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Cryptoassets for investment and financing
Regulatory threshold
What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in your jurisdiction?
Not all types of cryptoassets are subject to the same regulation. The legal nature of cryptoassets must be determined on a case-by-case basis, depending on the characteristics of the token or coin. However, in Mexico, special consideration must be taken to identify whether the cryptoasset is considered a virtual asset or security.
According to Fintech Law, cryptoassets used by the public as means of payment can be considered virtual assets if so determined by the Central Bank of Mexico. For this determination, the Central Bank of Mexico must take into consideration the following attributes:
- the use that the public gives to digital units as a means of exchange, storage of value or unit of account;
- the treatment that other jurisdictions give to digital units as cryptoassets; and
- the agreements, mechanisms, rules or protocols that allow generating, identifying, dividing and controlling the replication of these units.
Recognising if a specific cryptoasset is a virtual asset is relevant to determine:
- whether or not a financial institution requires authorisation to use it and how it can be used; and
- if a transaction report is required under the anti-money laundering laws.
Alternatively, a token can be deemed a security, and thus fall under the Mexican securities law if it falls within the definition provided by the Securities Market Law; namely, that:
Shares, ownership interests, debentures, bonds, options, certificates, promissory notes, bills of exchange and any other nominated or innominate negotiable instruments, registered or not registered in the Registry, subject to be traded in the stock exchanges mentioned in this Law, issued in series or a single offering and representing the capital stock of a legal entity, a proportional part of an asset or an interest in a collective credit or any other individual credit right, in terms of applicable domestic or foreign laws.
Determining if a token is a security is relevant to determine if special authorisations are required to perform certain transactions with this asset.
Investor classification
How are investors in cryptoassets classified and treated differently?
There is no particular distinction to investors just because it is related to cryptoassets.
However, Mexican law does make a distinction between retail, institutional, qualified and sophisticated investors.
The financial regulation establishes that a qualified investor should be understood as:
- basic: if it maintains investments during the past 12 months, greater than or equal to 1.5 million investment units (UDIs) (approximately US$460,000), or have a gross income during the previous two years greater than or equal to 500,000 UDIs (approximately US$153,300); and
- sophisticated: if it maintains investments in one or several financial entities during the past 12 months, greater than or equal to 3 million UDIs (approximately US$920,000), or have a gross income over the previous two years, greater than or equal to 1 million UDIs (approximately US$306,600).
For Fintech Law purposes (regulated crowdfunding schemes), an investor is considered sophisticated when it maintains investments during the past 12 months, greater than or equal to 550,000 UDIs (approximately US$168,600).
The Securities Market Law defines an institutional investor as a person to whom federal laws give that character or is a financial entity, including when it acts as a trustee under the protection of trusts that, according to the rules, are considered institutional investors. Some of the institutional investors recognised by the law include banks, financial companies, insurance companies, national reinsurance entities and fund managers authorised by law.
Last, a retail investor is any other investor considered by the law to be neither an institutional investor nor a qualified investor.
Initial coin offerings
What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?
Depending on the type and nature of the cryptoasset, would be the regulations applicable to the public offering of coins. If the token or coin is deemed a security, it would fall within the Securities Market Law and thus subject to its rules and regulations as a Security Token Offering.
There is a high risk that the Mexican regulators will consider an ICO as a regulated public offering, and thus subject to monetary and criminal sanctions if they are carried out without the licence required by the Securities Market Law.
The Securities Market Law considers a public offering as:
an offer, with or without a price, made in the national territory through massive communication media and to an undetermined person, to subscribe, acquire, dispose of or transmit securities, for any title
and securities as:
shares, ownership interests, debentures, bonds, options, certificates, promissory notes, bills of exchange and any other nominated or innominate negotiable instruments, registered or not registered in the Registry, subject to be traded in the stock exchanges mentioned in this Law, issued in series or a single offering and representing the capital stock of a legal entity, a proportional part of an asset or an interest in a collective credit or any other individual credit right, in terms of applicable domestic or foreign laws.
Under the Securities Market Law, only licensed financial entities can carry out public offerings.
In December 2017, the National Banking and Securities Commission, the Central Bank of Mexico and the Ministry of Finance and Credit Public issued a joint statement alerting the public to the risks associated with the use of virtual assets and participation in investment schemes such as ICOs.
In this statement, the three central financial authorities of Mexico recognised that there could be a wide variety of types or categories of tokens available in the market that can be obtained through an ICO, recognising that depending on the characteristics and circumstances of each token, they could be considered securities under the Mexican Securities Law; therefore, those offerings should be subject to the conditions and limitations of this law.
In the above statement, the authorities implicitly recognised the validity of the public offerings of tokens, specifying that, those that are classified as securities must observe the corresponding securities laws. Still, other tokens could be offered provided that the people interested in participating should do so only if they are investors with extensive experience, under the consideration that they are high risk, and as long as they are aware of the signs or indications of fraud that can be derived from participating in these schemes.
Security token offerings
What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?
