Latin America - Crypto policy experiments in Mexico and Colombia are aiming in two totally separate directions
Mexico is trying to keep traditional banking away from crypto trading. Colombia is doing just the opposite, but with a highly-tuned, cautious regulatory posture.
Forget Nayib Bukele and El Salvador’s heady Bitcoin policy experiment for a minute.
What other crypto policy-making is underway in Latin America? Let’s take a comparative look at Mexico and Colombia crypto regulations and the new financial arenas they are trying to set up for companies. The outcomes of these experiments will likely telegraph regulatory features to other countries and help inform what works and what does not for competing policy regimes.
Mexico’s Pragmatic Policy-Making. In Mexico, a Fintech law passed in 2017 set out a clear framework for ordinary Fintechs but applied little definition to crypto, what was then a fledgling industry and one that no lawmaker in Mexico seemed ready to tackle. Mexico’s Finance Ministry and regulatory agencies deferred to the Central Bank of Mexico on how to regulate digital assets. The Central Bank effectively declared that it did not recognize any digital assets and set up a moat between the traditional banking sector and crypto companies. In other words, Mexico does not want its banks going anywhere near digital assets for the time being.
Bitso is the company that set a precedent for how to survive in this hazy policy climate. They consulted with Banxico and eventually obtained a permit from Gibraltar for their crypto operations. Bitso operates as two companies in Mexico. One company operates under the country’s Fintech Law. The other operates under Gibraltar’s blockchain law as Nvio. It’s weird, but it works for them. And because they were savvy about consulting with the Central Bank, they are meeting Central Bankers’ wishes and handling a significant share of remittance volume.
How does Colombia’s top-down approach work? In Colombia, things are very different. There is a state-guided regulatory sandbox set up for banks to pair with crypto exchanges and run a pilot. Depending on the results of the pilot, the Colombian stock exchange regulator (SFC) will produce a regulatory framework. The Central Bank is hands-off and the Finance Ministry’s SFC is leading the charge. Unlike Mexico, Colombia’s government actually wants to marry traditional banks with crypto exchanges.
What’s the paradox? The paradox here is that for all of the opacity, Mexico is filled with crypto exchanges that want to capture the cross-border payments market. In Colombia, where the playing field could turn out to be much more market-friendly than Mexico, crypto exchanges see less of a market. Bitso is actually doing business in Mexico. In Colombia, it’s conducting very small volumes of pilot transactions with AVAL Group’s Banco de Bogotá. In other words, it’s still wearing its diaper.
What does this mean for companies? The obvious problem is that we’re not seeing governments borrow from best case practices. Instead, every country is making its own regulatory wild west. Some will win over companies more than others. But companies focused on Latin American financial services with VCs pressuring them to take the entire region will suffer the dizzying landscape of varying regulatory frameworks.
Who is most likely to succeed? Colombia’s model will be successful if its top down approach is not compromised by overly burdensome regulation that squelches innovation. That will be difficult to balance. I think Mexico’s model will suffer a lack of clarity unless congress equips the 2017 Fintech Law with a reform that accommodates digital assets. If so, we could see Mexico’s existing Fintechs enter the crypto market before banks do. If measured by transaction volume, Bitso’s performance suggests that Mexico is a better place to do business… so far.
Who to watch for next? Argentina is the one to watch. In Latin America’s third-largest economy, crypto adoption is greater than in Mexico and Colombia and they appear to be following a hybrid policy model that could combine elements of the Colombia approach and the Mexico approach. This week, Banco Galicia said it would offer crypto buying and selling. That’s very big news.
With a forthcoming presidential election (2023) revolving around the non-partisan issue of inflation, Banco Galicia has taken a risk that politicians of all stripes will need to accommodate them - no matter what.