Regulation of Fiat-Back Stable Coins in Mexico

Regulation of US dollar backed stable coins in México:

• Virtual assets are regulated in Mexico pursuant to:
  • The Law to Regulate Financial Technology Institutions (Ley para Regular las Instituciones de Tecnología Financiera or “Fintech Law”)
  • The Federal Law to Prevent and Identify Operations with Resources of Illegal Origin (Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita or “AML/CTF Law”); and
  • The General provisions applicable to Credit Institutions and Financial Technology Institutions in their operations with virtual assets (Disposiciones de carácter general aplicables a las Instituciones de Crédito e Instituciones de Tecnología Financiera en las operaciones que realicen con activos virtuales or “General Provisions regarding Virtual Assets”).
     
• The Fintech Law and the AML/CTF Law define a virtual asset as a “representation of value registered electronically and used among the public as a means of payment for all types of legal transactions and which transfer can only be carried out through electronic means”. Furthermore, the abovementioned law provides that “in no case shall legal tender in national territory, foreign currency or any other asset denominated in legal tender or foreign currency be considered as virtual assets”.
   
• Pursuant to this statutory definition and exclusion, given the nature of a US Dollar-backed stable coin (i.e., it represents as its underlying assets the value of a US Dollar), a US Dollar-backed stable coin would fall under the legal exclusion provided by the Fintech Law.
   
• Considering the above-mentioned exclusion, in our opinion a US Dollar-backed stable coin cannot be deemed subject to the scope of the crypto-assets regulation in México for purposes of the Fintech Law.
   
• Furthermore, the Mexican Central Bank (Banco de México or “Banxico”) under the General Provisions regarding Virtual Assets has defined virtual assets as assets that comply with the following characteristics:

“[…] I. Represent units of information, univocally identifiable, even fractional, electronically registered, which do not represent the ownership or rights of an underlying asset or that represent such ownership or rights for a lower value than these; II. Have emission controls defined by means of specific Protocols to which third parties may subscribe; and third parties may subscribe, and III. Have protocols that prevent the replicas of the information units or fractions thereof from being available to third parties or their fractions are available to be transmitted more than once at the same time” .

• Additionally, Banxico, the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público or “SHCP”) and the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or “CNBV”) on June 28th, 2021, issued a joint statement regarding the use of virtual assets (“Stable Coin Press Release”), which defines stable coins as follows :

A stable coin is a digital unit of value that is associated with the value of a fiat currency (such as the dollar, euro or peso). In this sense, the issuance of these collection rights against the issuer is not distinct from the reserved activity of solicitation of deposits/funds, which is restricted to regulated financial institutions in the country. If it is decided to use the technological infrastructure of a virtual asset to offer these issuance services, the corresponding authorization by law must be obtained, as well as authorization from the Mexican Central Bank to use these assets in the internal operations of the institutions.

• In this context, the Stable Coin Press Release aimed to: (i) distinguish the regulation applicable to cryptocurrencies, from those applicable to fiat-backed stable coins; and (ii) provide that, from the financial authorities’ point of view, an initial coin offering (ICO) in the Mexican territory of fiat-backed stable coins is considered as a solicitation of deposits/funds from the public (banking funding), and, thus, an activity reserved to a regulated financial institution.
   
• Consequently, from a strict interpretation of the Fintech Law, the General Provision regarding Virtual Assets, the AML/CFT Law, and the Stable Coin Press Release it may be understood that US Dollar Backed stablecoins are not considered virtual assets as they: (i) are denominated in foreign currency; (ii) represent the ownership or rights of an underlying asset, which may be redeemed against the issuer of the coin; and (iii) are associated with the value of a relevant fiat currency in the case at hand USD.
   
• Nevertheless, given the international regulatory framework of virtual assets (e.g. FATF rules and recommendations, and BIS recent publications) and the concerns of the financial authorities to regulate this industry, the Mexican authorities may consider a US Dollar Backed stable coin as a virtual asset and therefore subject to the AML/CFT Law and its regulation.

Regulation of virtual assets in Mexico:

• As mentioned above, virtual assets are regulated under the Fintech Law, the AML/CFT Law, and General Provisions regarding Virtual Assets. It should be noted that, although virtual assets activity is regulated by some financial laws (i.e. Fintech Law and General Provisions regarding Virtual Assets) it is not considered a restricted activity in which only financial institutions may engage. Non-financial entities that are engaged in this activity will need to comply solely with the AML/CFT Law.
   