Generally, any security to be publicly offered within Mexican territory must be registered in the National Securities Registry. An offer is defined as being:
- with or without a price;
- made in Mexican territory through mass media; and
- to an undetermined person, to subscribe, acquire, dispose of or transmit securities for any title considered to be a public offering.
Only licensed entities, such as brokerage houses, can carry out public offerings.
Securities offered within Mexico can be exempt of registration provided that the person conducting the offering meets any of the following requirements:
- it is made exclusively to institutional or qualified investors;
- representative values of the corporation’s capital stock, or their equivalents, are offered to less than 100 people, regardless of whether they are of one or more class or series;
- it is carried out under the scope of plans or programmes generally applicable to employees or groups of employees of the company that issues the securities or legal entities that the company controls or is controlled by; and
- it is made to shareholders or partners of legal entities that exclusively or predominantly perform their corporate purpose with them.
The National Banking and Securities Commission, per the guidelines approved by its Governing Board, is authorised to authorise any type of private offering different from those indicated above.
Offering securities abroad issued in Mexico or by Mexican legal entities, directly or through trusts or similar or equivalent, is also exempted from registration. Nevertheless, its offering must be notified to the National Banking and Securities Commission describing the main characteristics of that offer. Also, its prospectus must comply with specific features, including the express statement that the securities that are subject of the offer cannot be offered publicly in Mexican territory.
Stablecoins
What rules and restrictions govern the issue of, and investment in, stablecoins?
Currently, there are no specific regulations regarding Stablecoins. Depending on the type of stablecoin could be the type of law applicable to it.
Crypto-collateralised and algorithmic stablecoins could fall within the definition of a virtual asset, therefore, being subject to the regulations of the Fintech Law and anti-money laundering laws. The above, since due to their common characteristics, they are more similar to the description of Circular 4/2019 issued by the Central Bank of Mexico and are prone to be used by the general public, as means of payment as provided by article 30 of the Fintech Law.
Circular 4/2019 establishes the characteristics that virtual assets must have to be operated by fintech institutions, namely:
- to be units of information, uniquely identifiable, even in a fractional manner, that is electronically recorded and do not represent the ownership or rights of an underlying asset or represent the ownership or rights to a lesser extent;
- have emission controls defined by specific protocols to which third parties may subscribe; and
- have protocols that prevent replicas of information units or their fractions from being available for transmission more than once at the same time.
Alternatively, an asset-backed stablecoin is unlikely to be considered as a virtual asset because the Central Bank of Mexico has indicated that the definition of a virtual asset does not take into account those assets that use the same technology as the most well-known virtual assets that represent the holding at par of an underlying asset such as shares, foreign currencies or Mexican pesos.
However, special care should be taken that the model or structure used to issue a stablecoin does not fall within what the Fintech Law defines as an electronic payment fund. In this case, the stablecoin could only be issued by an authorised electronic payment fund institution, which is a type of fintech company licensed by the Inter-institutional Committee comprising members of National Banking and Securities Commission, the Central Bank of Mexico and the Ministry of Finance and Public Credit.
Airdrops
Are cryptoassets distributed by airdrop treated differently than other types of offering mechanisms?
In Mexico, no regulation specifically addresses airdrops. However, in practice, they would be treated differently from other types of offering mechanisms, such as public or crowdfunding offerings.
In principle, an airdrop would be legally treated as a donation. Many states establish that for a gift to be considered valid, the express or tacit acceptance of the donee is required.
In Mexico, a person or entity can make a massive donation of any kind of asset, including tokens. Notwithstanding, depending on the nature and characteristics of the cryptoasset distributed through the airdrop, if the donor and donee are natural or legal persons, Mexican or foreign, are the tax implications for the issuer and airdrop beneficiary.
Advertising and marketing
What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?
There is no specific regulation regarding advertising and marketing of cryptoassets. Possible regulations and restrictions to advertise or market these assets depend on the legal nature and characteristics of the cryptoasset.
The dissemination of information for promotional, marketing or advertising purposes about cryptoassets that can be considered securities, that are aimed at the general public, will be subject to the prior authorisation of the National Banking and Securities Commission (CNBV).
Despite that, the CNBV may, through general provisions, establish situations under which it is not required to comply with this requirement.
No messages regarding the public offer or placement of security tokens may be disseminated for promotional or marketing purposes that are not included in the placement prospectuses, information supplements, brochures or documents authorised by the CNBV.
The private offering, promotion, commercialisation and negotiation of security tokens not registered in the National Securities Registry, through systems of centralised information that facilitate the performance of these activities, may be carried out by any person and without the need to obtain authorisation from the financial authorities, provided that only institutional and qualified investors participate in these systems. However, the CNBV must be notified of the terms and conditions of the offer for statistical purposes, within 10 business days following its completion, including providing those interested in participating with the relevant information.
The offer, promotion, commercialisation and negotiation of the shares mentioned above may be carried out without the intervention of intermediaries from the stock market.
