Blockchain 2020 Comparisons

Last Updated June 17, 2020

Contributed By Legal Paradox, S.C.

Law and Practice

Authors



Legal Paradox, S.C. is a boutique legal services provider with a specialty in fintech and blockchain. With two offices in Mexico City, the firm's attorneys are perfectly positioned to take advantage of the opportunities of the fintech and blockchain world, as they have programming skills – such as solidity and hyperledger, blockchain programming languages – in addition to being graduates of highly regarded law and business schools. Legal Paradox represents the Mexican fintech and blockchain sector in the negotiation and lobbying regarding the Fintech Law and its secondary regulation and is leading an effort to create blockchain regulation across LATAM. As of today, the firm has advised up to 30% of the fintech and blockchain companies in Mexico and close to 190 Mexican and international entities, such as DAI, a UK entity in charge of executing the financial service programme of the prosperity fund managed by the British embassy in Mexico City.

Mexico has positioned itself as an innovation hub for the blockchain and fintech sector by having the first fintech law in the world that brings together, in the same regulatory body, new innovative financial entities, commonly known as wallets and crowdfunding, thus incorporating the possibility of using fintech tools such as virtual assets, open banking and the regulatory sandbox.

According to data obtained by Legal Paradox, only two years after the publication of the Fintech Law the ecosystem has had a growth of more than 90%. This is due to the existence of a regulatory framework that provides legal certainty to market participants, establishing an adequate balance between innovation and the reduction of legal and systemic risks. 

In this context, Mexico has seen a growing number of blockchain companies, including the largest exchange in LATAM with more than eight thousand users. This entity already has the first international cryptocurrency licence issued by Gibraltar Financial Services Commission at LATAM level and the first licence for a wallet issued by the Mexican fintech regulator. The exchange has also recently begun its international expansion by opening operations in Argentina.

This has generated a focus on Mexico, attracting the world's largest blockchain companies.

The COVID-19 pandemic, and the confinement and need to maintain social distancing that have accompanied it, while regrettable, has also ended the times when C-level executives would merely discuss the possibility of innovating and cleared the way for an accelerated and vertiginous technological adoption simply to be able to survive in this so called “new normality”. 

The number of players from traditional sectors, both private and public, that are seeing, in technological solutions such as blockchain and fintech, their future survival is growing exponentially since such technology has positioned itself as a light at the end of the tunnel.

This firm has seen an increase in our portfolio of more than 220% and we were already providing services for more than 30% of the sector. In addition, the sector has advanced between two and five years ahead of the growth projected prior to the start of the pandemic.

As discussed in 1.1 Evolution of the Blockchain Market, the adoption of innovation and technology has accelerated vertiginously both in the private and public sector.

This innovation has taken the form of, for example:

  • the adoption of blockchain technology to generate digital diplomas;
  • DAPPs developments;
  • decentralised identities;
  • financial onboarding processes with self sovereign-identity on chain and off chain;
  • supplier procurement platforms;
  • asset tokenisation;
  • crowdfunding and wallets;
  • the development of decentralised finance products;
  • notarisation;
  • energy distribution; and
  • the so-called project Cadena, a chain of information exchange between the customs authorities of Mexico, Colombia, Peru, Chile and Costa Rica promoted by the LACCHAIN alliance.

The above-mentioned LACCHAIN alliance is a program for the development of the blockchain ecosystem in Latin America and the Caribbean led by the innovation laboratory of the Inter-American Development Bank and integrated by leading blockchain organisations, among which is proudly Legal Paradox. The blockchain ecosystem being created in Mexico is positioning the region (LATAM) ahead of any other region in the world in the use of this technology, mainly for the fintech sector.

In Mexico there already exists a specific regulatory regime applicable to financial participants using blockchain technology or crypto.

The so-called Fintech law (Law Regulating Financial Technology Institutions) published in the Mexican Official Federal Gazette on 9 March 2018 (which became effective the following day) was the first law in the world to enact a specific compendium of legal provisions to govern different actors in the blockchain ecosystem.

