Publications

Category: Banking, insurance and finance

In times of constant innovation, cryptocurrencies and other crypto-assets occupy the center stage of our financial future, bringing promises of great investment opportunities with the use of blockchain technology. As with any new frontier, however, these opportunities also bring new challenges – in this case, regulatory challenges.

This is where the International Securities Organization (IOSCO) comes into play. This international body, responsible for ensuring the integrity of the securities market at a global level, will serve as a compass in the exploration of this new financial territory.

In May, IOSCO published a series of recommendations on the regulation of crypto-assets. We take the opportunity to address the institution´s role and the importance of its recommendations for regulating crypto-assets, both in the Brazilian context and in the global scenario.

What is IOSCO?

IOSCO is an institution that brings together  regulators of securities from around the globe. Recognized as the global standard-setting body for the securities industry, it was founded in April 1983 with the mission to develop, implement, and promote adherence to internationally recognized standards of regulation of securities.

This commitment translates into efforts to protect investors and sustain fair, efficient, and transparent markets while addressing systemic security risks.

The organization also carries out crucial actions to improve investor protection and boost confidence in the integrity of these markets. This is done by strengthening the exchange of information, cooperation to monitor misconduct, and supervision of markets and market intermediaries.

Recently, IOSCO opened a consultation on a series of recommendations regarding the regulation of crypto-assets, whose comments should be sent by the beginning of the fourth quarter of this year. Published on May 23, these guidelines address critical issues at the intersection of fintech and securities regulation. They could shape the regulation and oversight of crypto-assets in jurisdictions worldwide..

IOSCO's recommendations

The recommendations addressed  by IOSCO are principle-based, focused on results, and targeted at activities performed by crypto-asset service providers (CASPs).

The document has a total of 18 recommendations, divided into nine chapters. To deal with the main risks identified, the entire lifecycle of crypto assets is considered, analyzing each of its phases or aspects from beginning to end.

These recommendations cover a wide range of activities in capital markets involving CASPs, from crypto-asset offering, admission to trading, continuous trading, settlement, market surveillance, and custody to marketing and distribution – both oriented and not oriented toward retail investors.

The recommendations emphasize the need to intensify cooperation between regulators and propose parameters for cooperation, collaboration, and response to cross-border challenges in the application and supervision of standards to Iosco members.

This includes regulatory arbitrage issues arising from global activities involving crypto-assets and conducted by CASPs offering their services – often remotely – in multiple jurisdictions. It is important to note that the recommendations do not cover activities, products, or services rendered in ​​decentralized finance (DeFi).

Iosco's report also addresses operational and technological risk management, and distribution to the retail public. It also includes comments on stablecoins, crypto-assets designed to maintain a stable value.

The document contains three annexes that further clarify the subject. Annex A presents issues for consultation and encourages an open and collaborative dialog on cryptocurrency regulation. Annex B surveys recent events in the crypto market and provides a current and relevant overview of the sector. Finally, Annex C details IOSCO's objectives and principles in securities regulation and serves as the basis for the proposed recommendations.

Importantly, IOSCO plans to publish a consultation report with proposed recommendations on the DeFi space by September of this year.

The perspective of Brazilian regulators

In Brazil, the Law 14,478/22, known as Legal Framework of Crypto-assets, already offered basic guidelines for the regulation of virtual asset service providers. This statutewas regulated on June 13, 2023 by the Decree 11,563/23, which established the competence of the Central Bank of Brazil (Bacen) to, among other attributions, regulate the provision of virtual asset services in Brazil

The provisions of the statute do not, however, apply to assets representing securities. The competence to absorb the recommendations made by IOSCO and establish the regulation of crypto-asset service providers that are considered securities, in this case, will be up to the Brazilian Securities and Exchange Commission (CVM).

• The CVM already has some regulations on the subject, such as: CVM Guidance Opinion 40, which consolidates the agency's understanding of the rules applicable to crypto-assets that are securities, with the aim of ensuring greater predictability and security and fostering a favorable environment for the development of crypto-assets, with integrity and adherence to relevant constitutional and legal principles;
• Circular Letter 4/2023/CVM/SSE, which deals with the characterization of “receivables tokens” or “fixed income tokens” as securities;
• the sparse legislation regarding the implementation of the Regulatory Sandbox.

