The Latin American Fintech ecosystem is very dynamic and Central America is no exception. According to the IDB in its recent “Fintech in Latin America and the Caribbean” Report, the Latin American and Caribbean Fintech ecosystem has grown by 112% from 2018 to date, being led by Brazil, Mexico, Colombia, Argentina and Chile. The Central American region represents only 6% of the total number of Fintech companies in Latin America. However, despite the fact that the Central American Fintech ecosystem represents a small percentage in relation to the rest of Latin America, it is notorious that the region is following the growth trends and segments that predominate, such as payments, lending and financial software. In this article we intend to provide an overview of the state of Fintech regulation in the Central American region in order to understand the ecosystem from a regulatory point of view. Below is a brief description of the state of regulation in each country.
In Guatemala there is no specific regulation applicable to Fintech’s, so all the obligations and requirements that any company in the country must comply with apply to them, especially the regulation related to the prevention of money laundering and other assets and to prevent and eradicate the financing of terrorism.
In the year 2021 the Superintendence of Banks, authority in charge of the surveillance and inspection of the entities authorized to operate within the financial system of the country issued a statement in which it informed the population that in Guatemala the only monetary unit was the Quetzal and the only entity authorized to issue banknotes and coins within the country was the Bank of Guatemala, therefore virtual currencies were not legal tender in our country.
However, in order to help potential relationships between Fintech’s and the entities that make up the country’s financial system, among which are banks, finance companies, insurance companies, surety companies, etc., the Superintendency of Banks (“SIB”) created a meeting point called “SIB Innovation Hub” through which it supports the training of Fintech’s regarding the legislation applicable to their businesses.
In recent years Honduras has experienced a growth of the Fintech ecosystem, partly due to the pandemic. Because of this, the authorities have begun to regulate certain aspects of these businesses and at the end of 2021 the National Congress approved Decree No. 83-2021. This decree creates a general legal framework to regulate the organization, operation and functioning of domestic and foreign legal entities that provide payment and transfer services. Additionally, the companies that provide these services must obtain authorization from the Central Bank of Honduras (BCH) or register in the Registry that for such purpose will be kept by said Institution. Thus, these companies will be under the surveillance of the Central Bank of Honduras (BCH) and will be subject to the supervision of the National Banking and Insurance Commission (CNBS) or the corresponding supervisory entity.
Derived from this Decree, the Central Bank of Honduras has recently issued rules and regulations to regulate the activities and other aspects related to this Decree. At the end of August 2022, the Regulation for Services Offered by Electronic Payment Service Providers (“EPSPE Regulation”) and the Regulation for Payment and Transfer Services Using Electronic Money (“INDEL Regulation”) were approved.
The EPSPE Regulation is applicable to electronic payment and transfer services offered by domestic and foreign legal entities that through technological platforms provide electronic payment and transfer services in the national territory. Likewise, the purpose of this Regulation is to facilitate and promote financial inclusion and stability. On the other hand, the INDEL Regulation regulates the organization, operation and functioning that must be observed by legal entities that provide, in the national territory, payment and transfer services using electronic money.
Regarding digital assets or cryptocurrencies, so far there is no specific regulation in the country. However, the Central Bank has stated that crypto-assets are not supported by the laws of the country and therefore any transaction carried out with them will be under the risk and responsibility of the person who carries it out.
Finally, it is important to mention that a Financial Innovation Roundtable has been promoted by the BCH and the CNBS as a space for public-private collaboration, to promote innovation and healthy competition in the provision of financial products and services, through the adoption and use of financial technology.
In El Salvador, although it is true, there is no specific regulation for Fintech’s, we can find regulations that allow this type of companies to operate with a high degree of legal certainty, among them we can mention: Bitcoin Law, Electronic Signature Law, Electronic Commerce Law, Electronic Securities Law, Law to Facilitate Financial Inclusion, reforms to the Consumer Protection Law, regarding e-commerce providers, among others.
These regulations provide Fintech’s with the necessary legal enablers to develop most of their operations. Likewise, it is worth mentioning that the Innovation Secretariat of the Presidency of the Republic in its digital agenda to be developed between 2020-2030, in its point 2.6 establishes as a priority of the Salvadoran State to accompany Fintech’s in the development of its own regulatory framework to strengthen financial services in the country, among other measures to support said sector, which has been catalogued as indispensable to increase financial inclusion in the country. In the same sense, the Financial Inclusion Policy issued by the National Council for Financial Inclusion and Education, in its point 80 and in its table number 5, establish as one of the priorities the development of the Fintech environment and the need to support such sector immediately.
