Thank Donald Trump. The specter of the American president following through on threats to tax or disrupt remittances to Mexico convinced the finance minister, Jose Antonio Meade, to submit legislation that will put fintech startups on the same legal, licensed and legitimate basis as financial institutions.
The law must still be passed by Congress, but it is already having an impact on helping fintech companies win greater credibility with investors and counterparties.
Sebastian Acosta Checa, founder of IsBit, a Bitcoin payment platform for trade finance, hopes the law will encourage more corporations to start pilot programs with his service.
The law should make it easier for startups such as IsBit to gain access to bank APIs, share data for the prevention of money laundering, and connect to settlement platforms that, so far, have been the preserve of traditional financial institutions, he says.
The bill recognizes fintech companies by one of four definitions: crowdfunding servies; non-bank online lenders; electronic payment-funds institutions; and (vaguely) “digital asset management institutions”, which would include blockchain payment platforms along with robo-advisors and a variety of other types of players.
Although Asian governments are taking a variety of initiatives, there doesn’t seem to be a legal structure of this kind in Asia or elsewhere, says Hong Kong-based Padraig Walsh, partner at Bird & Bird, a law firm with a fintech specialization.
“It’s potentially productive,” he said of the Mexican initiative. “It removes uncertainty and says: ‘here’s how to be a proper fintech business’…It’s more proactive; most countries don’t know what they want and so they don’t do anything.”
How a government embraces fintech
Acosta Checa says that while the bill is an immediate response to Trump, it has deeper intentions and support within the government. It is also designed to take Mexico’s heavily cash-based economy and make it more digital, as well as to raise the country’s profile in global finance.
Not even Singapore has gone so far: the central bank has been supportive of fintech innovation but its sandbox and other efforts are not rules-based; experimentation remains at the discretion of the Monetary Authority of Singapore. In Mexico, on the other hand, the central bank is on the cusp of blessing blockchain and crypto-currencies based on consensus methods.
China is the world’s most advanced fintech society but without the civil rights and protections, including around data and privacy, that other countries maintain. India has made strides on digital identity, but not on the financial services around it.
In Southeast Asia – which may be a closer comparable to Mexico – there are budding regulatory efforts. According to a Baker McKenzie report in January, Indonesia’s central bank has just legitimized digital payment services, which brings some clarity to the roles of e-wallet companies, payment gateway companies and the like.
Malaysia and Thailand have launched their own regulatory sandboxes, while Thailand is moving to recognize peer-to-peer lending platforms and digital credit scoring methodologies.
None of these are as comprehensive as the Mexican bill, nor do they operate at the level of legislation.
But there are obligations too
The Mexican bill comes with obligations for fintech companies, too. If they meet the definitions within the four categories (as determined by the central bank), companies will need to apply for a license and accept third-party audits to ensure they comply with governance and compliance measures, as traditional banks or other institutions must. There is also a vetting process.
But the creation of a legal framework for fintech companies also allows companies to scale. “It means we can have a compelling business case,” Acosta Checa said. “We don’t need to fly under the radar anymore.”
For example, insurance companies and public pension funds would never touch a blockchain service based on Bitcoin. But now that such entities are to be regulated, they are legitimized.
Such a law does contain risks. What if the bill excludes fintech players that could become important tomorrow? How costly will the licensing process become? How much discretion will bureaucrats have over deciding what company is a legitimate fintech and which ones are not, or what constitutes an acceptable digital asset?
But for most of Mexico’s approximately 150 fintech companies, these are questions or problems for later.
If the bill is passed by Congress, it might help Mexico disrupt other markets when it comes to enabling finance to ride the digital wave. For regulators in other parts of the world, Mexico City may be about to become an important research destination.
