Navigating Crypto Regulation: Mexico

By Dennis Zdonov

It’s the third installment in our crypto regulation mini-series and today we’re looking at crypto regulation and security offerings in Mexico. Keep reading to find out about what Mexico considers FinTech “regulatory sandboxes” and how you can capitalize on this new development.

Mexico is Latin America’s second-largest economy, with a GDP of over 2 trillion dollars and a growing financial sector. Yet, more than half of the households in Mexico do not have a bank account because of mistrust of financial institutions. For this reason, cryptocurrency is more important than ever. More than $25 billion is wired to Mexico from workers in the U.S. each year — a significant portion being sent through crypto because of the speed, anonymity, and low cost of each transaction. In the first week of March 2018 alone, the BTC/MXN pair reached an all-time high trading volume of $10,629,708.

Because of the rapid growth of crypto and the potential financial ramifications of this next Mexican election, we’re tackling Mexico first in our foreign country series. Stay tuned for answers to some of the most important regulatory questions facing Mexican crypto businesses and individuals:

1. Where is crypto traded in Mexico and is it legal?
2. How can I buy or sell crypto for fiat?
3. How do I issue or purchase securities in Mexico?
4. Are there any unique crypto opportunities in Mexico?
5. What is my tax liability?

🇲🇽 Where is crypto traded in Mexico and is it legal?

So where can I buy and sell crypto in Mexico?

The most popular centralized crypto exchanges offering crypto-fiat trades in Mexico are Bitso and Volabit. Despite only offering trades in Bitcoin (Volabit), Ethereum and Ripple, (Bitso offers all three) both of the Mexican exchanges are lauded because their accessibility is far beyond any exchanges operating in the U.S. In 2017, Bitso and Volabit partnered with several Mexican phone and payment services such as Compropago, which has terminals available at over 135,000 locations in chains such as OXXO, 7-Eleven and Walmart.

The partnership with Compropago allows Bitso or Volabit users to deposit fiat into their accounts directly from any Compropago terminal in the country. The terminals allow users to deposit cash directly into one of the exchanges, who then hold the cash in a fiat account. To ensure the exchange isn’t holding too much fiat, out of liquidity and safety concerns, the deposited cash must be moved within 24 hours, into either crypto or transferred to a linked bank account. Neither exchange currently offers capabilities to withdraw crypto from a Compropago terminal, but users who do not have bank accounts can still withdraw cash from one of the few Bitcoin ATMs located in Mexico (there are three located in Mexico City). For residents of Mexico that do use a bank account, Bitso and Volabit also enable instant deposits and withdrawals to bank accounts “in just one second and at zero cost.”

Is crypto trading legal in Mexico?

The legality of crypto exchanges in Mexico is still a gray area, but after a new FinTech bill was signed into law and published on March 9, 2018, exchanges have begun applications for licenses in the country:

1. Bitso — the Bitso website states “Bitso S.A.P.I. de C.V., will request the respective authorization from the National Banking and Exchange Commission (CNBV) and, if applicable, from the Bank of Mexico (Banxico) in accordance with the term established in the general provisions issued for that purpose.”
2. Volabit — the Volabit website states “In terms of the eighth transitory article of the law to regulate financial technology institutions, the authorization to carry out operations within this platform of electronic payment funds is in process, so the current operation of the platform is not an activity supervised by the Mexican authorities.”

Exactly what and whether the crypto exchanges will need to change in order to comply with the upcoming requirements created by the CNBV is uncertain, but the FinTech bill is progressive and should encourage the industry to grow with the regulation (discussed further below).

💵 How can I buy or sell crypto for fiat?

Can residents of Mexico trade for fiat on Mexican exchanges?

Per the new FinTech bill, companies and individuals that want to participate in the FinTech industry in Mexico must use bank accounts maintained in authorized financial institutions in Mexico. The reason for this is so that the government can implement proper anti-money laundering and Know Your Customer (AML/ KYC) protocols that should allow institutions such as Banxico to trace where all cryptocurrency is originating. AML/ KYC requirements have not been fully explained where crypto is concerned, but the FinTech bill has delegated the CNBV to create specific rules.