Mexico's position as the undisputed fintech leader in Latin America has been boosted by the Fintech Law, which has been praised internationally and taken as a reference on how to boost the development of financial technology in the world. Regulators from different latitudes observe the Mexican example, anticipating the result that such an important regulatory body will have.

The Fintech Law concentrates, in the same regulatory body, several exciting possibilities of the Fintech world such as:

  • wallets;
  • collective funding platforms;
  • application programming interfaces (APIs), which will give rise to the model known as "open finance", as opposed to the traditional model of "open banking";
  • novel models in the framework of the regulatory sandbox that allow, in certain cases and subject to certain conditions, the implementation of innovative financial services using state of the art technology such as blockchain and under a lower regulatory burden; and
  • even the possibility of operating digital assets for banks, wallets, crowdfunding platforms and sandbox projects with the corresponding restrictions (this means that almost every financial entity in Mexico may use blockchain and digital assets complying the corresponding regulatory framework).

Digital assets in Mexico are defined as a “representation of value electronically recorded and used among the public as a payment method for any kind of legal act and whose transfer can only be carried out through electronic means”. In no case shall virtual assets be understood to mean the currency of legal tender on national territory, foreign currency or any other asset denominated in legal tender or in foreign currency.

In accordance with the guidance for a risk-based approach to virtual assets and virtual asset service providers published by FATF and the discussion paper on designing a prudential treatment for crypto-assets published by the Bank of International Settlements (BIS), Mexico enacted and change several regulation such as the Fintech Law and the Mexican Anti-money Laundering Law (Federal Law for the Prevention and Identification of Operations with resources of Illegal Proceeds). This legislation regards the operations of financial and non-financial entities with digital assets as highly vulnerable activities, setting forth the corresponding legal framework and their prudential treatment.

Financial Sector

The inter-institutional committee – formed by the Mexican Central Bank (Banxico), the National Banking and Securities Commission (CNBV) and the Ministry of Finance (SHCP) – is the body in charge of approving the incorporation of new fintech entities, those involved in wallets and crowdfunding.

Banxico is the authority in Mexico responsible for taking the necessary measures to preserve the value of the Mexican peso, control monetary policy and promote the healthy deployment of the financial system including the proper functioning of payment systems and wallets, setting forth the secondary legal framework that applies to them.

The CNBV is responsible for supervising and regulating, within its competence, those institutions that belong to the Mexican financial system, in order to ensure their stability and proper functioning, as well as maintaining and promoting the healthy and balanced development of the financial system as a whole, always in protection of the interests of the public.

The SHCP, through the Securities and Savings Banking Unit, formulates policies for the promotion, regulation and supervision of financial services, banking, credit, securities, assets and derived assets; for the protection of bank savings, savings and popular credit; and for the protection and defence of the financial services consumers.

The Financial Intelligence Unit is an instance of the SHCP specifically in charge of identifying, preventing and combatting any kind of operation related to money laundering and the financing of terrorism.

Other

The National Institute of Transparency for Access to Information and Personal Data Protection is Mexico's data protection authority.

The Energy Regulatory Commission and the National Service of Environmental Certification for Sustainable Investments are the main bodies regulating the energy industry in Mexico.

In Mexico there are no self-regulatory organisations or trade groups that perform regulatory or quasi-regulatory roles with regard to blockchain.

There is current ongoing litigation that will impact on the blockchain sector, whose details we cannot share at this time.

There are no enforcement actions in Mexico that have helped market participants better understand the “regulatory perimeter” of permitted and prohibited activity using blockchain. However, such actions are expected in the future.

As mentioned in 2.1 Regulatory Overview, the Fintech Law sets forth a regulatory sandbox, meaning the possibility of carrying out activities reserved for financial entities authorised by the Mexican financial regulator, using innovative technological tools or means or with different modalities from those currently existing in the Mexican market, such as blockchain technology.