• Such laws provide the legal framework for financial and non-financial entities to be able to perform operations with virtual assets in Mexico subject to the limitations provided thereunder.
   
• Per the Mexican legal framework, any non-financial entity that performs operations with virtual assets cannot hold any funds from their clients proceeding from the settlement of the virtual assets or the deposit of funds so that their clients may buy virtual assets using fiat money. The latter, since this activity is considered banking funding (an activity restricted to regulated financial institutions such as banks, and financial technology institutions, among other entities regulated within the Mexican financial system).
   
• Therefore, as long as the crypto exchange only provides services regarding the custody, storage, sale, purchase, or transfer of virtual assets, it would not be considered a reserved activity for financial institutions in Mexico.

AML Obligations for crypto exchanges:

• On this matter, the AML/CFT Law provides that any operations with virtual assets performed by non-financial entities are deemed as a vulnerable or risky activity . Consequently, crypto exchange platforms are allowed to conduct business in Mexico, insofar as the crypto exchange complies with the regulatory requirements set forth in the AML/CFT Law.
   
• It should be noted that even though under a strict interpretation of the Fintech Law, the General Provision regarding Virtual Assets, and the AML/CFT Law a fiat-backed stable coin is not expressly included under the definition of virtual assets and even in certain scenarios may fall under the exclusion provided thereto, given the international regulatory framework of virtual assets (e.g. FATF rules and recommendations, and BIS recent publications) and the concerns of the financial authorities to regulate this industry, the Mexican authorities may consider a US Dollar Backed stable coin as a virtual asset and, therefore, subject to the AML/CFT Law and its regulation. Nevertheless, please be advised that requesting written confirmation from the SHCP may be adequate to confirm that a US Dollar Backed stable coin is considered a virtual asset for purposes of the AML/CFT Law.
   
• In this context, crypto exchange platforms shall comply with the following requirements:
   
  • Internal AML/CFT Policy. The exchange must have an internal manual with the applicable policies to comply with the provisions of the AML/CFT Law and its regulations. 
     
  • KYC obligations. The exchange must identify each customer, keep unique identification files for each client and classify its clients according to internal policies as well as preserve the clients’ identification files for a minimum period of 5 years.
     
  • Reporting obligations. The relevant crypto exchange platform will be subject to supervision by the Tax Administration Service (Servicio de Administración Tributaria or “SAT”) and the Financial Intelligence Unit (Unidad de Inteligencia Financiera or “UIF”) and will be required to file reports on an ongoing basis for transactions with virtual assets that exceed the established threshold of 645 Units of Measurement and Update (Unidades Medida y Actualización or “UMAs”) (approximately $58,000.00 Mexican pesos)  per transaction or accumulated transactions executed by a single client within a six-month period, among other obligations.
    This report must be submitted every month before the 17th day of the next month on which the operation or accumulated operations were executed, except in certain “red flag” cases in which the transaction needs to be reported within 24 hours after its execution. The report must be submitted with the UIF through the relevant webpage of the SAT or Money Laundering Prevention Portal System, using the corresponding templates and guidelines issued by the authorities.
    If in any given month there are no operations that exceed the threshold, then the monthly report must be submitted stating that there was no operation to report on the grounds that no operations exceeded the relevant threshold.
     
  • Inspection visits. The crypto exchange platform shall allow inspection visits carried out by the applicable authorities and provide the relevant information of its clients. The refusal to receive these visits or provide clients’ information may entitle the authority to impose administrative sanctions over the relevant crypto exchange platform.
     
• A non-financial entity that performs operations with virtual assets will have to comply with the regulatory requirements under the AML/CFT Law set forth above.  

Electronic payment funds regulation:

• On the other hand, entities that perform operations with US Dollar Backed stable coins may be subject to the Fintech Law to the extent that the issuer entity (i) issues stable coins in Mexico and receives, manages, or safeguards funds from the general public related to such issuance and (ii) offers the ability to redeem and transfer such funds with third parties.
   
