Veritas Online

Tecnologías de la Información

Regulating Transactions with Virtual Assets in Mexico

septiembre 24
14:53 2018

INTRODUCTION

The “General Provisions referred to under Article 58 of the Act to Regulate Financial Technology Institutions” (Fintech Act) were published on the Mexican Official Gazette last 10 September 2018. This regulatory measure, in general, has the main purpose of preventing the use of the institutions covered by this Act as a means for committing money laundry transactions or terrorism financing.

In the foregoing context, this regulatory frame seeks to force the Financial Technology Institutions (FTIs) of Mexico to comply with a series of rules and “know-your-client” procedures in order to prevent the operations indicated in the previous paragraph.

The new regulatory framework – discussed here – is issued by the Ministry of Finance and Public Credit (the Ministry) in accordance with the provisions of Article 58 of the Fintech Act, which establishes the compliance obligations to which FTIs are subjected to.

Based on the foregoing, the purpose of this article is to analyze the scope of the aforementioned provisions regarding transactions denominated in virtual assets.

BACKGROUND

A FTI is, simply said, that company which uses technology to provide all kinds of financial services to the general public or to a particular market segment, seeking to be more efficient and competitive than traditional financial institutions in terms of customer service and operating costs.

FTIs today carry on a wide variety of financial services including, among others, payment and transfer platforms; lending; access to financial markets; crowdfunding; insurance; access to cryptocurrencies and blockchain, and all that disruptive financial activity that operates one hundred percent on digital platforms.

Now, the FTIs which are regulated under the Fintech Act are only the crowdfunding institutions and the electronic payment funds institutions. However, the Act also covers other financial institutions that wish to carry out transactions with virtual assets in accordance with Article 88 thereof.

TRANSACTIONS WITH VIRTUAL ASSETS

The Fintech Act, as well as its recently published general provisions, make a great attempt to regulate the transactions executed by FTIs in virtual assets. However, the regulatory provisions do not reach the transactions carried out in said assets that are implemented in other jurisdictions or by companies or institutions that are not covered by the Act.

In the first instance, the FTIs -and other financial entities of the country- will only be able to carry out transactions with the virtual assets that are determined by the Bank of Mexico through general provisions and must have the prior authorization to do so from the same institution.

At the date of the publication of this article, the Bank of Mexico has not published the general rules referred to on the previous paragraph. However, the definition of the term virtual assets provided by Article 30 of the Fintech Act gives us a clue as to which are the virtual assets that will be included under this regulatory precept.

That said, it is worth reviewing Article 30 of the Act that defines virtual assets for purposes of the Act, as “the electronic representation of value used among the public as a means of payment for all types of legal deeds and their transfer can only be carried out through electronic means. In no case shall the currency of legal tender in Mexico (pesos), other currencies (e.g. US dollars) or any other asset denominated in currency of legal tender or in foreign currency be understood as a virtual asset “.

According to the above definition, the essential characteristic of virtual assets that can distinguish them -those regulated and all others- is that they are used by the public as a means of payment for all types of legal deeds.

CLASSES OF VIRTUAL ASSETS

On the day of the preparation of this article (21 September 2018) there were in the market 1977 virtual asset classes –also known internationally as cryptocurrencies or tokens-, which are traded in 14,003 markets also virtual.

Bitcoin is the cryptocurrency of highest value with 54.7% dominance in virtual markets. The cryptocurrencies or tokens can be divided and subdivided to date as follows:

A.- Those that are used as a means of payment or exchange for the acquisition of products and services, whether real or digital.

A.1.- Those that are used universally, that is, openly in the commercial markets to the extent that they are accepted as a means of payment or exchange.

A.2.- Those that are only accepted in a closed community such as those created by department stores, virtual casinos, retail stores and similar.

B.- Those that may be more of an investment in nature that may or may not be regulated by the applicable legislation.

B.1.- Those that are referred to an underlying other than currencies of legal tender e.g., precious metals (gold or silver).

B.2.- Those that are referred to underlying assets represented in shares.

B.3.- Those that are referred to debt or future services.