In addition, Mexico is part of the Global Financial Innovation Network (GFIN) and has implemented the GFIN cross-border pilot scheme to create an environment that allows firms that:

  • have cross-border operations;
  • have simultaneous activities in different jurisdictions;
  • are looking to expand; and
  • are looking to run sequential sandbox test across jurisdictions,

to simultaneously trial and scale new technologies in multiple jurisdictions, gaining real time insight into how a product or service might operate in the market.

The tax regimen in Mexico has not been updated to consider the use of blockchain or crypto. However, the traditional regulation is applicable.

The Mexican Blockchain Network (MBN) is a multi-sector initiative, to provide a public infrastructure so that different participants can deploy public solutions based on the blockchain. This initiative seeks to democratise access to blockchain in the country, and open a channel to facilitate pilot projects and analyse the potential uses of blockchain technology in relevant areas.

From 14 August to 28 September 2018, a proposal for a governance model for the MBN was made available to citizens, so that interested parties in this ecosystem could help define the required policies to establish and consolidate it.

The result was a guide to define the beta phase of development, which is divided into two sections:

  • A summary of all the governance questions discussed regarding technical issues, capital, incentives, identity and technology.
  • The description of the Governance Model, which already integrates citizens' comments.

There is no set of specific rules applicable to ownership of digital assets. In this context the general rules of disposal apply depending on the specific case. 

In Mexico there are no official categorisations other than the definition of digital assets as a “representation of value electronically recorded and used among the public as a payment method for any kind of legal acts and whose transfer can only be carried out through electronic means” set forth in the Fintech Law.

However, it is important to analyse if the asset has the qualities of a security under the Mexican regulatory framework, in which case that framework will be applicable.

Mexico does not have a specific legal framework for stablecoins.

However, the definition of digital assets sets forth that in no case shall virtual assets be understood to mean the currency of legal tender on national territory, foreign currency or any other asset denominated in legal tender or in foreign currency.

Furthermore, and for fintech and bank institutions, such digital assets must meet various characteristics such as being information units, uniquely identifiable, even in a fractional manner, registered electronically, which do not represent the ownership or rights of an underlying asset or, which represent such ownership or rights to a lesser value, among others.

In this context, the legal framework and distinctions made between stablecoins whose value is intended to be pegged to a second asset, those backed by deposits of fiat currency and algorithmic stablecoins that use a formula to maintain their peg are open to interpretation. 

When talking about payments with digital assets it is important to distinguish who makes the payment.

The foregoing becomes relevant since the Fintech Law sets forth that:

  • digital assets are “representation of value electronically recorded and used among the public as a payment method for any kind of legal acts and whose transfer can only be carried out through electronic means"; and
  • fintech and banking institutions may only operate with digital assets as long as those assets are not used to directly provide their clients with services of exchange, transmission or custody of virtual assets.

In this context, third parties other than fintech and banking institutions may use digital assets as a payment method; and fintech and banking institutions may use digital assets as payments between them and indirectly with the public in principle. However, it is important to remember that the regulatory sandbox allows entities to provide regulated financial services and request regulatory exceptions subject to compliance and the limitations of the legal framework.

There are no specific regulations applicable to non-fungible tokens, therefore their legal framework is open to interpretation. 

The market is divided into custodial exchanges, non-custodial exchanges and brokers. To the best of our knowledge, there are no decentralised exchanges (DEXs) operating in Mexico.

In Mexico persons exchange fiat currency for cryptocurrency or cryptocurrency for fiat through exchanges, liquidity providers and brokers – all of whom are subject to the KYC/AML legal framework. Please refer to 4.3 KYC/AML for further discussion.

The regulation for money transmission sets forth the legal regulatory framework for entities that – regularly and in exchange for the payment of a consideration, commission, benefit or profit – receive, in national territory, rights or resources in national currency or foreign currency, by any means, to transfer them abroad or to another place in the national territory. 

In this context it is important to remember that digital assets shall not, in any case, be understood to mean (i) the currency of legal tender in national territory, (ii) foreign currency, or (iii) any other asset denominated in legal tender or in foreign currency. The regulation of money transmission using cryptocurrency denominated in legal tender or in foreign currency is therefore open to interpretation.

