How Blockchain Is Influencing 2023 Banking Landscape in Mexico

In today's Expert Contributor of MEXICO BUSINESS NEWS MAGAZINE,?Cesar Cotait Kara Jose , CEO of?Exadel , explores blockchain development in Mexico as well as three key considerations for banks regarding building a blockchain strategy.

Blockchain is no longer just a buzzword in the financial services industry — by 2030, blockchain is projected to add an?estimated US$1.7 trillion ?to the global economy.?

Not only is blockchain poised to be a major contributor to financial services markets in the coming years but it is also a pervasive trend that expands across almost all industries.?

The banking sector is the largest adopter of blockchain, accounting for?29.7% of the blockchain market value in 2020 . Behind banking, the other industries leading in blockchain market share included process manufacturing (11.4%), discrete manufacturing (10.9%), professional services (6.6%), and retail (6.0%).?

It has become increasingly evident that banks and other financial institutions must include blockchain technology in their overarching business strategies. The essential question for banks to answer in 2023 is how robust and expansive their blockchain strategy needs to be.?

In this article we explore the current state of blockchain development in Mexico, as well as three key considerations for banks to keep in mind regarding building a blockchain strategy.?

Let’s begin by examining the 2023 blockchain market in Mexico.?

State of Blockchain Markets and Development?

In June 2022, it was revealed that Bitso — a Latin American cryptocurrency exchange — had?processed US$1 billion in crypto remittances ?between the US and Mexico. This news brought worldwide attention to Mexico, as it became clear the nation was charging ahead in the cryptocurrency march.?

Currently, the?crypto segment in Mexico ?is projected to reach a value of US$309.9 million by 2023. Looking to the future, crypto revenue is expected to experience a 15.23% compound annual growth rate (CAGR) from now until 2027, by which point this revenue is estimated to reach US$546.3 million.?

Though these numbers are still well below the crypto revenue generated in the US — projected to reach US$22.71 billion in 2023 ?— the sheer volume of remittances processed between the US and Mexico showcases the potential for cryptocurrency to boost revenue and provide new economic opportunities in the Latin American nation.?

Meanwhile, Mexico is proving to be a leading innovator of blockchain development.?

Here are three of the major blockchain developments currently happening in Mexico:

1. Blockchain HACKMX:?Blockchain HACKMX ?is an initiative of the National Digital Strategy and the Ministry of Public Administration in partnership with Campus Talent Mexico. The primary objectives of this initiative are to promote government innovation in digital technologies and to improve the delivery of digital public services.?
2. Blockchain Association in Mexico:?In 2018, the?first blockchain association in Mexico ?was formed by seven key blockchain industry players — Bitso, Volabit, BIVA, GBM, Lvna Capital, ConsenSys, and Exponent Capital. Some of the key objectives of this association include establishing a set of standards for blockchain technology and providing greater public education and educational resources.?
3. Banxico CBDC:?The Central Bank of Mexico (Banxico) is?developing a central bank digital currency ?(CBDC) that is predicted to launch sometime in 2024. This development is still in the early phases, as Banxico works out the legal, administrative, and technological requirements necessary for such a currency. The launch of this CBDC could provide major financial opportunities to unbanked citizens and increase financial inclusion.?

Between the growing revenue and increasing number of both independent and government-backed blockchain projects in Mexico, banks and financial service providers must consider how they will approach building an internal blockchain strategy in 2023 and beyond.??

3 Key Considerations for Banks Adopting Blockchain Strategies in Mexico

Devising a blockchain strategy for a business is no small task. This task becomes even more complex for traditional banks that must balance their investment in new technologies with ongoing internal innovation and digital development.?

With this in mind, let’s look at three of the most crucial considerations for Mexican banks when creating a blockchain strategy:?

1. The Development of a Mexican Digital Currency

Circling back to one of the blockchain projects we discussed earlier, Banxico’s development of a CBDC is a major game-changer in the Mexican banking industry.?

Though this CBDC is not set to launch until 2024 — with?some reports ?suggesting it may be even longer until the official launch — the release of a government-backed digital currency is sure to send waves through the national economy.?

For traditional banks, one of the core considerations surrounding a CBDC is how they must update their digital infrastructures to accept, store, and process a digital currency. Since this CBDC is a product of Mexico’s central bank, it will undoubtedly come with some degree of guidance for how it can be accepted and leveraged by other financial institutions.??

