Abstract: Following the 2008 financial crisis, companies formed financial alternatives to traditional banking to meet consumers' needs. Such alternatives benefitted from the advent of new means of recruiting and interacting with clients, remunerating and investing. Mexico has a track record of facilitating flourishing start-ups in the financial technology (fintech) sector. This article presents the context in which Mexico developed regulations for its fintech industry and provides an overview of key regulations and models of operating fintech institutions under Mexican law.
Context of Fintech in Mexico
The emergence and expansion of
Financial Companies (Sofom) and
Popular Financial Companies (Sofipos), a model under which some of the financial technology companies in Mexico began to operate, made the country one of the largest hubs for startups in Latin America, although the services were not strictly regulated or supervised.
The main problems were the lack of regulation in matters of crowdfunding, deposits and payments, and currency exchange, which had never been considered under the Securities Market Law or the Credit Institutions Law. The overall lack of regulation generated either significant legal uncertainty for the operation of fintech start-ups in Mexico or insufficient legislation to cover the operations carried out by the sector.
On March 9, 2018, Mexico enacted the
Financial Technology Institutions Law (the “Law”) to categorize and regulate banking sector agents, entrepreneurs and private capital owners.
The Fintech Regulatory Framework
The Law is critical to understanding the interactions of market participants, associations, regulators and financial institutions because new forms of financial services provided by the fintech industry, such as crowdfunding and electronic payments, are now subject to a new regulatory scheme. The Law regulates three parties involved in the industry: the banking sector, entrepreneurs and private capital, and seeks to stimulate broadbased market participation; promote financial stability in domestic and regional markets; prevent fraud, money laundering operations through Romina Fernández romfernandez@mayerbrown.com +55 9156 3662
Raul Fernandez Briseno raulfernandez@mayerbrown.com
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mobile payments and cryptocurrencies; and generally protect consumers and maintain competition.
The Law regulates two types of Financial Technology Institutions (ITF): (i) crowdfunding institutions, and (ii) electronic-payment fund institutions. It also regulates virtual assets—securities not backed by a banking institution. The differentiation of regulated activities leaves out important areas, such as credit risk, insurance activities (insurtech), among others. The net result is a largely asymmetrical regulation of the sector.
The first type of regulated ITF, crowdfunding, is defined by the Law as activities intended to establish connections amongst members of the general public, with the purpose of providing funding through operations carried out through computer applications, interface platforms, webpages or any other forms of electronic or digital communication.
However, crowdfunding activities are divided into five categories, which the Law only regulates three of: (i) crowdfunding debt, in which funding is granted to applicants through various investors; (ii) crowdfunding capital, in which investors acquire a specific interest in the applicant entity; and (iii) crowdfunding co-ownership or royalties, in which an investor acquires a percentage of the revenue, profits, royalties or losses on an applicant's projects, as part of a joint venture or agreement. The remaining two types of crowdfunding (donation-based and reward-based) are not regulated, as they do not require an authorization for carrying out essential activities.
Crowdfunding institutions must perform the obligations established by the Law, as they apply to their operations. For example, all transactions must be done in pesos, US dollars or cryptocurrencies if an authorization from the Bank of Mexico (BM) is granted; must be subject to a money laundering prevention framework; and cannot issue statements of guaranteed return on investments.
One common service provided by electronic payment institutions is the opening of accounts for customers, where the customers are able to make deposits in local or foreign currency, move certain virtual assets, issue electronic payment transfers and transfer funds, whether in national or foreign currency or virtual assets, if authorized by the BM. However, no interest, income or any other monetary benefit is paid on the accumulated balance for these transactions, and no loans can be granted by these payment institutions.
Both types of ITFs require the use of an operating authorization and funds used by clients in operations with the ITF and are not guaranteed by the federal or state government.
Virtual Assets
The Law defines virtual assets as an electronic representation of currency used by the general public as payment for all types of transactions that are only conducted electronically.1 In practice, some users use them for a different purposes, such as storing currency. Although the exchange of virtual assets generates interest on accounts of public demand, they are neither issued nor endorsed by the BM or any financial institution.
On March 8, 2019, CIRCULAR 4/2019, issued by the BM was published. The Law tasked the BM to determine the means of implementation for CIRCULAR 4/2019: (i) determine which virtual assets and characteristics are allowed to operate; (ii) set the type of operations and restrictions for transactions; (iii) establish deadlines, terms and conditions in cases where the virtual assets involved are converted into other sort of virtual assets or their characteristics are modified; (iv) ascertain the information regarding virtual assets transactions that are required to submit to BM in order to obtain its authorization to operate with virtual assets; and (v) define the characteristic of the authorization required to execute the transactions with virtual assets.
If you are interested in setting up an account, make sure to do the following: (i) identify the different cryptocurrencies offered in the market and verify the number of users that support the chosen cryptocurrency, the greater the number the better; (ii) confirm that the official site of the offered cryptocurrency is duly authorized for exchanges; and (iii) make sure to have a wallet provider to store the acquired cryptocurrencies which has high standards for safety.
Consumer Protection
Not only does the Law clearly seek to protect ITFs from money laundering or terrorist financing, it also aims to protect against consumer fraud and the unlawful use of personal data by requiring applicants and investors to identify themselves and by regulating the money transfers by consumers. However, this protection has not been enough, since the law dictates that the consumer must bear the entire risk. In addition, market participants need to be fully aware of the financial risks involved, and fintech providers may have internal controls and risk management that need to be carried out in strict connection with the Law and its secondary provisions (i.e. minimum and maximum limits of capital stock permitted by their clients and the amount clients may use, the minimum and maximum limits of cash and money transfers in Mexico and abroad, among others).
Also, fintech providers will use Application
Programming Interface (API) to exchange market participants' private information with financial institutions and other competitors. Companies and market participants need to be aware that their data can only be transferred by means of the APIs if the fintech providers or financial institutions had received written consent of their customers to do so. Additionally, customers may confirm with the fintech provider if they are complying with the legal obligation to adopt systems to prevent money laundering and terrorism financing and know-your-customer policies for personal data processing before onboarding.
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Originally published 27 June, 2020
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