As it stands, both Bitso and Volabit require users to link a bank account if they want to withdraw more than a set quantity of Pesos per day. Residents of Mexico can use both exchanges to buy and sell crypto for fiat in large quantities if they do have a Mexican bank account linked to the exchanges.

Can residents of the U.S. and territories trade for fiat on Mexican exchanges?

From a legal perspective, this answer is still unclear. From a practical perspective, the answer is most likely no for two reasons;

1. AML/ KYC — In light of the new requirements under the FinTech bill, Mexican crypto exchange users may be restricted to those who maintain a Mexican bank account. But even those Americans that do maintain a Mexican bank account may still struggle…
2. Restrictions on offerings to U.S. residents — to set up a Bitso account, prospective users must enter personal information including name, date of birth, and country of residence. If you select “United States” on their dropdown, you will receive the message “Incorrect Country — Unfortunately we cannot accept United States residents at this time”. While they do not explain why they can’t accept U.S. residents, AML/ KYC concerns are probably not the reason, considering the same message does not appear for United Nations sanctioned countries (such as North Korea/ Iran). It is more likely that the exchange is cautious about the repercussions from the SEC regarding offering the sale of securities to U.S. residents. Whether or not Volabit has the same restriction is unclear, but they do require a Mexican phone number to verify identity.

👮🏻 How do I issue or purchase security tokens in Mexico?

In 2005, a Securities Market Law (Ley del Mercado de Valores) (LMV) was approved by the House of Representatives and the Senate of Mexico. The LMV redefined securities law and it is this framework that any token issuer or purchaser must follow today.

How is a “security” defined in Mexico?

The LMV does not permit offerings of security tokens until a registrations statement with El Registro Nacional de Valores (RNV) has become effective. The LMV defines a security almost identically to the U.S. Federal Securities Act of 1933, with no functional difference;

“shares, debentures, bonds, warrants, certificates, promissory notes, bills of exchange and other credit instruments issued en series or en masse, whether registered or not before the RNV, that represent the capital stock of a legal entity, the proportional part of an asset or the participation on a collective debt or any individual credit right may be traded through the market exchanges regulated by the new LMV”.

Any prospective purchasers or issuers of tokens in Mexico should follow the same analysis provided in the previous two articles. While Mexico does not follow the “Howey Test”, the underlying principles of the test are broad and whether or not a token has an “independent utility” will ultimately be the prevailing question throughout most of the jurisdictions we tackle through this mini-series. The LMV requires that any security token meeting this definition will need to be registered with the CNBV.

How can I issue a security token without registering it with Mexican authorities?

Similar to the U.S. SEC’s Regulation D exemptions, the easiest way to offer security tokens through an ICO/STO (STO meaning Security Token Offering) is to limit the offerings to qualified investors. Per the LMV securities framework, token issuers will not need to register their security tokens in any of the following scenarios;

1. Securities are offered exclusively to qualified investors or institutional investors;
2. Equity securities (providing shares or equity in the company as opposed to traditional tokens that provide a utility or investment) are sold to a maximum of 100 individuals;
3. Securities are sold pursuant to an employee benefit plan (e.g. equity in a start-up as compensation or payment); or
4. Securities are sold as an “option to purchase” for shareholders or members of entities whose principal purpose is to render services to those shareholders or members (e.g. a country club could allow members to buy shares of the club instead of, or in addition to, regular payments).

What defines a qualified investor in Mexico?

The Comisión Nacional Bancaria y de Valores (CNBV) is responsible for maintaining the definitions, which currently stand as follows:

Basic Qualified Investor:

• Any person holding investments in securities during the prior year on average of UDI 1.5 million; or,
• Any person that has obtained, during the previous two years, an annual net income equal to, or exceeding, UDI 500,000.

Sophisticated Qualified Investor:

• Any person holding investments in securities during the prior year on average of UDI 3 million; or
• Any person that has obtained, during the previous two years, an annual net income equal to or exceeding UDI 1 million.

