MEXICO: An Introduction to FinTech Legal

THE METAVERSE AND ITS FINANCIAL TRANSACTIONS - OVERVIEW AND REGULATION IN MEXICO

Technological advancements have made e-commerce and telecommunications an essential part of the global economy. In recent years, countless platforms have been developed providing innovative ways to carry out commerce, entertainment and financial transactions through the Internet, enhanced and accelerated by the COVID-19 pandemic, where businesses and consumers were forced to interact virtually. The metaverse, due to its capacity to replicate real life situations in a virtual environment, has already started to revolutionise the way in which goods and services can be exchanged.

According to Nick Clegg (President of Global Affairs at Meta) in an interview with CNN, Mexico is among the principal countries that are engaging in the development of the metaverse. Similarly to other countries, regulators in Mexico are facing the uncertainty and challenge of applying existing regulation to the metaverse (which was not created specifically for such type of platform) and the potential creation of a legal framework that provides certainty and protection for the users of the metaverse and the public interest.

What is the Metaverse? 

According to author Andrew Clemens, “the metaverse exists as an augmentation of the actual world, a three-dimensional environment that allows individuals to penetrate and engage”. In short, the metaverse is a digital world that can be accessed by individuals to carry out a wide array of activities.

The difference between the metaverse and other digital platforms is the virtual and immersive reality component which allows users to interact in the digital world in new ways. Users use specialised headsets to block the physical world and become submerged in the digital environment provided by the metaverse. As Meta CEO Mark Zuckerberg stated in an interview with the Verge, in the metaverse “instead of simply seeing stuff, you are immersed in it”.

The metaverse is not owned by a single group or organisation. Several entities have created their own virtual reality platforms in which users can interact. Currently, some of the most important platforms are Decentraland, which was launched in 2017, allowing users to create and acquire virtual real estate as well as organise social events; Sandbox and Roblox, which are platforms fundamentally used for gaming. Facebook, now Meta, and Microsoft are also investing heavily in developing their own versions of the metaverse, Microsoft recently launching Horizonworlds.

Digital economy in the metaverse 

According to a report published by Gartner, it is estimated that by 2026, 25% of people will spend an hour in the metaverse and 30% of companies will offer services and products in the metaverse.

Due to the capacity of virtual reality to replicate real life situations, the metaverse can be used to carry out a wide variety of activities, such as office activities (holding business meetings or interviews in the metaverse), entertainment (movies, digital tourism, among others), as a social platform, to provide education services and even healthcare (digital consultations with physicians and other health professionals).

Users can also acquire goods that can then be physically delivered at their homes, or they can purchase digital assets to be used by their digital selves (“avatars”). Currently, several companies such as Samsung, Hyundai, Coca-Cola, Louis Vuitton, among others, sell their products within the metaverse.

Some of the digital goods that are acquired in the metaverse have the nature of Non-Fungible Tokens (“NFTs”), which can be defined as a “data unit that is both non-transferable and unique that is stored on a blockchain, a type of digital ledger used to store transactions… NFTs provide evidence of ownership based on a digital ledger maintained by the NFT”. Real estate, articles of clothing, sports and entertainment memorabilia, collectibles and accessories sold in the metaverse are usually NFTs and thus are unique.

The digital economy of the metaverse is becoming more relevant. According to Bloomberg, in 2024 the global metaverse revenue opportunity could approach 800 billion dollars.

Currently, financial transactions within the metaverse are carried out using cryptocurrency. Decentraland, for example, has its own ERC-20 standard utility token (tokens created via the Ethereum network) known as MANA. Sandbox uses another Ethereum powered currency known as SAND to run its economy.

Mexican Regulation in the Metaverse  

As with most of the world, Mexico has yet to provide a legal framework for the metaverse, including regulation on intellectual property, tax, regulation of virtual assets and their trade, regulation of conduct, privacy, data protection, gambling and lottery and cybersecurity, among other matters.

Current laws may be applicable for certain aspects of the metaverse, but specific laws and regulations need to be issued, for example, for financial transactions. However, currently it is necessary to apply the existing financial regulation to the virtual environment and transactions (including the metaverse), even if it may not be ideal and may need to be adapted further.

One of the most important legal challenges that countries are facing today is creating regulations that provide for clear rules indicating which country has jurisdiction over a certain transaction carried out in the metaverse. Due to the fact that such transactions may involve parties that are physically located in different places around the world, it is important to establish standards that set forth which law would be applicable, considering the residence of the parties that are involved, or other objective criteria.

Cryptocurrency regulation in Mexico 

As mentioned before, the economy in the metaverse is powered by cryptocurrency that in some cases is managed by the developers of the applicable platform. This use of cryptocurrency in the metaverse has significant legal consequences in Mexico due to the regulation applicable in operations in which such digital assets are involved.

On 9 March 2018, Mexico published the Financial Technology Institutions Law (“Fintech Law”), becoming one of the first countries in the world to specifically address financial digital services, providing a framework for a regulatory sandbox, application programming interfaces (APIs), as well as crowdfunding and electronic payment fund institutions (collectively referred to as Fintech entities).