• For the purposes of the Fintech Law, electronic payment funds are considered as funds that are accounted for in an electronic register of transactional accounts and that: (i) are referenced to a monetary value equivalent to a determined amount of money, in local or foreign currency or a determined number of units of a virtual asset determined by Banxico; (ii) correspond to a payment obligation of the issuer, for the same amount of money or units of virtual assets; (iii) are issued against the receipt of the amount of money or virtual assets, for the purpose of crediting, transferring or withdrawing such funds, in whole or in part, by means of the instruction given for such purposes by the respective holder of the electronic payment funds, and; (iv) are accepted by a third party as a receipt of the respective amount of money or virtual assets”.
   
• On this matter, only certain authorized financial institutions such as Electronic Payment Institutions regulated under the Fintech Law may perform activities regarding the issuance, administration, redemption, and transmission of electronic payment funds.
   
• Therefore, crypto exchanges may not receive, manage or safeguard electronic payment funds from the general public or offer the ability to redeem and transfer such funds with third parties as this activity is reserved for certain authorized financial institutions such as Electronic Payment Institutions.

Money transmitter regulation:

• Finally, entities that perform operations with US Dollar backed stable coins may be subject to the General Law for Credit Organizations and Auxiliary Activities (Ley General de Organizaciones y Actividades Auxiliares del Crédito or "LGOAAC") applicable to money transmitters if such entity receives in México funds with the sole purpose of transferring those funds abroad to a designated beneficiary or convert them into fiat-backed stable coins.
   
• The LGOAAC defines a money transmitter as “a corporation or limited liability company organized in accordance with the provisions of the General Law for Commercial Companies that, among other activities, and on a regular basis and in exchange for the payment of a consideration, commission, benefit or profit, receives in the national territory rights or resources in national or foreign currency, directly in its offices or by cable, facsimile, courier services, electronic means, electronic transfer of funds or by any means, for the sole purpose of transferring them abroad, to another place within the national territory or to deliver them, in a single installment, in the place where they are received, to the designated beneficiary, in accordance with the instructions of the sender” .
   
• Therefore, only corporations and limited liability companies that have current registration as money transmitters with the CNBV may carry out the aforementioned transactions, which will be considered as a transfer of funds. Thus, crypto exchanges may not receive in Mexico resources with the sole purpose of transferring them abroad to a designated beneficiary or converting them into fiat-backed stable coins. Please be advised that according to certain criteria, the financial authorities may consider that a crypto exchange receives funds in México when such funds are held in a Mexican bank account for more than 24 hours. 

Conclusions:

• From a strict interpretation of the crypto asset regulation in México (i.e. Fintech Law, the AML/CFT Law, and General Provisions regarding Virtual Assets), US Dollar Backed stable coins are not considered virtual assets as they: (i) are denominated in foreign currency; (ii) represent the ownership or rights of an underlying asset, which may be redeemed against the issuer of the coin; and (iii) are associated with the value of a fiat currency.
   
• An initial coin offering (ICO) in the Mexican territory of fiat-backed stable coins is considered banking funding, and, thus, an activity reserved for regulated financial institutions, as mentioned under Section A and even in some scenarios under the scope of the securities law.
   
• However, given the international regulatory framework (e.g. FATF rules and recommendations, and BIS recent publications) of virtual assets and the concerns of the financial authorities to regulate this industry, the Mexican authorities may consider a US Dollar-backed stable coin as a virtual asset and, therefore that any entity that carries out any operation with them would be subject to the AML/CFT Law and its regulation and would have to fulfill the relevant KYC obligations and regulatory reports as described in Section B and C.
   
• Any entity may provide means to custody, store, sell and purchase, or transfer virtual assets. However, such entities cannot hold any funds from their clients proceeding from the settlement of virtual assets or the deposit of funds so that their clients may buy virtual assets using fiat money, as stated under Section B.
   
• A non-financial entity that performs operations with virtual assets will have to comply with the regulatory requirements under the AML/CFT Law.
   
• Entities that perform operations with US Dollar Backed stable coins may fall under the regulatory scope of the Fintech Law to the extent that the issuer entity (i) issues stable coins in Mexico and receives, manages or safeguards funds from the general public related to such issuance and (ii) offers the ability to redeem and transfer such funds with third parties and, consequently, performs activities reserved to Electronic Payment Institutions in terms of Section D.

Authored by: Federico De Noriega, Manuel Valdéz, and Dinorah Pensado