New regulation would effectively ban crypto exchanges in Mexico
Bucking international trends, the Mexican central bank would deny exchanges a sensible path to regulation and deny Mexicans safe access to financial technologies.
The Mexican central bank, acting under authority from a recently enacted fintech law, proposed new regulations last week that would effectively ban cryptocurrency exchanges in the country. This is a misguided policy that we hope the central bank will reconsider.
Cryptocurrency exchanges dealing in fiat currency need access to the local banking system. Under the new law, that access will be severely impeded. While the central bank can claim that they are not “banning” exchanges, the effect will be the same. As originally envisioned, the new fintech law should have opened Mexico for innovation by not only allowing cryptocurrency exchanges to continue operating but also to provide them a reasonable path to better regulation as full-fledged financial institutions. The central bank, however, has now proposed to do the opposite, closing the door on these promising new technologies by prohibiting any regulated financial institution from offering cryptocurrency exchange, transmission, or custody services to customers.
The Mexican central bank’s proposal unfortunately demonstrates a dismissive ignorance of how these technologies work. The rationale for the proposed rule is breathtaking: that the “complexity of the mathematical and cryptographic processes that underlie digital assets” and the “difficulty for users to understand these processes,” along with the volatility of digital assets, presents an information asymmetry problem that, apparently, can only be addressed by quarantining consumers from direct contact with crypto. Because cryptocurrencies are such complicated technologies, the argument goes, average citizens can’t understand how they work and should not, therefore, be allowed to buy them.
Aside from being aggressively paternalistic by suggesting that the average Mexican does not have the capacity to make her own decisions on these matters, the argument is also absurd. The average person has no idea how a car works, and yet people are allowed to drive them. An approach of “protecting” consumers by eliminating regulated exchanges is no different than failing to promulgate automobile safety standards for car manufacturers and instead prohibiting people from buying cars in the first place and allowing only buses on the roads. Indeed the math and cryptography that underlies a cryptocurrency like Bitcoin is the same SHA-256 and ECDSA encryption that underlies secure websites and internet banking, should the public also be protected from these services with a prohibition?
It’s an abnegation of the regulator’s responsibility to protect consumers and will simply subject those consumers to more dangerous practices from providers outside of Mexico or those who are willing to violate the law. Should these rules be enacted, they would deny Mexicans the benefits of cryptocurrency technology while simultaneously failing to protect them from the risks. No other major economic power has taken such an extreme and unwarranted approach to regulating cryptocurrencies, and several have provided sensible regulatory frameworks that protect customers while still allowing innovation to flourish. Cryptocurrencies—like the internet over which their networks run—are globally accessible. If there are no Mexican-based exchanges, Mexicans will inevitably use exchanges based in other jurisdictions. Some of these foreign exchanges may be sensibly regulated by more forward-looking governments, but others may be rogue operations that deliberately evade any regulatory jurisdiction. A blanket prohibition will, without question, push fintech innovation outside Mexico, but it will also push Mexican cryptocurrency users into underground markets and the dangers that lurk therein.
There is a 60-day period presently open in which the public is welcome to submit comments on this proposed rule. Coin Center intends to file a comment and we hope that others will as well and help explain to the central bank why its approach would not only make it an outlier among industrialized nations, but would hurt the consumers it is trying to protect as well.