IOSCO's recommendations will certainly serve to guide the CVM's specific regulation on the subject, enriching the discussion on the nature and classification of crypto-assets, in addition to helping to establish guidelines for adequate investor protection.

These new parameters proposed by the institution should encourage the creation of efficient and responsive regulation, which stimulates innovation and market integrity, without losing sight of preventing illegal activities and maintaining the stability of the financial system.

The consolidation of these rules can therefore not only bring more legal certainty to investors and companies operating in the sector, but also encourage the growth and internationalization of the crypto-assets market in Brazil.

Importance of Iosco recommendations for the regulation of crypto assets

The importance of these recommendations for the regulation of crypto-assets in Brazil and around the world is immense. The growing popularity of crypto-assets has brought major challenges for regulators. The need for a global and coordinated regulatory approach has never been greater.

IOSCO's recommendations can serve as an important roadmap for regulators around the world – including Brazil – to develop and adapt their regulatory frameworks to deal with the evolving crypto-assets market.

In addition, the initiative seeks to limit the risk of regulatory arbitrage, which occurs when market participants take advantage of differences between regulations in different jurisdictions.

This is particularly important in the crypto-assets market, which is global in nature. In sectors like this, regulatory differences can lead to serious risks, including systemic ones.

IOSCOS's actions point to a future in which the regulation of crypto-assets will become increasingly homogeneous and consistent globally, with a unified approach on the subject, more protection for investors and the safe and sustainable growth of this important segment of the financial capital market.

Reading the recommendations is therefore essential for regulators, private investors, and other participants in the crypto-asset market, as they are a compilation of what to expect in the future in the regulatory environment in Brazil and around the world.

Category: Tax

In the judgment of the Direct Action for Constitutionality^[1] 49 (ADC 49), the Supreme Constitutional Court (STF) ruled that the levy of ICMS on transfers between establishments of the same entity is unconstitutional.

According to the judgment, ICMS credits related to input supplies must be maintained, and the states must introduce mechanisms for the transfer of ICMS credits in interstate supplies until 1 January 2024, given the modulation of the ADC 49 decision effects.

In light of this judgment, the Senate has presented the Bill of Complementary Law (BoL) n. 332/18, which aims to amend the Complementary Law n. 87/96 (ICMS Law) to establish:

• the non-levy of ICMS on transfers of goods of the same owner;
• the maintenance of ICMS credits related to input supplies; and
• the right to transfer ICMS credits between origin and destination.

Approved by the Senate on 9 May 2023, the BoL has been sent to the House of Representatives for discussion and a vote.

According to the proposed amendments, the ICMS Law will expressly enshrine the non-levy of ICMS on transfers between establishments of the same entity, and the right to maintain ICMS credits. In addition, the amendments establish that, in interstate transfers, the credits must be guaranteed by the destination state, in accordance with the interstate rates provided for by the Senate (4%, 7% or 12%), the origin of the goods, and the origin- and destination state.

Any positive balance between the credits recorded in relation to input supplies and the credits transferred to the destination shall be ensured by the state of origin.

The BoL also establishes that taxpayers may choose to consider transfers a taxable event, observing the rates determined in the legislation for internal output supplies and the rates provided for by the Senate for interstate output supplies.

The provision to tax transfers as a taxable event is relevant to enable the enjoyment of tax incentives already granted. This is an aspect of concern for taxpayers after the judgment of the ADC 49, given the potential incompatibility with the calculation system (especially when the tax base of the benefit refers to the outstanding ICMS payable amount in the calculation period) or even the unfeasibility of such system.

Making the judgment of the ADC 49 suitable with the system of tax incentives is especially delicate, as it could give rise to complex legal discussions about eventual violation of a right secured to taxpayers, who took on and fulfilled onerous obligations for the enjoyment of tax incentives. This because, in the case at hand, any inapplicability of the incentives would not result from a unilateral revocation on the state’s end, but rather from a Court decision determining the non-levy of the tax.

In addition, the option for taxpayers to tax the transfer may also be relevant to accommodate the supplies subject to the ICMS substitution regime (ICMS-ST), given that the absence of debit (own-ICMS) in the interstate output supply could result in a lack of balance when calculating the ICMS-ST that is due to the destination state.

