Mexico: A Dispute Resolution: White-Collar Crime Overview

Virtual Assets, Asset Freezing and Victim Compensation Under Mexican Criminal Law

Virtual assets are emerging in legal systems around the world, and they are no longer viewed solely as a form of digital currency; they are increasingly used as a means of exchange and as a mechanism for fulfilling economic obligations. In Mexico, virtual assets are regulated by the Law to Regulate Financial Technology Institutions (the “Fintech Law”), which was enacted to regulate technological advancements in the financial sector, particularly those related to digital technologies and crypto-assets.

During criminal proceedings, dealing with virtual assets is challenging as a form of compensation under the Mexican Criminal Law, especially when a person under criminal investigation owns virtual assets.

The Mexican National Code of Criminal Procedure establishes provisional measures, which include among others the freezing of assets in the financial system as well as the seizure of property. However, the current criminal legal framework does not address virtual assets as a provisional measure so there is no guidance about how virtual assets should be seized or preserved as digital property. This legislative gap creates uncertainty regarding the legal classification of such assets and the procedural mechanisms available for their preservation during criminal proceedings.

The Mexican Fintech Law sets up the conditions whereby financial entities may operate with virtual assets under the Bank of Mexico’s supervision. This law does not regulate any criminal aspect or freezing of virtual assets and does not distinguish between centralised and decentralised systems. As a result, both prosecutors and judges are left without a clear framework capable of addressing the unique characteristics of virtual assets.

Virtual assets may be held through either centralised or decentralised systems. In a centralised exchange system, an intermediary provides custody of the assets and maintains control over users’ accounts, and often these entities have a registered corporate domicile in a particular jurisdiction.

By contrast, in a decentralised system, there is no intermediary. Instead, users have exclusive control over their private keys, while transactions are validated through a distributed blockchain network in which various anonymous persons work. In most of these cases, there is not a legal person or entity that manages the currency.

While Mexican authorities can ask centralised systems to take actions to freeze virtual assets that someone has in the intermediary system, that does not occur in a decentralised system. That happens mainly because only the holder of the private keys can authorise a transfer in these last systems. Consequently, the current Mexican criminal procedural framework leaves a significant gap regarding the effective freezing, attachment and preservation of virtual assets and property during criminal proceedings.

The main problem lies in the inexistent legal framework governing the seizure and freezing of virtual assets regarding Mexican criminal law. In traditional cases, the Public Prosecutor’s Office can secure assets by directing judicial orders to a specific institution that has custody or control over them. Virtual assets, however, do not always fall within such a structure due to the uncertainty surrounding the existence of an identifiable intermediary that could comply with a judicial order.

Most virtual assets currently in circulation are incorporated outside Mexico and operate under foreign regulatory frameworks. Consequently, any attempt to freeze such assets would require international co-operation, which will create jurisdictional problems. Furthermore, certain exchanges operate without a physical establishment within Mexico, making it considerably more difficult for the Public Prosecutor’s Office to identify the appropriate entity and secure compliance with a freezing order.

With that said, in decentralised systems, only the holder of the private keys can authorise any transfer, making it difficult for the Prosecutor’s Office or a court to enforce a judicial order. This is mainly because the person with the authority to freeze the assets is the holder of the private keys, who, in these cases, will be the accused. Furthermore, blockchain technology in these systems frequently prevents authorities from identifying the individual exercising effective control over the assets, thereby rendering precautionary measures considerably more difficult, if not impossible, to enforce.

Consider, for example, a fraud case. The defendant is formally charged with fraud, precautionary measures are requested, and it is discovered that the defendant is a millionaire whose wealth consists primarily of investments in virtual assets. The authorities proceed to freeze the defendant’s bank accounts, yet those accounts contain very little money because the majority of the defendant’s assets are held in virtual assets. What happens then? How can those assets be frozen, seized or attached?

There is currently no legal framework explaining how this should be done or even whether it is legally possible, particularly given the technological characteristics of virtual assets. As a result, virtual assets in Mexico are not being seized or frozen, creating a major problem in which it is impossible to know how many real assets someone has.

An even more concerning example would be considering a defendant who misappropriates USD100 million and immediately converts the proceeds into virtual assets. Under the current legal framework, Mexican authorities have no clear procedural mechanism to freeze, preserve or ultimately recover those assets. How can those assets be seized? How can they be preserved? At present, there is no legal mechanism providing an answer to these questions.

If the defendant begins transferring those assets, additional criminal offences may arise. There is a real possibility that the assets may be laundered through successive transactions, creating an increasingly complex network of transfers.

In conclusion, Mexican criminal law fails to regulate virtual assets, making crimes such as money laundering possible and leaving precautionary measures regarding virtual assets practically non-existent. As the use of virtual assets continues to expand, Mexico’s criminal justice system faces a growing regulatory gap. Unless legislation evolves to establish clear mechanisms for identifying, freezing and preserving virtual assets, prosecutors and courts will continue to face significant practical obstacles in protecting victims’ rights, enforcing precautionary measures and combating financial crime.