Institutional Investor:

• Any entity which is deemed as such or is a financial entity (Mexican and foreign banks, broker-dealers, insurance companies, investment funds, private pension funds, among others).

STO’s must ensure that they collect the appropriate paperwork to verify qualification-status, or else they will be at risk of offering an illegal security and may have to buy back their tokens or face personal liability.

The limits on gaining investor status are similar to those provided by the SEC exemptions; however, the SEC definition of “accredited investor” does allow investors to use net assets (except for personal property) in the determination, which isn’t an option in Mexico. For this reason, it could be more difficult to attain qualified investor status in Mexico.

Whether any ICO’s are using this fundraising mechanism in Mexico is difficult to ascertain because there aren’t many ICOs coming out of Mexico. One of the few Mexico-based coins, AgroCoin, launched their ICO in March 2018. AgroCoin is an “investment product of Amar Hidroponía that… allows the investor to participate in the profits that are generated in a Production Unit of Chile Habanero… [one] AgroCoin represents a share of 1/10,000 of the profits, that is, it represents one square meter of the Production Unit.” From this brief description on the front page alone it is very obvious that the coin has no utility and is merely a unit of investment. Nevertheless, from reading the terms of service, it doesn’t appear that AgroCoin is limiting their ICO to “inversionistas calificados” — qualified investors. This could be because companies in Mexico are less afraid of the CNBV than U.S. token issuers are of the SEC. In the U.S., you would expect the company to at least make some effort to masquerade as a utility token! 😱

How are security tokens registered in Mexico?

Many token issuers find that limiting their offerings to qualified investors is simply unworkable for their business, especially when they’re offering services that the general public is more likely to see value in. In this case, to open up their ICO to the public, the issuer could choose to take the more traditional route and register the security token.

To register security tokens in Mexico, the company will have to go through a similar process to the U.S. initial public offering (IPO). Firstly, approval must be granted by the CNBV, which requires the issuer to produce a prospectus containing;

1. Legal and financial information prepared in accordance with Mexican accounting principles;
2. A credit rating from a recognized credit rating agency;
3. A description of the transaction;
4. A discussion of risk factors;
5. Management discussion and analysis; and
6. Applicable regulation, including tax treatment and corporate governance information.

The CNBV will approve or deny the application and if approved, every quarter the CNBV will rate the transparency of the information provided by the issuer to investors:

1. A green grade if the issuers reveal 80% to 100% of their information.
2. A yellow grade if the issuers reveal 51% to 79% of their information.
3. A red grade if the issuers provide deficient transparency to their investors

This grading system is not implemented in the U.S. and the consequences of requiring it are twofold; 1) companies will be pressured into full compliance through a fear of appearing negligent; or 2) companies that are genuinely trying to comply, but have low start-up budgets, will ultimately struggle to reach a green grade because of the expenses required to hire lawyers and accountants.

What are the ongoing obligations for a public company in Mexico?

After “going public”, the token issuer will be subject to the same stringent ongoing disclosure requirements as required in for U.S. public companies, which include:

1. Reporting: Companies must provide annual and quarterly reports including audited financial statements.
2. Disclosure: Companies must disclose to the public any relevant event that may affect the value of the security if the event is equivalent in value to 5% of the company’s assets, or 3% of the previous year’s total sales.
3. Restrictions: Voting restrictions in Mexican public companies are included in each specific company’s by-laws and must be analyzed on an ongoing case-by-case basis.

One of the many reasons token issuers generally choose to hold an ICO instead of an IPO is because these ongoing disclosure requirements are extremely time-consuming and costly. Penalties for failing to make continuing disclosures and reports range from suspension or cancellation of listed securities to personal liability for the individuals appointed to provide the information. Individuals may face criminal liability if any relevant information is not disclosed or disclosed in a false or misleading manner.

Do the ongoing obligations apply to foreign companies offering securities in Mexico?

Foreign token issuers listing their securities on Mexican exchanges must submit the same information as local companies if they do not have any securities listed in non-Mexican stock exchanges. If they do have securities listed in non-Mexican exchanges, the foreign company must periodical information (in Spanish) with the CNBV and the stock exchange including audited financial statements. These requirements only apply to securities issued and listed on traditional stock exchanges (after an IPO), and a company issuing tokens through an ICO will not need to comply with these rules if they are seeking to have their token listed on a Mexican crypto exchange.