When talking about the "know your customer" (KYC) and anti-money laundering (AML) legal framework applicable to transactions in digital assets, it is important to distinguish who is the entity making those transactions: (i) fintech and banking institutions, or (ii) other entities.

For fintech and banking institutions there are specific KYC/AML rules for each financial entity and for other entities the general rules of the Federal Law for the Prevention and Identification of Operations with Resources of Illegal Origin apply. 

There are no specific rules applicable to markets for digital assets.

However, it is important to analyse if the asset has the qualities of a security under the Mexican regulatory framework in which case this framework will be applicable. If so, the main authority will be CNBV.

In addition, with regard to antitrust matters, Mexico has two antitrust authorities:

  • the Federal Economic Competition Commission (COFECE), which has the authority to set remedies for fraudulent or manipulative practices in all markets except telecoms; and
  • the Telecommunications Federal Institute (IFT), which has the same authority as COFECE but exclusively over the telecoms market.

The applicable regulation did not clearly establish which authority was competent to resolve cases related to digital platforms. In this context, in May 2019, a resolution was issued that gave the competence to COFECE in resolving the merger between Uber and Cornershop, establishing a historical precedent that will affect the market for digital assets in the future.

There have been not yet been any enforcement actions under the Mexican regulatory framework.

There are no specific regulatory limits on the ability of a digital asset exchange to re-hypothecate (on-transfer) to third parties the digital assets they hold for customers, the general transfer rules apply.

There are no specific regulations in Mexico applicable to businesses that provide hot or cold storage solutions for private cryptographic keys that control the ability to give instructions with respect to digital assets.

There are no specific rules applicable to fundraising through the creation and sale of tokens.

However, it is important to analyse if the asset has the qualities of a security under the Mexican regulatory framework in which case the securities legal framework or the crowdfunding legal framework will apply.

There are no specific rules applicable to fundraising through initial exchange offerings (IEO).

However, it is important to analyse if the asset has the qualities of a security under the Mexican regulatory framework in which case the securities legal framework or the crowdfunding legal framework will apply.

There are no specific rules applicable to investment funds, therefore the general legal framework for investment funds will apply.

In discussion of regulation regarding broker-dealers dealing with digital assets is important to distinguish who is the entity making these transactions: (i) fintech and banking institutions, or (ii) other entities.

Fintech and banking institutions may be broker-dealers both between themselves and indirectly with the public in principle. However, it is important to remember that the regulatory sandbox allows:

  • for the provision of regulated financial services; and
  • requests for regulatory exceptions subject to compliance with, and the limitations of, the legal framework.

For fintech and banking institutions there are specific KYC/AML rules for each financial entity and for other entities the general rules of the Federal Law for the Prevention and Identification of Operations with Resources of Illegal Origin apply. 

There are no specific laws, regulations or binding judicial decisions addressing the legal enforceability of private contractual arrangements made, in whole or in part, using agreed-upon computer code that executes across multiple “nodes” on a blockchain-based network, therefore the general legal framework for contracts will apply.

When talking about the responsibility of the developers it is important to distinguish whether they have a contract/terms and conditions. If they have a contract the damage or economic loss will depend on the terms and conditions set forth between the parties. If no contract was agreed upon, damages or losses are governed by civil law and the affected part must demonstrate the following:

  • the existence, and a clear identification, of the agreed obligations of the developer regarding the instructions given to a smart contract;
  • a breach of the stated obligations; and
  • the direct damage caused.

There are no specific rules applicable to decentralised finance (DeFi) platforms.

However, it is important to analyse if:

  • the asset has the qualities of a security under the Mexican regulatory framework, in which case the securities legal framework will apply; and
  • the DeFi platform is carrying out an activity reserved for crowdfunding platforms under the Fintech Law, in which case the corresponding legal framework will apply.

Whatever the case may be, the Law for the Protection and Defence of the User of Financial Services and The Law for the Transparency and Regulation of Financial Services, which regulate the applicable commissions, interests rates, conciliation procedures, among other things, shall apply.