It is also worth mentioning that the provision of the ICMS Law that establishes specific criteria for the definition of the tax base of transfers (article 13, paragraph 4) has been revoked.

The correct definition of the tax base of transfers is important, as it can directly affect the measurement of ICMS credits to be transferred to the destination state. The issue can lead to disputes and trigger credit disallowances and tax assessments.

In the absence of a specific provision for the tax base of transfers, the residual rules provided for in article 15 of the ICMS Law may, in principle, be applicable.

We recommend that companies evaluate the need for updating the criteria for defining the ICMS tax base according to the possible new legal parameters.

The new provisions of the ICMS Law, if approved by the House of Representatives, will take effect from 1 January 2024, in compliance with the modulation of effects determined by the STF.

^[1] A request filed before the Supreme Constitutional Court aiming for the declaration that certain legislation is constitutional.

Category: Infrastructure and energy

At the end of the first quarter of 2023, Brazil still has one of the highest real and nominal basic interest rates in the world. Adding to this the turbulence that the international economy is going through in a post-pandemic and war scenario, with high inflation and rising interest rates even in the most developed countries, infrastructure financing in Brazil is experiencing an especially challenging moment.

Credit is essential for all sectors of the economy, including households. However, without credit, especially in the form of project finance, infrastructure projects entrusted to the private sector will not be viable. And investment in infrastructure plays a relevant role in economic growth, since the availability and quality of transportation, energy, and telecommunications infrastructure, among others, are requirements for the growth and competitiveness of other sectors of the economy.

Not by chance, reduction of interest rates is one of the biggest concerns of the new government.

Several factors explain the high value of the Selic (the basic interest rate in Brazil), with emphasis on the country's fiscal situation and how it is viewed, with greater or lesser distrust, by the market.

On the other hand, one of the main factors responsible for the even higher interest rates on credit transactions carried out in the financial market is the high risk of default, which is directly related to the availability and efficiency of collateral.

On June 1, 2022, the Chamber of Deputies approved Bill 4,188/21, which seeks to improve the collateral system in Brazil. Initiated by the Executive Branch, the bill had contributions from associations representing various market segments and is awaiting consideration by the Federal Senate, where it should have priority.

Guarantees can contribute to greater availability of credit and to cheapening it, as well as to performance of contracts and legal certainty in general. Improvements, therefore, are more than welcome, especially in Brazil, where the reaction of the Legislative Branch to correct inefficiencies or legal gaps is usually slow, and consolidation of case law to overcome interpretative doubts is equally slow.

The bill intends, for example, to eliminate inefficiencies and uncertainties of the real estate fiduciary sale system that have persisted for more than 25 years, since the advent of Law 9,514, of 1997!

Among them is the discussion of whether the rule in paragraph 5 of article 27 of the law would imply automatic extinguishment of the secured debt, in the event of a second auction of the property sold in which there was no bid equal to or greater than the value of the debt, even if the fiduciary sale agreement expressly excludes this extinguishment.

Some judicial precedents already point to lawfulness of the removal of the extinguishing effect, when expressly agreed upon in relations between companies, and not between individuals. However, these precedents are still far from being settled case law.

And what are the other improvements proposed by Bill 4,188/21?

The main new features are:

• discipline of the specialized collateral management service, in charge of collateral management institutions - GGI;
• discipline of the collateral agent;
• recognition of the legal possibility and the more detailed discipline of successive fiduciary sales or assignments over the same asset;
• broader improvement of the process of extrajudicial enforcement of the fiduciary sale of real property; and
• recognition of the legal possibility and discipline of extrajudicial foreclosure of mortgages.

The specialized collateral management service and collateral management institutions - IGGs

This is undoubtedly the biggest innovation of the bill, which creates the concept of an IGG, a legal entity under private law responsible for specialized management of collateral, which should be regulated in more detail by the National Monetary Council (CMN).

Although it does not qualify as a financial institution and is prohibited from conducting activities that are exclusive to such institutions, an IGG will be subject to regulation, authorization, and supervision by the Central Bank.

An IGG will act on its own behalf when establishing, registering, managing, valuing, and enforcing collateral, but for the benefit of creditor financial institutions. It will also assume fiduciary duties not only vis-à-vis these institutions, but also vis-à-vis the borrowers in the secured transactions and the provider of the collateral. Breach of these duties will result in personal liability for the IGG.