When advertising and marketing cryptoassets used for investment and financing, the parties must refrain from guaranteeing any type of result or benefit.
Trading restrictions
Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?
No restrictions currently apply.
Crowdfunding
How are crowdfunding and cryptoasset offerings treated differently under the law?
Crowdfunding was highly regulated by the Fintech Law, to create and maintain healthy growth and stability in the market, and to protect applicants, including investors. However, not all forms of crowdfunding were regulated by this law.
Alternatively, the offerings of cryptoassets are not explicitly regulated by law. Consequently, their offer will depend on the nature and characteristics of the cryptoasset being offered and if the placement is private or public.
Under this premise, it is possible that if the offer is public, and its nature and characteristics fit within the forms of crowdfunding regulated by the Fintech Law, its offer could be handled by this regulation. If not, its rule will depend on the type of cryptoasset and offering mechanism (eg, securities by the Securities Market Law).
Transfer agents and share registrars
What laws and regulations govern cryptoasset transfer agents and share registrars?
No specific laws govern cryptoasset transfer agents, neither is there any interpretation of any authority considering it analogous to other regulated transfer agents.
In the case of shares being publicly offered and traded, the shares must be registered before the National Securities Registry.
Anti-money laundering and know-your-customer compliance
What anti-money laundering (AML) and know-your-customer (KYC) requirements and guidelines apply to the offering of cryptoassets?
According to the Fintech Law, financial entities that operate with virtual assets (a type of cryptoasset) must have anti-money laundering prevention mechanisms. For this purpose, the National Banking and Securities Commission issued guidelines that must be followed by financial institutions and fintechs. They include:
- policies, mechanisms, and procedures to identify its clients;
- identity verification documents of the clients; and
- conservation of the client’s identification file.
This data and information include name, address, nationality, gender, occupation, unique population registry code, email, phone number and digital signature.
Further, the ordinary and professional offering of virtual assets by subjects other than financial and fintech institutions, which are carried out through electronic platforms, digital or similar, that manage or operate, facilitating or carrying out purchase operations or sale of these assets owned by their clients or, provide means to safeguard, store, transfer virtual assets other than those recognised by the Central Bank of Mexico in terms of the Fintech Law, are considered vulnerable activities in terms of the Federal Law for the Prevention and Identification of Operations with Resources of Illicit Origin, commonly known as the AML law.
The subjects must register electronically before the Financial Intelligence Unit of the Ministry of Finance and Public Affairs and file vulnerable activity reports through the Money Laundering Prevention Portal when:
- a purchase or sale of virtual assets is equal or superior to 645 Units of Measure and Update (UMAs) (approximately US$2,620); and
- users carrying out purchases or sales of virtual assets accumulate in six months and amount that is equal or superior to 645 UMAs.
Those reports are required to be submitted through the Portal, no later than the 17th day of the next month after the date when any of both situations took place.
Any entity or individual rendering vulnerable activities must comply with additional requirements such as:
- registering as a vulnerable activity;
- physically submitting to the Tax Administration Authority certain documentation regarding bylaws, proof of address, lists of shareholders, commercial name and website and identification information from the legal representative, among others;
- having an AML policy;
- having robust KYC requirements to identify their clients; and
- protecting the identification information for at least five years.
Non-compliance to the AML provisions may lead to fines and criminal sanctions.
Sanctions and Financial Action Task Force compliance
What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?
Mexico is known to have robust and strict legislation regarding anti-terrorism financing and money laundering. Moreover, the Fintech Law and the financial legislation establishes KYC, AML, and FATF obligations to entities that offer virtual assets (a type of cryptoasset) operations to their clients. These obligations can include, in some cases, full KYC of their clients, cybersecurity, deep scrutiny of identification documents, validation, advance electronic signature, transaction limits, transaction information and history, bank statements, bank address information, income statement, and more.
Mexico is a member of the FATF and has complied with some, but not all, the standards issued by it in the past.
Concerning cryptoassets, in 2015, the Ministry of Finance and Public Credit issued a standard based on the Guidance for a Risk-Based Approach to virtual assets and Virtual Asset Service Providers (VASPs) issued by the FATF in June 2015. The standard established an extensive interpretation of the restrictions applicable to particular transactions with cash and precious metals to virtual assets. Because this limitation is not included in the law, this variation cannot be considered valid until the AML law is modified.
Based on the FATF recommendations, the Tax Administration Authority published the Agreement that modified the General Rules referred to the Federal Law for the Prevention and Identification of Operations with Resources of Illicit Origin (Anti-Money Laundering Rules) in the Official Gazette on 30 November 2020. According to the new rules, virtual asset service providers must register with the Tax Administration Authority as a vulnerable activity and physically submit specific documentation regarding its bylaws, shareholders, commercial name, website, and identification of their legal representatives.
Finally, individuals and corporations, who carry out vulnerable activities may obtain the certification granted by the Financial Intelligence Unit regarding compliance with the Anti-Money Laundering Laws. The certification will be valid for five years.
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Give the date on which the above content is accurate.
1 December 2020.
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