However, the currency is also intended to help address financial inclusion within Mexico, bringing us to our second key consideration for traditional banks — financial accessibility.?

2. Financial Accessibility and Forced Displacement?

A lack of financial accessibility is a long-standing issue in the Mexican economy.

According to a?2022 PYMNTS report , roughly 60% of the Mexican population is unbanked. Within this group of people, Western Union reports that nearly 40 million citizens (or approximately one-third of the population) are unbanked specifically due to a distrust of traditional banks.?

Though financial inaccessibility is rampant throughout Mexico, blockchain and digital currencies are giving unbanked populations new opportunities for financial inclusion.?

Blockchain also presents new opportunities to address the problem of forced displacement in Mexico.?

Forced displacement occurs due to perpetual disasters, violence, and crimes that push populations to migrate away from specific regions. As a result, those who choose to migrate away can end up without financial security due to the lack of a bank account and inadequate identification documents.?

The?Internal Displacement Monitoring Centre ?reports that Mexico experienced 29,000 internal displacements (migrations occurring within the country) due to violence in 2021. A further 19,000 displacements occurred due to natural disasters.?

With the assistance of blockchain, both government and nonprofit organizations can improve conditions for displaced people by enabling digital identity and payment solutions. These solutions could potentially give people the means to prove their identity without official documents, as well as transfer funds to new regions and into new currencies without the use of a bank account.

3. Blockchain and Cryptocurrency Regulation

In terms of the regulatory burden for Mexican banks, blockchain resides in a legal gray area. As of January 2023, there is no official guidance regarding the use of blockchain technology as a whole in the country.?

However, the International Standards Organization (ISO) has published numerous standards on blockchain technology. Though the ISO is not a regulatory body, the standards they provide can potentially be used as guidelines for using and developing the technology in Mexico.

Current ISO blockchain standards include:

• ISO/TR 23455:2019:?An overview of smart contracts and how they work, focused primarily on the technical aspects of the technology.?Read the full abstract here .?
• ISO/TR 23244:2020:?An overview of privacy and personally identifiable information protections as they apply to blockchain technology.?Read the full abstract here .
• ISO/TR 22739:2020:?An overview of fundamental blockchain technology published in 2020.?Read the full abstract here .?
• ISO/TR 23576:2020:?A broad overview of the threats, risks, and controls related to digital asset custodians that manage signature keys for digital asset accounts (such as keys for a blockchain wallet).?Read the full abstract here .?

Despite blockchain as a whole still lacking regulation and standardization in Mexico, specific applications of blockchain technology are regulated within the nation.?

Virtual assets in Mexico, which include blockchain assets such as cryptocurrency and NFTs, are regulated by the?Law to Regulate Financial Technology Institutions , more commonly referred to as the Fintech Law. This regulation applies to crowdfunding institutions, electronic money institutions (EMIs), and sandbox model startups.?

Though the Fintech Law applies primarily to fintech organizations, it is an important piece of the legal puzzle surrounding blockchain in Mexico. Mainly, the Fintech Law provides a clearer pathway for fintech organizations to act as financial institutions when offering blockchain products or solutions.

The evident threat here is that fintechs may rise as competitors to traditional banks that have not adopted a strong strategy for blockchain.?

Final Thoughts: How Can Mexican Banks Overcome the Blockchain Challenge?

Blockchain is a highly innovative technology with many potential use cases in the banking industry.?

The key considerations regarding blockchain for traditional banks in Mexico include:??

• Blockchain provides the base technology needed to create a CBDC, giving centralized banks and government entities new opportunities to participate more in blockchain markets.
• Blockchain has the ability to address the problems of financial accessibility and forced displacement within Mexico.
• Blockchain regulation in Mexico is currently limited, leaving room for creativity and innovation — but also leaving room for greater risk and competition.??

For Mexican banks to overcome the blockchain challenge and build an effectively robust blockchain strategy, the solution lies in collaboration.

Blockchain is inherently a collaborative technology.?

With the right approach to utilizing blockchain, traditional banks can leverage the technology to forge new relationships with fintechs and blockchain developers. In turn, banks can provide tremendous new value to existing customers while also expanding their reach beyond the traditional banking system to connect with the massive number of unbanked people in Mexico.?

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