With such a high level of regulation and responsibilities, it is questionable whether we will have companies willing to take on this role.

The IGG differs from a mere collateral agent. The latter is a well-known figure in the market, especially abroad (collateral agent). In Brazil, although not so widespread and reserved for more complex transactions, the collateral agent is equivalent to a simple agent of creditors holding collateral, acting in their exclusive interest and with a scope of action, rights, and obligations defined in a contract signed with them.

The IGG was designed to play a different role. In contrast to the collateral agent, the initiative to contract the IGG would, as a rule, not be taken by the creditor agent, but by the individual or legal entity interested in holding an asset, usually indivisible, linked to multiple potential credit transactions.

As one potential use of this service, imagine an individual who has only one property to pledge as collateral. In theory, it could even be a family asset, since the bill, among its general provisions, also amends the legal framework for family assets, to remove exemption from foreclosure whenever the asset is voluntarily offered as collateral by its holder, regardless of the nature of the secured obligation.

Suppose, then, that this individual, at first, sees the need to take out financing that represents only 10% of the value of the property. Instead of tying 100% of their single, undivided property to the loan, which would represent an undesirable overcollateralization and could create a barrier to any future loan transactions, the individual will hire a IGG to manage the security interest on the property.

The security interest on the property will then be registered in the name of the IGG, and it will be permitted in the respective contracting instrument of the IGG to link multiple credit transactions to this collateral within the maximum term of the contract and up to the maximum total amount equivalent to the value of the property, as independently assessed by the IGG.

Once a financial institution agrees to grant credit to the individual in question, it would link its credit to the collateral under the management of the IGG, consuming at that time, in relation to the total collateral, only the maximum amount of credit granted and apparently without the need for any addition to the security interest already registered in the name of the IGG in the competent public register.

The individual would be free to contract new credit transactions in the future, until the total value of the security interest, as assessed by the IGG, is exhausted. In addition, as the originally linked transactions are amortized, this would open up more space for new credit transactions.

The collateral managed by the IGG, as a mere service provider, and registered in its name would not be confused with its own assets. Therefore, they would not be liable for any obligations of the IGG, but would constitute separate assets.

Risks and benefits of the proposal

The market will need time to assimilate this novelty, but the figure of the IGG has merit and could optimize the use of assets pledged as collateral, enabling a greater number of credit transactions at a lower cost.

However, the change is not immune to risks, in particular the risk of a supervening decrease in the original appraised value of the asset, after that original value has been backed by credit transactions that have fully consumed it. In this case, any supervening reduction in the value of the asset pledged as collateral, or even the original overestimated valuation, will mean a shortfall in collateral, to be shared proportionally among all creditors, unless an order of priority is stipulated among them.

Perhaps because it anticipated this possible scenario, the bill authorized the IGG to provide personal guarantees, which would secure the credit precisely when the collateral it manages is insufficient. Likewise, the bill establishes that the CMN may regulate the possibility for the IGG to acquire existing credit rights, including those linked to the collateral.

While these authorizations may, on the one hand, mitigate the risk of insufficient collateral under management, on the other hand, they may create the risk of conflict of interest that the project is concerned with avoiding by preventing the IGG from engaging in activities that are exclusive to a financial institution.

In any case, having understood the purpose of the IGG, it does not seem that it can be of much use in the context of infrastructure financing. It is of the essence in project finance transactions, typical of the infrastructure sector, that financial agents have the leading role in structuring security interests. For this context, the provisions regarding collateral agents will have greater application.

The IGG seems to have been designed for simpler and more standardized credit transactions, so much so that it is limited to transactions in the national financial system. Credit transactions in the capital market or with foreign lenders were excluded from its application from the outset.

As the explanatory memorandum of the bill shows, IGGs have the potential to facilitate the operations of cooperatives, fintechs, and small financial institutions, institutions that do not necessarily require collateral that is individualized or that they structured.

Collateral agents

The concept of the collateral agent is not new, but express regulations regarding it will be very welcome.

In project finance transactions, where there is often a need for different senior or subordinated financing agents to share collateral, the appointment of the collateral agent by these agents was already common, even in Brazil.