Just remember that the definition provided by Article 30 of the Fintech Act establishes that “in no case it will be understood as a virtual asset the currency of legal tender in national territory, currencies, or any other asset denominated in legal currency or in foreign currency”. Thus, the tokens with underlying currency referred to legal tender (pesos) are not virtual assets for the purposes of the Act and its regulatory provisions.

ANALYSIS

From the reading of the abovementioned provisions, several interpretations can be derived as follows:

1.- Regulated FTIs and financial institutions may only operate with the virtual assets approved by the Bank of Mexico (which may be three or four) as long as they are used by the public as a means of payment for all types of legal deeds. This automatically discards all tokens that are referred to an underlying asset and are in nature close to an investment which are described in paragraphs B.1, B.2 and B.3. above indicated and tokens that are only used as means of payment or exchange in closed communities such as those created by the departmental or consumer stores referred to in section A.2 above.

2.- Therefore, all those crowdfunding FTIs, for example, that wish to make a placement of a token that does not comply with the characteristic of being used by the public as a means of payment for all types of legal deeds would be, in principle, violating the Act and its general rules.

3.- Having said the foregoing, ICO (Initial Coin Offering) placements can only be carried out in Mexico by non-regulated entities or ultimately outside of Mexico.

4.- Bitcoin, which is the most valuable virtual asset in the market today does not comply with the characteristic of being “used by the public as a means of payment for all types of legal deeds“. This is, as of today, Bitcoin is not accepted for the payment of taxes, salaries, public services, tuition fees for schools and universities, supermarket bills, movies, etc. It seems that in order to comply with the characteristic of being accepted as a means of payment for all types of legal deeds, the asset shall be accepted openly, in general and in an ordinary manner. Bitcoin today is only used as a speculative investment in the vast majority of cases.

5.- Given the foregoing and in accordance with current legislation, not even Bitcoin falls within the scope of the Fintech Act and its regulatory provisions. Therefore, and in the absence of the general rules of the Bank of Mexico, the FTIs and financial institutions should be unable to use and offer financial services to their clients which are denominated in any sort of virtual assets including Bitcoin.

6.- Once the general rules of Bank de México are issued, we will know which virtual assets will be approved to the FTIs for offering, if any, since to date there is no virtual asset in the market that complies with the aforementioned characteristic.  At that time, the FTIs must comply with all the new regulatory provisions related to the identification of their clients and users, including in particular: (i) the conduct of interviews with clients when initiating a contractual relationship, (ii) to send the reports of the transactions with virtual assets to the Ministry on a quarterly basis, (iii) the preservation of the documents in electronic format for at least 10 years, and (iv) the establishment of special control and monitoring systems when the transactions carried out by the customers of the crowdfunding FTIs exceed twelve thousand five hundred investment units in one month or seven thousand five hundred investment units in the case of FTIs of electronic payment funds. (An investment unit is a Mexican index which is updated for inflation. Today, the value of 1 IU is 6.115).

CONCLUSIONS

There are currently no “virtual assets used by the public as a means of payment for all types of legal deeds” on the Mexican market today. Not even Bitcoin meets this characteristic because of the abovementioned arguments. Therefore, FTIs and other financial institutions in Mexico, in the first instance, cannot operate under the current legislation with any kind of virtual assets or cryptocurrencies.

Mexican companies wishing to seek financing sources through the placement of their virtual coins (ICOs) must do so abroad, since doing it in Mexico could, under the current legal context, be illegal.

Once the general rules of the Bank of Mexico are published, an additional window will open to continue studying the topic of the use of virtual assets in Mexico. Despite this, it can be said that the current legislation falls short at attempting to regulate the use of existing virtual assets in the market. Furthermore, the speed at which these kinds of transactions move is tremendous. Only in the last two months there are already more than two hundred new classes of cryptocurrencies and almost 500 new virtual markets from where the transactions with these assets are operated. Thus, there is a risk that the longer it takes to issue a final regulation the higher the possibility that it would be outdated in light of the fast moving economy and market.

 

Juan Ángel Becerra Cantú
Integrante de la Comisión Fiscal Internacional del Colegio
juan.becerra@cgctax.com

Facebook Comments

Related Articles

A %d blogueros les gusta esto: