MEXICO: An Introduction to FinTech Legal
FINTECH: Mexico’s Trends & Challenges
Back in March 9, 2018, the Mexican Congress enacted the Financial Technology Institutions Law (hereinafter “FinTech Law”) in order to regulate the rendering of financial services through innovating technology—mainly those used by crowdfunding and electronic payment institutions, as well as cryptocurrencies. This initiative effectively situated the country as the first jurisdiction in Latin America to specifically address the financial technology industry.
During the last decade, Mexico has positioned itself as one of the best options in Latin America to create or develop start-ups. The size of the economy, a population nearing 130 million people and the legal certainty that a legislation of this magnitude has generated, have given investors the possibility to expand their businesses and create new opportunities in the market.
However, the rise of certain challenges involving the obtaining of the authorisation before the competent authorities has been a constant issue, since regulatory requirements and administrative pre-requisites have been hard to comply with for multinational and domestic companies alike.
Under the provisions set forth by the FinTech Law, the National Banking and Securities Commission (“CNBV” per its acronym in Spanish) is the organism in charge of granting authorisations to Financial Technology Institutions (FTIs) in Mexico, by means of an approval issued by an Interinstitutional Committee.
In order to enable an orderly transition to the new regime, the FinTech Law provided that the entities that were already carrying out regulated activities before such legislation was enacted, were obligated to file before the CNBV a registration process to obtain an authorisation within a 12-month time period starting on the day that the FinTech Law came into force. These entities are still permitted to continue carrying out their activities by the transitory regime until the CNBV’s corresponding authorisation process has been resolved, to the extent that their webpage states that their authorisation is under way and that it is not yet supervised by the Mexican authorities.
This transitional regime has avoided hindering the booming growth of the FinTech industry in Mexico inasmuch as most of the entities are still pending authorisation by the CNBV whereas only a few have already been authorised.
The robust structure of the FinTech Law has brought significant foreign investment in the sector. In our experience, we have mainly seen three different modalities of investment: i) creating new start-ups and filing for authorisation to the CNBV; ii) using FinTech as a service model; or iii) investing or acquiring interest in a company with an ongoing FinTech business.
Authorisation for a new entity
When investing in the FinTech sector in Mexico, by creating a new start-up, it is necessary to file for authorisation to the CNBV. During the authorisation process, the authorities oversee and test the petitions in a thorough manner, assessing the business plans, corporate requirements (such as minimum capital paid-up and subscribed, technological infrastructure, internal controls policies, procedures, manuals to operate, among others) and interim measures that address innovative models (regulatory sandbox) depending on the activities performed.
FinTech as a service
Furthermore, when operating with the model of “FinTech as a service” (which has been a recurrent form of investment in Mexico lately), it is key to correctly split the activities carried out by the company that is authorised by the CNBV, from the activities conducted by the company that is hiring the first-mentioned entity, to provide transparency and make it clear to the general public what activities are carried out by each of the said entities. In this regard, it has come to our attention that the CNBV has fined several entities for implementing this FinTech as a service model incorrectly.
Investing in or acquiring an existing company
When acquiring or investing in an existing company authorised by the CNBV, the inexperience of investment and corporate structures to raise capital in the country has been a significant obstacle to certain groups, given that such structures must be modelled in light of the inherent characteristics of the investors participating in the business. The industry has encountered hardships regarding the timing of the phase in which to get advice, since groups usually start operating in Mexico relying on misinformation obtained from Internet advisers and end up having to modify their entire investment structure.
Another topic that has been a constant in the FinTech sector throughout the last years has been cryptoassets—especially since, nowadays, an important number of non-regulated enterprises are beginning to develop projects to create their own cryptocurrencies.
In this respect, it is important to bear in mind that the FinTech Law empowered autonomous specialised institutions, such as the CNBV and Mexico’s Central Bank (Banxico) to issue secondary regulations on the matter.
On March 8, 2019, the Banxico issued secondary regulation by means of a ruling letter number 4/2019 “General Rules Applicable to Credit Institutions and Financial Technology Institutions in Transactions made with Cryptoassets”. This ruling sets the Central Bank’s position on the cryptoassets by stating that they may be used by FTIs and credit institutions to the extent that they have the following characteristics: they shall i) be information units, unequivocally identifiable (even fractionally), registered electronically and that do not represent the ownership or rights to an underlying asset, or that represent such ownership or rights in a lesser value than these; ii) have the necessary issuance controls defined by determined protocols and to which third parties may subscribe; and iii) have the necessary protocols that avoid the availability of replicates of the information units or its fractions to be transmitted more than once in a single moment.
Despite the fact that some of the abovementioned restrictions barring “external” transactions and risk transfer to clients may appear worrisome, only certain financial institutions, such as FTIs and banks, are obligated to comply with the restrictions provided by Banxico’s ruling letter 4/2019.
Conversely, non-regulated entities should be able to fall without the scope of these constraints when issuing new cryptoassets, as long as they are indeed not regulated under financial legislation or subject to the limitations set forth by the FinTech Law.
As a consequence of intrinsic characteristics, Mexico has become a great area of opportunity for investing in its growing FinTech sector and, naturally, a jurisdiction with potential difficulties from a regulatory standpoint.
Therefore, given the complexity of the FinTech ecosystem and the myriad of business models that exist in its realm, it is of the utmost importance for electronic payment and crowdfunding start-ups to analyse their particularities in order to successfully adapt themselves and comply with regulatory requirements by developing a robust and comprehensive course of action that will avoid hampering or slowing down its progress in the region.
Both Ana Sofía Ríos and Valentín Ibarra are Partners with Chevez, Ruiz, Zamarripa y Cía. Jorge Ramón Galland is a Senior Associate in the same Firm.