With caveats applicable to certain assets, not being a regulated activity (unlike with IGGs), any legal entity can act as a collateral agent. Among the exceptions, it is worth mentioning the receipt and custody of financial funds on deposit, which is an activity exclusive to financial institutions, as well as administration or management of investment funds, which requires authorization from the CVM.

In public-private partnerships, it is also common to appoint collateral agents to hold securities, receivables, or assets as collateral for the public consideration due to the private partner. In this case, the appointment of the collateral agent must meet the requirements set out in the PPP notice or in the draft concession agreement and its exhibits.

Due to these frequent uses, we already contended for, in 2018, the convenience of a legal system for collateral agents.^[1]

In fact, in any of these contexts, until an express framework is approved, the collateral agent will not be free from undesirable questions. Even if all are defensible, the mere existence of doubts and questions contradicts the ultimate purpose of collateral, which is to provide certainty and predictability.

Strictly speaking, if its role is justified on the sole basis of a power of attorney, the collateral agent should act on behalf of the principal, and not on its own behalf. But this is not the practice: the collateral agent usually receives and registers collateral in its name, without the necessary indication of all beneficiaries of the collateral.

In this respect, the commission would be the most appropriate typical contract for the collateral agent to act on its own behalf but in the interest of the principal. However, the typical commission contract, as provided for by articles 693 et seq. of the Civil Code, seems to limit its use to the context of the acquisition or sale of goods, which does not exactly fit with the receipt, management, and enforcement of collateral.

But even if the concept of collateral agent is based on an atypical engagement, which would not be prohibited, the absence of a clear regulations may raise doubts in a scenario of execution of the security interest or for the agent's liability regime. The proposed regulations is therefore very timely to give more certainty to the role of the collateral agent, including in the context of project finance.

Successive sales and fiduciary assignments of the same asset

Bill 4,188/21 came in good time to confirm the possibility of successive fiduciary sales, as already admitted without further doubt for mortgages.

With some interpretative effort, it was already possible to defend the legality and validity of "second or third degree" fiduciary sales.

In a perfectly feasible line of reasoning, it was contended that the fiduciary could dispose of its residual rights over the asset already disposed of in a fiduciary capacity at an earlier time, including the right to regain full ownership of the asset, after discharge of the secured debt.

The bill uses another basis, but with equivalent effect: that it is lawful for anyone to dispose of future property. Even if, in this case, the fiduciary ownership in favor of the fiduciary creditor is only perfected with subsequent acquisition of the asset by the fiduciary debtor, the effectiveness of the sale will be retroactive to the date of registration of the security interest (article 1361, paragraph 3, of the Civil Code).

Although the bill has brought this express confirmation only in the context of the fiduciary sale of real estate, its reasoning seems perfectly applicable to the fiduciary sale or assignment of any other asset or right.

The proposal has good potential for application even in infrastructure financing, as it is not uncommon in this market to require collateral with different degrees of priority in favor of subordinated creditors. Although it was already possible to defend the legal viability of second-degree fiduciary sale, the risk of disputes could not be ignored.

Improvements to enforcement of the fiduciary sale of real property

Another novelty to be highlighted in the bill is the objective provision that, in a second auction, the property fiduciarily sold may be sold for up to 50% of the value assigned to it in the fiduciary sale agreement. This removes the subjectivism from the concept of an arm’s length price.

And, as already referenced above, if the sale is made for a price lower than the debt, the debtor will remain liable for the difference, ruling out automatic discharge.

It is also interesting to introduce a provision to deal specifically - and with less room for doubt - with execution of a claim secured by more than one real property fiduciarily sold.

Extrajudicial execution of mortgages

The bill also proposes to amend Law 9,514/97 to extend the alternative of extrajudicial execution to mortgages, which is not currently allowed under the Civil Code.

This possibility could be useful in various segments, including infrastructure financing. Extrajudicial execution tends to offer greater speed and efficiency to the process of forced execution of the asset, removing the slowness and litigiousness of the judicial route.

Other changes

The bill also brings in other more specific changes. It now expressly admits the creation of a security interest on mining rights other than the mining concession, such as on the right to a research authorization permit, licensing right, and mining permit.

It also aims to abolish Caixa Econômica Federal's monopoly on civil pledges.

