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Central American “Fintech” policy: a call to action.

By Iraida Herrera Abreu.


After analyzing the fintech regulatory schemes of Singapore and the United Kingdom, the main regulatory components of those systems are the following: a) a specific Fintech law, b) sandboxes, c) a consolidated Fintech association, d) a joint working group with the regulator. [1]


Some countries in Latin America have already set up their Fintech associations. Central America is not an exception. Nevertheless, the establishment of these regulations is recent, and therefore, initiatives such as developing specific Fintech law proposals, innovation offices or regulatory sandboxes have yet to be consolidated.


In Latin America only Mexico has approved its own Fintech law. [2] On the contrary, even though Central American countries are facing a rapid growth of the fintech industry they do not have any specific regulations. Even when they shall comply with regulations that are applicable to any business (e.g. data protection, taxation, consumer protection) there are no specific regulations for the financial technology developments in the region.


Central America offers interesting possibilities for policy and regulatory solutions on Fintech. State parties to the Central American Integration System (SICA, for its Spanish acronym) and, in particular, to the Economic Integration Subsystem, can adopt binding, regional regulation through a community law system with multiple sources of law. These include traditional, international law mechanisms (e.g., treaties) and binding legal instruments adopted by regional bodies through autonomous procedures. [3]


Fintech, as a dynamic industry, requires action from both the private and the public sectors. It is now a question if policymakers need to take the necessary steps to address the dynamism and potential that Fintech firms and their alignment with the law’s objectives can provide; and if so, how they should do it.

The first question we should ask is then: should the governments of Central America regulate Fintech transactions? If so, why? When designing fintech policy we should consider, also, if it is possible to construct a unifying fintech regulation for Central America’s jurisdictions and, if not, the alternative to a general legal regional framework. The results may help governments formulate an adequate policy that improves financial inclusion for the Central American populations and for attraction of foreign investment within the region.


As regulators are domestic by nature, building mutual trust between national regulatory bodies is a question of time and its achievement is a real challenge. However, like in cross-border banking regulation, international regulatory networks might be entrusted with an essential function in establishing regulatory standards for dealing with Fintech. [4]


Regulatory challenges in Fintech subjects tend to vary on the specific Fintech sector, the state of development of financial products and services in the region in question, and the regulatory environment. In other words, achieving a qualitative, responsive, and effective regulation across borders cannot be considered an easy task.


The thought I intend to spread is: have you ever considered what would happen if the regulators of Central America would ensure a sufficient level of information sharing between each other, for the purpose of establishing a uniform monitoring regime?


Considering the history and challenges of Central American governments e.g. corruption, we should determine if the means to achieve a proper Fintech development supervision around the region is through a regional innovation office, a regional (multi-jurisdictional) regulatory sandbox, a regional regtech proposal or an alternative to a regional legal framework.


Over the last two years, there has been an increasing academic interest in Fintech around the world. This rise has run parallel to the evolution of the different business segments for technological financial services. Studies in the United Kingdom, Singapore, Europe and the United States identify, define and explain the essential concepts of Fintech, such as “financial inclusion,” “regulatory sandbox,” “regtech,” “innovation office” and so on. [5]


Some early lessons have been shared by academic institutions and research organizations around the world on regulatory innovations to enable inclusive Fintech, such as UNSGSA [6] and University of Cambridge. These studies are focused on more developed countries. In Latin America and Central America, however, only the Inter-American Development Bank has studied this phenomenon. I consider this a problematic as there is a lack of objective information around the region.


The “Report on Fintech in Latin America 2018: Growth and Consolidation”[7] –which is the most updated source extended by the organization—provides a description of the financial technology sector in the region, tacking gender issues and Fintech, the studies of the existing Fintech associations and the discussion of the Fintech’s sector’s potential for improving financial inclusion, and funding for the productive sector in Latin America. [8]

Costa Rica is the only country in Central America where (even if there is no specific regulation for Fintech transactions) the Interamerican Development Bank (IDB) has performed an ecosystem investigation. This research [9] describes the lack of regulatory provisions that the country faces, such as a lack of special regulation for fintech startups, lack of financing and capital, among other fundamental instruments that Costa Rica lacks.


