As Mexico’s groundbreaking regulatory legislation for fintechs celebrates an anniversary, a handful of prominent fintechs are opting to scale back their models rather than applying to be fully regulated entities.
The changes underway at Paypal and cryptocurrency exchanges Volabit and Vexbi are arriving ahead of key deadlines this month to register as a “financial technology institution” (ITF) and meet other criteria under Mexico’s fintech regulation laws passed in 2018.
Mexico’s “Ley Fintech” and subsequent legislation in September 2018 has been well received internationally as the first robust framework for fintech regulation in Latin America, and several other governments are already using it as a roadmap for developing their own regulation.
The question emerging is whether fintechs in jurisdictions following Mexico’s footsteps could consider scaling back operations just as some Mexican firms are doing now.
The first deadline, on September 9, is the last day to request authorization as an ITF with financial regulator (CNBV).
Also as of September 10, cryptocurrency exchange houses operating in Mexico must begin reporting any operations that exceed 54,000 pesos (US$2,770) to the finance ministry.
PAYPAL OPTS OUT
Within its development and eventual implementation, regulators and private sector voices alike underlined that it is a model for providing certainty to investors while not stifling innovation. The latter, however, appears to be hitting a snag as these fintechs opt to scale back functionality.
Of particular concern for the firms are terms surrounding stringent regulation of a digital “wallet”, a factor that led Paypal to recently announce it would be doing away with online balances, telling customers that they would no longer be able to maintain a balance in their Paypal Mexico account as of September 25 – the deadline to register as a crowdfunding ITF.
In an email, Paypal told users that with their current account, which would be deemed a wallet under Mexican law, future payments would automatically be transferred to a selected bank account. Also, the firm is disabling the automatic recharge balance function.
The September 25 date coincides with the deadline for fintechs working with crowdfunding and/or electronic payment funds to become an active participant in the “ sandbox”, a regulatory regime used to allow firms to use technologies that are still deemed risky or untested before being able to stand on their own.
In an interview with local daily El Economista, Moisés Gormes, director of PayPal’s payment methods in Mexico, said the changes come after the company decided not to request authorization as an electronic payment fund, saying that it still wants to remain an aggregator of payment methods, but has concerns about further regulation should they register.
“I think that right now it’s too early to determine how much penetration [the fintech regulation] will have, we see it in a good light, but we believe that the right time to focus on the strategy right now is for the aggregator, that is, to continue supporting businesses to give good experiences to consumers,” Gormes said in the interview.
THE CRYPTO QUESTION
Crytpo exchanges, like Volabit, Vexbi and Mexico’s largest exchange Bitso, have struggled this year to interpret warnings and recommendations included in a March 8 circular that called for the financial system to maintain “a healthy distance” from cryptocurrencies, or, as they are dubbed in Mexico’s regulatory parlance, “virtual currencies”.
The rules issued by the central bank prohibit regulated ITFs or credit institutions (ICs) from offering the general public operations with digital assets, but allow unregulated cryptocurrency exchange houses to continue operating.
And as ITF status is required to operated digital wallets, Volabit and Vexbi have opted out.
The firms said September 17 that wallets in Mexican pesos would be disconnected from their platform as a “temporary measure” related to regulation on cryptocurrencies.
The statement explains that the platforms will continue to operate almost the same as they have been doing so far. However, the difference is that when making deposits in Mexican pesos these will automatically be converted to USD Coin, an ERC-20 token backed by the US dollar, which users can use to buy Bitcoin, Litecoin and Ripple.
Regarding the measure announced by the exchange houses, Tomás Alvarez Melis, director of Volabit, in conversation with crypto media outlet CriptoNoticias, said that Mexico’s Ley Fintech, in combination with the provisions issued by the central bank, essentially excludes crypto traders from being able to register and forces them to remain unregulated.
“It’s a bad regulation. Maintaining cryptocurrency operations in a deregulated scheme affects the development of the industry at the national level, as it inhibits the participation of institutional players, such as investment funds and regulated financials, which will most likely seek to conduct their operations in jurisdictions where there is an environment regulated for the operation of cryptocurrencies,” Alvarez was quoted as saying.
BITSO TAKES ANOTHER PATH
Mexico’s largest exchange Bitso adapted to the regulation by separating its operations into two parts. The logic being that as long as Mexican pesos are used, customers would continue to use existing services, such as the central bank’s interbank electronic payment network ( SPEI), cash financing or Bitso Transfer.
They would also remain under the operational supervision of the corporate name Bitso SAPI de CV, which is now a regulated ITF in Mexico.
With regard to interactions with cryptocurrencies, all of Bitso’s activities, since August, are under a framework specifically developed to regulate business in the cryptocurrency sector of the Gibraltar Financial Services Commission, outside of the jurisdiction.
The firm has worked to be clear and transparent to maintain a strict separation between the services provided in Mexico and those provided in Gibraltar.