Key Takeaways

1. The United States-Mexico-Canada Agreement (USMCA) provides for financial and digital trade regulations that harmonize the treatment of fintech companies.

2. North American companies leveraging digital assets for payments should consider strategic regional opportunities available under the new USMCA fintech Framework.

3. The USMCA Parties (member countries) continue to license fintech companies using cryptocurrency and create regulatory sandboxes to incentivize experimentation with the new technology under relaxed regulatory conditions.

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At over $30 billion USD in transactions a year, the United States-Mexico remittance corridor is one of the largest in the world.^[1] The rapid development of cryptocurrencies has enabled cross-border transactions at just a fraction of the cost and at unprecedented speeds, spurring collaboration between crypto innovators in the U.S. and Mexico. Faster moving money does not necessarily mean less cost if there are too many competing and costly regulatory regimes. The USMCA seeks to harmonize the treatment of financial service providers across the three member countries.

The historic USMCA is more than just a trade agreement – it is North America’s first multinational fintech treaty. Chapter 17 of the USMCA puts the countries more in line with World Trade Organization (WTO) principles by seeking to ensure equal treatment of companies across member countries, protecting market access, and reevaluating the treatment of non-banking financial services.^[2]  Under NAFTA, non-banking fintech companies dealt with competing regulatory frameworks, and there was little codified incentive to embrace the open banking movement.^[3]

The USMCA has aligned its member countries with the blockchain effort towards interoperability by creating consistent standards for the handling and sharing of customer data, prohibiting governments from discriminating against foreign fintech companies, and by making it easier for fintech companies to provide services in other USMCA countries.^[4] Notably, the agreement guarantees financial institutions access to the payment and clearing systems of all other member countries.^[5] This is good news for crypto exchanges like Bitso who are trying to capture the on-demand liquidity market for member country banks and regional remittance payments networks.

Whether or not the USCMA ensures equal treatment of financial innovation companies across borders, compliance under any global regulatory framework comes at a cost.  Cryptocurrencies’ unfortunate treatment as a black-market asset by many regulatory authorities has resulted in demanding compliance requirements. The Financial Action Task Force (“FATF”), the global money laundering and terrorist financing watchdog, issued guidance to its 37 member countries requiring virtual asset service providers to share sender and receiver information in certain types of cryptocurrency transactions.^[6]  Meanwhile, recent FinCEN guidance has mandated robust anti-money laundering (“AML”) and know-your-customer (“KYC”) compliance programs for U.S. money services businesses dealing in virtual currencies.^[7]

To encourage fintech companies to innovate in the face of regulation, the US and Mexico have both adjusted their regulatory stances through novel licensures and regulatory sandboxes. By operation of the USMCA, fintech companies now have greater access to regulatory sandboxes and policies adopted by any of the three participating USMCA countries.

Regulatory fintech sandboxes are developing in the United States as a tool to allow companies to experiment with financial technologies under a relaxed, but closely-watched regulatory environment. The first U.S. sandbox, pioneered by Arizona in 2017, provides limited access to Arizona’s market to test innovative financial products or services without first obtaining full state licensure or other authorizations that would otherwise be required.^[8] Other states, such as Wyoming, Utah, and Nevada have since followed suit with similar sandboxes.^[9] At the federal level, the Consumer Financial Protection Bureau has launched a trial disclosure sandbox, a no-action letter policy, and a compliance assistance sandbox creating a safe harbor for innovative products and services for a limited period of time while sharing data with the Bureau. Although unsuccessfully contested by the New York State Department of Financial Services, the U.S. Office of Comptroller of the Currency has implemented its policy of considering applications for special purpose national bank charters from fintech companies that are engaged in the business of banking, but do not take deposits.

Mexico, a Latin American leader in introducing open banking standards, has enabled its regulatory authority to defer authorizations for new financial services and has already issued specialized licenses for cryptocurrency exchanges to operate as financial technology institutions.^[10] Although cryptocurrency’s future seems shrouded in regulatory uncertainty, the USMCA and its member countries’ shifting policies towards financial technology makes it clear that financial innovators have several regulatory options to choose from when considering development of new services or entering new regions.

With the development of central bank backed currencies, including proposed US legislation introducing a “digital dollar,” there will be more digital liquidity and interest in remittance solutions leveraging digital assets and open banking standards. Bi-national partnerships between member financial institutions, payment processors, and cryptocurrency exchanges in the United States and Mexico have already formed, securing some companies strategic positions within evolving digital remittance corridors. The remittance market is one to watch in the crypto industry, serving as a reminder to new and established financial service companies to consider integrating with digital asset solutions in light of new found and regulatory efforts and protections.

FOOTNOTES

^[1] Emilio Rivero Coello, Are cryptocurrencies useful for remittances?, CoinCenter (Jan. 6, 2020).

^[2] See Luis Alejandro Estoup, “FinTech under the new United States-Mexico-Canada(USMCA) agreement,” Thomas Reuters Practical Law (2020).

^[3]See id.

^[4] See e.g., USMCA, Article 17.3 (“National Treatment”); USMCA, Article 17.4 (“Most Favored-Nation Treatment”); USMCA, Article 17.17 (“Transfer of Information”).

^[5] USMCA, Article 17.15 (“Payment and Clearing Systems”).

^[6] Financial Action Task Force, “Guidance for a Risk-Based Approach: Virtual Assets and Virtual Asset Service Providers,” (June 2019).

^[7] FinCEN Release No. FIN-2019-G001, “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies,” (May 9, 2019).

^[8] H.B. 2434, 53d Leg., 2nd Reg Sess. (Ariz. 2018).

^[9] See Kohen & Wales, “State Regulations on Virtual Currency and Blockchain Technologies,” (Aug. 29, 2019).

^[10] See Valdex, Branch, & Mainero, (Feb. 24, 2020).