But Costa Rica does not lack only of regulatory provisions. The country, as the rest of the Central American countries, lacks academic research on the necessity of certain provisions for Fintech development around the region. They lack a proposal or an exclusion of regulatory assessment for Fintech transactions. According to the Guatemalan Fintech Association, there is yet not one single publication or academic research addressing the regulatory framework for FinTech companies in Guatemala. [10]


Definitely, further research should be conducted to define the regulatory model that should be adopted for Fintech in Central America. This should be done by academics, professionals, private entities, Fintechs and public institutions. In recent years technology has unquestionably brought new development opportunities to our Markets. We must understand it: financial technology is influencing the financial industry overall. Thus, we should address the question of what the best regulatory scheme is to encourage competition and innovation, while minimizing risks and ensuring a level playing field in the region.


The rise of Fintech generates a number of concerns about its effect on the stability of the financial system as a whole. These concerns are connected with the structure of Fintech industry. Systemic risks are higher when individual actors are fragile, shocks are easily propagated, and information asymmetries are widespread. [11]

Under scope theories such as the theory of the systemic risk of decentralization, we should address whether Central American governments should provide special regulations for Fintech transactions or not. Said theory explains how, in the post-crisis era, it is assumed that “too big to fail” institutions present the greatest systemic risk to the economy. But the small size and disperse nature of the Fintech industry might raise specific systemic risks. A careful analysis of the for Fintech-specific regulation (or for its absence) shall be conducted not only by our governments but by the private institutions and associations throughout the Central American region.


Lastly, financial policy makers must take into account the international dimension on Fintech operations. Usually, regulations are drafted without close scrutiny of the long-term international consequences of particular regulatory approaches. Both private and public institutions should study and propose how to treat Fintech in Central America under the lenses of both international and community law, as Fintech transactions are typically not located in a single jurisdiction. With accurate Fintech policy, Central America can be strengthened as a region.



Notes

[1] UNSGSA FinTech Working Group and CCAF “Early Lessons on Regulatory Innovations to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes, and RegTech” Office of the UNSGSA and CCAF: New York, NY and Cambridge, United Kingdom (2019), Page 62.

[2] Please refer to the “Law to regulate fintech transactions” of the Congress of the United Mexican States, published on March 9, 2018.

[3] Guatemala, Costa Rica, El Salvador, Nicaragua, Honduras and Panamá.

[4] Ivanova, Petja “Cross-border regulation and fintech: are transnational cooperation agreements the right way to go?” Published by Oxford University on behalf of Unidroit. Unif. L. Rev., Vol. 24, 2019, 367–395, Advance Access publication: 19 June 2019, Page, 368. [5] UNSGSA FinTech Working Group and CCAF “Early Lessons on Regulatory Innovations to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes, and RegTech” Office of the UNSGSA and CCAF: New York, NY and Cambridge, United Kingdom (2019), Page 62.

[6] UN Secretary-General’s Special Advocate for Inclusive Finance for Development.

[7] IDB, IDB Invest and Finnovista Coordination: Gabriela Andrade, Daniella Kathyuska Bolaños, Andrés Fontao, Macarena Banus, and Jessica Pleguezelos “Fintech Latin America 2018, Growth and Consolidation.” Jel Code: 033.

[8] Idem. Page 2.

[9] Ernest, W., Gutiérrez, P. Schneider, C. “Fintech in Costa Rica: the evolution of financial services” IBD Monography 732.

[10] Interview to Natalia Pinzón, President of the Fintech Association of Guatemala, conducted on May 11, 2020.

[11] Magnuson, William, “Regulating Fintech,” 71 Vand. L. Rev. 1167 (2018), available at: https://scholarship.law.tamu.edu/facscholar/1256, page 1120.

About the Author

Iraida has practiced Guatemalan law for four years. Besides her legal experience, Iraida has developed technology for lawyers and public notaries in Latin America. She is currently a Project Manager for A2J Tech, a social enterprise based in Denver, Colorado. She holds a J.D. equivalent degree from Universidad Francisco Marroquín, Guatemala (2016) where she graduated cumlaude as an Attorney at law and Public Notary. She also holds an LL.M. General Master in Laws form Cornell University Law School, New York (2019). Currently, she is pursuing an MBA focused on Innovation and Strategic Technology Management from the London School of Business and Finance (2021).


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