Cryptocurrency Regulation in Mexico Prior to 2024: An Overview

The legislative landscape for cryptocurrencies in Mexico before 2024 presents a complex interplay of regulations, with significant involvement from various financial authorities. The primary legislative framework governing this sector is the Law to Regulate Financial Technology Institutions (the “Fintech Law”), which broadly addresses the main trends in the financial technology area, including cryptocurrencies, referred to as “virtual assets” under Mexican law. These virtual assets are defined as an electronically recorded representation of value used by the public as a means of payment for all legal acts, with transferability limited to electronic means​​.

Regulation and Oversight

The Bank of Mexico (Banxico) is the central authority overseeing cryptocurrencies in Mexico. Banxico’s Rule 4/2019 outlines the terms, conditions, restrictions, and authorizations that financial technology institutions must adhere to when transacting with virtual assets. Notably, there is no outright prohibition on services or operations with virtual assets in Mexico. However, operations must not contravene any prohibitions set by the applicable legislation. Financial companies like Credit Institutions or Financial Technology Institutions (FTIs), including Collective Financing Institutions (CFIs) and Electronic Payment Funds Institutions (EPFIs), can operate with virtual assets if they have the necessary authorization from Banxico​​.

Exchange and Custody

The FinTech Law permits credit institutions and FTIs to engage in exchange and custody transactions with virtual assets. However, Rule 4/2019 significantly restricts these operations, particularly barring direct services of exchange, custody, or transmission of virtual assets to clients by credit institutions and FTIs. Non-financial companies can provide exchange or custody services related to virtual assets under certain conditions, such as registration with the Tax Administration Service in Mexico and compliance with the Federal Law for the Prevention and Identification of Transactions with Illicit Proceeds​​.

Borrowing and Yield

Mexican financial regulation does not explicitly address borrowing and yield transactions within Decentralized Finance (DeFi) protocols. Virtual assets are considered intangible movable property under Mexican commercial law, and securities can be created over these assets to ensure credit operation compliance. Each type of security over virtual assets requires case-by-case assessment for operational and regulatory feasibility​​.

Compliance and Risk Warnings

Financial entities operating with virtual assets must comply with various regulations, including the FinTech Law, general provisions applicable to credit institutions, and the Federal Law for the Prevention and Identification of Operations with Resources of Illicit Proceeds. The Mexican authorities, including the Ministry of Finance and Banxico, have issued press releases warning about the risks associated with virtual assets, emphasizing their speculative nature, lack of intrinsic value, and high volatility​​.

Taxation and Legal Use

The Federal Attorney’s Office for the Defense of the Consumer (PRODECON) has analyzed the tax treatment applicable to profits derived from the sale of virtual assets. These transactions are treated as alienations of movable property under the Income Tax Law, in the absence of a specific regime for taxing this income. Virtual assets can be legally used as a means of payment in establishments or services that accept them, and there are Bitcoin ATMs for buying/selling bitcoins. However, users assume all risks and responsibilities, as there is no guarantee or regulation ensuring recovery of money in case of losses​​.

Future Prospects and International Influence

There is ongoing debate in Mexico regarding the regulation of cryptocurrencies, their assimilation to securities, and the extent to which financial institutions should participate in cryptocurrency offerings and sales. Despite influences from other jurisdictions with enacted cryptocurrency rules, the Mexican Central Bank has determined that virtual currencies do not currently fall under regulation, nor do they constitute lawful currency in Mexico. Cryptocurrency operations in the Mexican market are likely to continue growing, fueled by the absence of regulation and the increasing penetration of technology-driven financial services companies in the Mexican economy​​.

In conclusion, the legislative environment for cryptocurrencies in Mexico prior to 2024 is characterized by cautious regulatory approaches, significant restrictions on financial institutions’ dealings with virtual assets, and an emphasis on risk awareness and compliance, particularly in anti-money laundering efforts. The dynamic nature of this sector, coupled with international trends and investor interests, suggests that Mexico’s regulatory stance on cryptocurrencies might evolve in the future.