🔥 Are there any unique crypto opportunities in Mexico?

Can I take advantage of the new FinTech regulatory sandboxes?

In December 2017, the Mexican senate passed the new FinTech bill that was signed into law in March 2018. The law applies to any institution in financing with a particular focus on: virtual asset management institutions (cryptocurrencies), electronic payment institutions (exchanges) and crowdfunding institutions (ICO / STOs). The FinTech bill was passed in an attempt to bring new FinTech institutions to Mexico, and it does not explicitly clarify the applicability of existing law to virtual currencies or exchanges.

The biggest takeaway from the bill affecting crypto is the creation of FinTech “regulatory sandboxes”, similar to those offered in the United Kingdom, that will allow crypto institutions to obtain a temporary authorization lasting 2 years to operate and offer their services to a limited number of clients. The reporting and disclosure requirements are less onerous, and will provide an opportunity for crypto businesses to play in the sandbox and see whether they can become a viable technology.

To apply for a temporary authorization, FinTech companies must apply to the CNBV and the FinTech committee (made up of two representatives each from the SHCP, CNBV and Banxico) and must certify that:

1. The transactions the FinTech institution intends to carry out are expressly indicated in their company by-laws;
2. The company has the appropriate corporate structure to transact; and
3. The company has the requisite controls and infrastructure such as operating, accounting, security systems, officers and manuals.

After the 2 year temporary authorization has expired, companies who took advantage of the regulatory sandbox will find the process to attain a full-time license far less onerous, and they should have built up some revenue during the trial period which should alleviate the burden of expensive administrative costs.

Currently there aren’t any companies taking advantage of the sandbox, but hopefully that will change as more details are released regarding the application procedure.

💰 How do I pay tax on any gains or income?

What asset class is crypto considered to be for tax purposes in Mexico?

The Mexican government has not provided any guidance as to the tax treatment of virtual currency aside from confirming, like most jurisdictions including the U.S. and U.K., that for the purposes of tax, crypto is not a legal tender or currency in Mexico. With the knowledge that it is not legal tender, we must presume that virtual currency will be treated as an asset or commodity.

Is crypto subject to VAT in Mexico?

Since virtual currency will likely fall into the asset category, we can presume that trading crypto in Mexican territory would expose traders to value added tax (VAT) liability. Interesting for cryptocurrency, however, is that Mexico imposes VAT liability on the transfer of goods only if the transfer takes place in Mexican territory — which can be uncertain when dealing with virtual currency.

Mexican VAT legislation provides that a sale is deemed to have occurred in Mexican territory if the asset being transferred is in Mexico at the time of shipment, or if shipment is not required, if the physical delivery of the asset takes place in Mexico. However, in the case of intangible assets, the sale is considered to occur in Mexican territory when both the purchaser and seller, whether an individual or a company, are residents of Mexico.

It is very likely cryptocurrencies will be deemed to be intangible assets because they lack physical form. If we view them as such, crypto transactions will only be subject to VAT in Mexico if both the purchaser and seller are residents of Mexico. This position remains to be confirmed by tax authorities, but even if it is confirmed, the residency determination will be particularly difficult because of the anonymity of crypto.

For example, where a resident of Mexico living in Mexico City purchases bitcoin from Bitso, the Mexican exchange, the sale should be subject to VAT. However, Bitso does not charge VAT on any transfers that are made. Whether this is because they are paying VAT on their end, or they are just ignoring VAT liability altogether is uncertain. It would not be surprising if they were ignoring it altogether given the massive trend, across all jurisdictions, for a failure to pay tax on crypto.

On the other hand, if a resident of Mexico is using an exchange such as Binance, operated in Malta, they would not be subject to VAT.

This article is legal information and should not be seen as legal advice. You should consult with an attorney before you rely on this information.

Originally published at tokenarcade.com on June 21, 2018.