Crowdfunding firms are defined as entities that connect investors to the general public through any means of electronic communication. The Fintech Law and its secondary rules aim to ensure a better protection of individuals seeking to invest in crowdfunding projects, by reducing the anonymity of entrepreneurs (solicitants) as well as by making it mandatory for the crowdfunding firms to communicate the risks of investment in such projects through their platforms.

Electronic money institutions are defined as entities that offer services of issuance, management, accountability, and transfer of electronic payment funds, through any means of electronic communication. These payment funds may be referred in fiat currency or cryptocurrency.

On 28 March 2019, the Mexican Central Bank issued the Circular 4/2019, heavily restricting the use of cryptocurrencies by Fintechs and banking entities. In accordance with such regulation, these entities may only use cryptocurrencies in their internal operations and may not perform transactions involving such assets with their consumers.

Regarding operations using cryptocurrencies in Mexico, it is important to consider that only the operations carried out by the aforementioned crowdfunding firms and electronic money institutions, as well as banking institutions, are regulated. Operations carried out between all other individuals and entities do not fall under the scope of the Fintech Law, its secondary regulations and Circular 4/2019, and thus regular mercantile and civil legal provisions would apply.

The above may have several implications depending on the specific nature of the virtual asset that is being transacted. That is, under Mexican legislation a cryptocurrency may be treated as a right over an intangible asset registered in the blockchain ledger, or even, in some cases, as a security for purposes of the National Securities Law. This would all depend on the specific characteristics of each cryptocurrency and the transactions carried out with it.

Therefore it is necessary to make an exhaustive analysis of the nature of the virtual asset involved to define the legal treatment that would be applicable.

It is also important to consider that with the publication of the Fintech Law there was no change in Mexico’s tax legislation, therefore the taxpayers are forced to apply existing rules in their operations, which may not prove to be ideal and may generate economic distortions in these types of transactions.

Due to the above, financial transactions using cryptocurrencies that take place within the metaverse should be analysed considering, firstly, if the Mexican legal provisions are applicable, and afterwards, the specific characteristics of the virtual asset and transaction in order to determine the applicable legal treatment.

Finally, anti-money laundering regulations in Mexico establish that the sale, storage, transfer and exchange of cryptocurrency is considered a vulnerable activity, and thus is subject to know one's client procedures and filing of notices regarding such activities before the Mexican authorities. In this sense, a metaverse administrator who sells cryptocurrencies in Mexico would have to comply with the requirements set forth in the anti-money laundering regulations. Specific legal provisions have been issued by the Ministry of Finance regarding transactions carried out with cryptocurrencies by Fintechs to prevent money laundering.

Securities and financial regulation in Mexico 

Transactions of virtual assets in the metaverse such as NFTs or any asset that represents a right or an underlying asset may be subject to current regulation on securities, banking, money transmission, among others. Each transaction must be analysed to determine whether the specific transaction may qualify as a type of investment contract or as public offers as defined in the securities laws.

If we were to analyse a public offering in the metaverse, we would need to consider that in terms of the Mexican Securities Law: (i) entities can carry out public offers of securities that are registered in the National Securities Registry or that are subject to be registered in such Registry; (ii) public offer is defined as the offering in Mexican territory, with or without price, through mass media and to undetermined individuals, to underwrite, acquire, sell or transfer securities; (iii) security is defined as any stock, obligation, bond, option, certificate, promissory note and other debt instrument issued en masse that represents the capital stock of a legal entity, an aliquot part of a good or the participation in a collective credit or any individual right in terms of national or foreign provisions; (iv) offers made abroad (of securities issued in Mexico or by Mexican entities) must be notified to the Mexican Banking and Securities Commission, describing its main characteristics; and (v) private offers of securities not registered in the National Securities Registry may be carried out if (1) the offer is made to qualified or institutional investors; (2) the securities represent the capital stock of a company and are offered to less than 100 persons; (3) the offer is based on an employee plan; or (4) the offer is made to partners or shareholders of entities that carry out their corporate purpose exclusively with the securities.

Considering the abovementioned definitions and regulations, an offering made in the metaverse may be considered as a public offering under Mexican law, limiting the entities that operate in the metaverse in issuing en masse any security (including tokens).

Apart from the securities regulations, activities such as lending, trading, issuing, exchanging or other activities regarding in-world currencies, may trigger the application of other regulations, such as banking and money transmission.

Conclusions 

The metaverse is a disruptive environment that has the potential to revolutionise the world, including the exchange of goods and services through electronic means. The development of metaverse platforms is ongoing and a diverse range of activities are being carried in such digital environments among users around the world.

Currently, in Mexico and in the rest of the world, no specific regulation has been issued regulating transactions carried out in the metaverse, which has forced authorities to apply existing regulation to such operations, even though they are not exactly applicable, which unfortunately results in legal and economic distortions.

It is necessary for the Mexican authorities to issue regulation that specifically regulates activities carried out in the metaverse, in order to provide certainty, not only to the companies that transact in such digital environment, but also to the users that participate therein.