There are no specific rules applicable to the use of digital assets as collateral, the general rules for collateral will apply and it may be possible to register the collateral in the single registry of real estate guarantees.

When talking about the custodians of digital assets is important to distinguish who is the entity making those transactions: (i) fintech and banking institutions, or (ii) other entities.

Fintech and banking institutions may offer custodial services between themselves and, indirectly, to the public, at least in principle. However, it is important to remember that the regulatory sandbox allows for:

  • the provision of regulated financial services; and
  • requests for regulatory exceptions, subject to compliance with, and the limitations of, the legal framework.

For fintech and banking institutions, there are specific rules in the Fintech Law, for other entities there are no specific provisions therefore the general rules for custodians will apply.

There are no specific rules applicable to data privacy (including the “right to be forgotten”) in Mexico that apply to the use of blockchain-based products or services, therefore the general provisions will apply.

In general the person responsible for collecting the personal data of an individual must make available, to the owner of that data, a privacy notice that complies with the applicable regulation so that the data owner consents to the collection of his or her data and the specific use that will be given to it.

Data protection law give the data owner the power to access, rectify, cancel or oppose the treatment of their data. If those rights are not upheld, significant penalties may arise.

A specific legal framework is applicable to financial data.

There are no specific rules applicable to data protection that apply to the use of blockchain-based products or services, therefore the general provisions will apply.

In Mexico, there are two main sources of data protection laws, one applicable to the private sector and the other applicable to authorities and state organisations. In general, the person responsible for collecting the personal data of an individual must make available, to the owner of that data, a privacy notice that complies with the applicable regulation so that the data owner consents to the collection of his or her data and the specific use that will be given to it.

Data protection law give the data owner the power to access, rectify, cancel or oppose the treatment of their data. If these rights are not upheld, significant penalties may arise.

A specific legal framework is applicable to financial data.

There are no specific rules applicable to mining. 

However, in Mexico, a general principle applies: Whatever is not prohibited by law is permitted for non-regulated people or businesses. Therefore, as there are no regulations or prohibitions applicable to mining, it is an allowed activity.

Notwithstanding the above, mining has an important energy aspect and, depending on the amount of energy required, a mining entity may be considered as a qualified user and therefore subject to the corresponding energy legal framework.

There are no specific rules applicable to staking. However, staking needs to comply with the custodian legal framework.

When considering staking custodians of digital assets, it is important to distinguish who is the entity making those transactions: (i) fintech and banking institutions, or (ii) other entities.

Fintech and banking institutions may be custodians between themselves, and indirectly with the public, in principle. However, it is important to remember that the regulatory sandbox allows:

  • provision of regulated financial services; and
  • requests for regulatory exceptions, subject to compliance with, and the limitations of, the legal framework.

For fintech and banking institutions, there are specific rules in the Fintech Law, for other entities there are no specific provisions; therefore, the general rules for custodians will apply.

Legal Paradox, S.C.

Avenida Volcán 150
colonia Lomas de Chapultepec I Sección
Alcaldía Miguel Hidalgo
C.P. 11000
Mexico City

+52141669048

carlos@legalparadox.com www.legalparadox.com/english
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Law and Practice in Mexico

Authors



Legal Paradox, S.C. is a boutique legal services provider with a specialty in fintech and blockchain. With two offices in Mexico City, the firm's attorneys are perfectly positioned to take advantage of the opportunities of the fintech and blockchain world, as they have programming skills – such as solidity and hyperledger, blockchain programming languages – in addition to being graduates of highly regarded law and business schools. Legal Paradox represents the Mexican fintech and blockchain sector in the negotiation and lobbying regarding the Fintech Law and its secondary regulation and is leading an effort to create blockchain regulation across LATAM. As of today, the firm has advised up to 30% of the fintech and blockchain companies in Mexico and close to 190 Mexican and international entities, such as DAI, a UK entity in charge of executing the financial service programme of the prosperity fund managed by the British embassy in Mexico City.