“It is truly shocking because we are seeing how only one cryptocurrency exchange has demonstrated greater potential than 35 dedicated investment management entities,” said Eloisa Cadenas, CEO of consulting firm CryptoFinTech and professor at the Mexican Stock Exchange Group.
Why Mexico’s interest in cryptocurrencies is skyrocketing
The reason behind why Mexico’s interest in cryptocurrencies skyrocketed so suddenly has social and economic roots. Many Mexican citizens welcome crypto in part for its potential to transfer money more easily. In Mexico, that is becoming increasingly hard to do so. In its effort to fight criminal activities, Mexico has probably made simple transactions more difficult for the general public.
The country has long tackled with financial crimes like tax evasion and money laundering. But 2 years ago, Mexico decided to put major prevention policies in place. In August 2019, just before Bitso’s trade volume began its significant surge, the government began implementing new fintech laws that sought to control financial service providers in the banking and private capital sectors, from entrepreneurs to crowdfunding institutions.
Mexico’s new law on financial institutions
Based on the new laws, tech firms holding deposits for users had to register as a financial institution in Mexico. But compliance was not at all cheat! Applications ran over $35,000 and the law demanded businesses – even startups – to have a minimum annual profit of $100,000. National media reported at the time that out of the 500 listed Mexican startups, only 201 could be approved by regulators to carry on operations. Once the new laws was in effect, only 85 applied for accreditation. Bitso was among the firms to receive the green light in continuing such operations in Mexico.
In order to follow the new banking regulations in Mexico, PayPal announced it will stop holding deposits on its customer accounts. Now, the fintech giant only processes payments as an intermediary, meaning Mexicans can no longer maintain a balance on their account.
Crypto trading platforms can facilitate faster money transfers at a lower cost than banks. According to Cadenas, the combination of the following circumstances
- Mexico’s stringent new banking laws
- expensive financial services,
- the large unbanked population
is driving public interest in cryptocurrencies.
Like other countries, people use crypto primarily for speculation and trading in Mexico, Cadenas said. But the multibillion-dollar flow of remittances into the country, particularly from the U.S., and the difficulties involved in money transfers, gave birth to a rare business opportunity for the crypto platforms claiming to make transactions easier and cheaper.
Mexico’s interest in cryptocurrencies spiked
In 2014, Bitso launched Mexico’s first bitcoin exchange.
According to Bitso co-founder and CEO Daniel Vogel, in 2016 Bitso grew mainly because of young gamers in Mexico paying for video games using bitcoin on a digital media platform called Steam. However, all that stopped the following year when bitcoin’s value skyrocketed from $900 to $20,000 in a few months. By the end of the year, bitcoin transaction fees also spiked, accounting for up to 40% of a single transaction. The young Mexican gamers couldn’t afford the cost any longer.
There was a massive virgin territory just asking for new players, i.e. remittances. Bitso had already partnered with another payment platform Ripple to facilitate quick exchanges between dollars and pesos through liquid XRP. Therefore, the firm began processing remittance transactions.
“We transacted, I think on a weekly basis, almost 10% of the remittances from the U.S. to Mexico,” Vogel said. “And that was super exciting,” he added.
The COVID-19 era
To date, the COVID-19 pandemic is quickly spreading throughout the country. Mexico’s central bank reported that in June 2020, Mexican employees in the U.S. sent home a mind-bending $3.56 billion in remittances, which increased 11% from the previous year.
Relatively all of those transactions were electronic transfers, through bank accounts, Western Union, PayPal’s Xoom and crypto trading platforms like Bitso. But there are charges of course. Last year, Mexico President Andrés Manuel López Obrador severely criticized Western Union and Xoom companies for their high fees on remittance transfers.
Internally, we can say that the use of cryptocurrencies is becoming more attractive compared to what other financial institutions offer
Comparatively, the transfer cost of that money through cryptocurrency can be as little as 0.1%, Cadenas said. According to Bitso’s website, some withdrawal methods, which include bank transfers, are free of charge for users receiving funds via this particular exchange.
But here is another issue: A 2018 global database on financial inclusion by the World Bank showed 63.1% of Mexican adults (above the age of 15) didn’t hold any bank accounts.
The fintech regulations enacted last year included a whole chapter on virtual assets. These regulations can be another reason why Mexico’s interest in cryptocurrencies is skyrocketing.
As a consequence of the bill, the government banned exchanges from holding fiat currencies without a license. But applying for compliance was truly costly putting crypto startups and entrepreneurs out of business.
Another provision in the aforementioned bill required Mexico’s central bank to issue specific secondary rules on the way virtual assets would be regulated. As Ramos mentions, the law banned financial institutions from issuing or transferring the “risk of cryptocurrency” to the customer by any means. But regulations still allow institutions to use crypto for their internal operations, Ramos said.
But the regulations issued by the central bank sounded worse than they actually were, Ramos said. The reason is the government did not ban crypto or call it illegal, and that was good enough.
“The central bank recognized that crypto activities were permitted in Mexico. They were not illegal. What they were saying with this secondary provision was that financial institutions should take care and if possible avoid participating actively in the crypto industry,” Ramos said. Operating a crypto business in Mexico is expensive, thanks to the new fintech licensing requirements, but within the law.
It takes time for crypto companies to take the leading role in remitting money or offering digital payment systems in Mexico. Across the country, cash is still greatly preferred, and cryptocurrencies are not widely accepted. The industry has its own problems, starting with the fact that not many people understand how crypto works, and it seems offputting compared to a short walk to the nearest Oxxo.
Nevertheless, startups are continuing to enter the Mexican crypto sphere. That can significantly account for Mexico’s interest in cryptocurrencies skyrocketing. For instance, while Bitso is aiming to expand outward, having already established itself in Mexico and in Argentina, startups like crypto exchange Mexo are uniquely targeting local users. Last year, the startup distributed $300,000 in donations to Venezuelans who were in need.
In addition to Mexico’s large population exploring alternatives to traditional financial services, other factors have aligned to facilitate mass adoption. It can also play a role in advancing financial inclusion, Cadenas said.