and a group of jurists to elaborate the pleas.

“The idea is to glue together those that are regulated by the CVM—equity crowdfunding, robo advisors, peer to peer lending, and investments—and discuss which point of the regulation policies can be adjusted or modified,” highlights Perez.

He explains that in crowdfunding regulation, there was already an informal model of experimentation. Now the regulation of a secondary market is being studied. The topic is already being discussed among companies of the segment and there are no obstacles to a parallel regulation.

“Nowadays the blockchain technology allows an improved efficiency and democratization of the capital markets and could come to be used in the secondary market of crowdfunding,” says Perez.

Carlos Russo, director of investments of Transfero, says that the sandbox might be able to bring regulatory transparency to the operational models of the company, which deals with digital coins. There are three business models: operations focused on buying and selling of digital coins, management of digital assets, and tokenization of assets. The last two are within the scope of CVM.

ALSO READ: Visa’s token transactions triple as technology gains ground in Brazil

The management of digital assets is establishing an off-shore fund that will later be linked to a fund in Brazil. The tokenization operation deals with the emission of digital coins (ICO).

“Today the CVM exempts the management of digital assets of any license, given that it does not engage with securities assets. We imagine that the autarchy will consider incorporating the regulatory framework of other managing bodies to their managing model,”, says Russo.

In the case of tokenization, due to the juridical precariousness, no company to this day risked offering an ICO in Brazil. There are two types of frameworks: the issuing of a utility token, which does not have a securities asset; and the issuing of a token with the characteristics of a securities asset, which requires a similar process to that of a traditional IPO. “For that reason we recommend our clients to complete the issuing of tokens abroad,” justifies Russo.

He informs that he will propose a public consultation that the CVM adopt for tokenization of assets a normative instruction similar to that of IN 588, which regulates crowdfunding and stipulates that companies with revenues up to BRL 10 million per year can access through crowdfunding the capital of investors.

Credit and open banking can also progress with the sandbox

Rafael Pereira, president of the Brazilian Association of Digital Credit (ABCD), says that the sandbox of the CVM could benefit a segment of credit, since everywhere there is a tendency of narrowing the connection between credit and the capital markets.

“Abroad there is an integration with the capital markets through the securing of receivables and credit investment funds. We already have some experience with FIDC (Investment Fund in Credit Rights), and the sandbox of the CVM could simplify the use of these devices,” argues Pereira.

Rafaella de Palermo Peres, juridical director of Guiabolso, says that one of the benefits of the sandbox is to create a friendly environment for innovation and competition, to the benefit of consumers. “Today there are no incentives for banks to innovate because the system is focused on the dominant position that is consolidated. Once there is an opening for those types of shifts, the objective is to incentivize all players, both big and small,” summarizes Rafaella.

Alexandre Lara, founder and CEO of Blue 365, informs that even if the company is not subject to the supervision of the CVM, the initiative of launching the sandbox is welcome. The 365 operates with the analysis of client behavior and how to help them negotiate their debts and recover credit.

“We are expecting more maturity from the initiative, so as to test open banking projects. There is the opportunity of an improved customer service, since knowing the details of their relations with a financial institution qualifies us in a better way,” says Lara.

He emphasizes that Blue 365, since it deals with the analysis of client data, is subject to the General Law of Personal Data Protection. “We have to obtain or opt in the client and act with clarity and transparency so that he understands the use of his information,” says Lara.