Among other matters foreign to the central topic of security interests and with a special chance of review in the Senate or presidential veto, we highlight the proposal to reduce to zero the withholding income tax, with respect to income paid or credited to a beneficiary resident or domiciled abroad, produced by any debt securities publicly distributed by a legal entity governed by private law other than financial institutions, by FIDCs, or even by financial notes, without further requirements or conditions.

Bill 4,188/21 is far from offering a comprehensive solution to all the inefficiencies and challenges existing in our collateral system, in its various modalities and market segments, but it certainly demonstrates concern and commendable progress. It is hoped that it will be approved with the urgency that the issue deserves.

^[1]ENEI, José Virgílio Lopes. Guarantees of Performance of the Public Administration to Contractors in Public-Private Partnerships. São Paulo: Almedina, 2018.

Category: Tax

Brazil introduced Provisional Measure No. 1152 on December 29, 2022, updating its transfer pricing rules to align more closely with international standards, especially as the country evaluates its integration with the OECD.

The new rules, which will become mandatory starting in 2024, address controlled transactions, comparability analysis, and the selection of the most appropriate method. They also regulate transactions involving intangibles, intra-group services, cost-sharing contracts, and transactions concerning debt and guarantees.

Taxpayers have the option to adopt the new regulation as early as 2023. We have prepared this ebook with insights from our partners on the main impacts of applying the new rules, the transactions covered within their scope, and the contentious issues. Take a look!

Category: Banking, insurance and finance

The Brazilian Congress is currently processing Bill 2,551/23 (Bill 2,551/23), forwarded by the federal government to simplify the procedure for issuing debentures. This will require changes to Law 6.404/76.

Bill 2,551/23 is part of the financing simplification and red tape cutting initiative prepared by the Bureau of Economic Reforms of the Ministry of Finance. According to the bill's explanatory memorandum, the proposed legislative changes seek to reduce costs related to fundraising by companies, as well as to provide more liquidity to securities and dynamism to the capital market.

The main changes proposed include:

Corporate Approvals

• Non-convertible debentures issued by publicly-held or privately-held companies may be approved at a board of directors or executive board meeting, without the need for a general meeting (as is the case with other debt instruments).

The amendment should speed up the process of issuing debentures, especially for companies whose rules for convening and calling to order general meetings provide for longer deadlines.

Filings and other requirements

• Exemption from the mandatory filing of debenture indentures with commercial boards.

It will be incumbent on the Brazilian Securities and Exchange Commission (CVM), for publicly-held companies, and the federal government, for privately-held companies, to regulate the form of registration and disclosure of the indenture and the corporate act approving issuance of debentures.

Quorum for resolutions at general meetings of debentureholders

With due authorization of the CVM, the quorum for resolutions to amend the conditions of the debenture indenture may be reduced if:

• the issuer is a publicly-traded company;
• the reduced quorum is mentioned in the call notices;
• the reduced quorum is adopted only upon third call; and
• the debentures are dispersed in the market, i.e. no debentureholder may hold directly or indirectly more than half of the debentures.

In addition to the aforementioned changes, Bill 2,551/23 provides for the exemption of the opening of a book of registration of debentures with the commercial registry, as well as the possibility of separating the interest charged as remuneration from the nominal value of the debentures(strip).

The basic text of the bill is still subject to amendments suggested by members of congress. The initial proposal, however, seems to simplify and streamline the process of issuing debentures, which is still undergoing adaptations resulting from approval of the new regulatory framework for public offerings, in force since January of this year.

Category: Tax

Scheduled for July 1, 2023, the deadline for the entry into production of eSocial labor lawsuit events was again postponed, as the Federal Government reported in a note issued on June 30, without the definition of a new date.

In addition to seeking to meet several requests for postponement made by private sector entities, the postponement of the labor lawsuits events was planned so that the new date of entry into production coincides with the replacement of GFIP by DCTFWeb.

Although it has not yet officially defined a new deadline for the beginning of the obligation to send the information regarding labor lawsuits, the schedule presented by the Ministry of Labor in Letter SEI 55194/2023/MTP, issued in response to the request for postponement of the Federation of Industries of the State of Minas Gerais (FIEMG), indicates as the deadline for entry into production the day 1 October 2023.