Finally, as part of these efforts, the Superintendence of the Financial System in coordination with the Central Reserve Bank has created a Financial Innovation Office, as a Public Policy tool whose mission is to channel private initiatives that promote ventures based on financial technologies in the country, accelerating their adoption, in order to facilitate access and use of financial services for more Salvadorans. Similarly, there is a package of regulatory reforms within which stand out: Fintech Bill, Personal Data and Habeas Data Bill, Innovation Agency Bill, Digital Identity Bill, Bill to regulate the rest of Cryptoassets, Bill to regulate Decentralized Autonomous Organizations, Bill to regulate Decentralized Financial Operations, Bill to reform the Civil Code, Bill to reform the Commercial Code.
In Nicaragua, the Central Bank (“BCN”) published the “Regulations for Financial Technology Providers of Payment Services and Virtual Asset Service Providers” which regulates Financial Technology Providers of Payment Services, which provide payment services with digital wallets, mobile points of sale, electronic money, electronic currency trading and exchange services, fund transfer services and/or online payment gateways; and Virtual Asset Service Providers that on behalf of others perform exchange between virtual assets and fiat currencies; exchange between one or more forms of virtual assets; transfer of virtual assets; custody and/or administration of virtual assets or instruments that allow control over virtual assets; and participation in and provision of financial services related to the offering of an issuer and/or sale of a virtual asset. All providers must register with the BCN and with the Financial Analysis Unit; institutions regulated by the Superintendency of Banks and Other Financial Institutions and by the National Microfinance Commission that provide regulated services will not be required to apply for a license with the BCN, but must register and will be subject to the provisions set forth in the Regulations. In view of the growth of new technologies, a Financial Technology Providers (Fintech) Bill is currently being drafted and is being promoted by the BCN, but has not yet been promoted before the National Assembly. This bill maintains the two existing categories of providers and adds the new category of Financial Technology Service Provider of Intermediation and Financing. To date, approximately 12 institutions have registered with the BCN, including most of the banks operating in the country and Fintech companies offering different types of services. With the Regulations and the Draft Law, a favorable environment for the provision of Fintech services is being regulated in a more comprehensive manner. These regulatory initiatives allow more and more companies to venture into the Nicaraguan market.
The Fintech ecosystem in Costa Rica has shown a growing activity in recent years, which has generated interest not only from users but also from supervisory bodies.
Thus, although there are no specific regulations for this sector, such as a “Fintech Law”, laws and regulations have been issued that directly or indirectly regulate, as the case may be, the activities carried out by companies that participate in business segments that can be considered part of the Fintech ecosystem. Of particular interest are the provisions for the prevention of crimes of money laundering, financing of terrorism and proliferation of weapons of mass destruction, which must be complied with by companies engaged in payment gateways, remittance companies, credit companies that are not already supervised financial intermediaries, among others. These must comply with their registration before the General Superintendence of Financial Entities, but only for AML supervision purposes.
Another important aspect in Costa Rica is the existence of the National Electronic Payments System, SINPE, administered by the Central Bank of Costa Rica, which allows and facilitates interbank fund transfers in real time and at very low cost, even free of charge in some cases. In this system, in addition to all banking and financial entities in the country, “payment service providers” may participate, including Fintech companies engaged in activities such as those mentioned above. In order to enter and operate in the SINPE, it is necessary to register with the Central Bank by complying with the technical requirements it has, and to register with the SUGEF. The Central Bank has been open to the incorporation of Fintech companies in SINPE, and in fact there are already some actively participating.
As for digital assets or cryptocurrencies, there is no regulation. The Central Bank has been restrictive, stating that these assets are not legal tender and therefore their commercialization is done at the risk of whoever is involved.
A bill was recently submitted to the Legislative Assembly to regulate the figure of the Virtual Asset Services provider, as an obliged subject in terms of AML prevention, in line with the recommendations issued by FATF in 2021.
Finally, it is important to highlight that in April 2022 the Costa Rican authorities launched the Financial Innovation Center, which is a space for dialogue and consultation for those who wish to develop technological innovation initiatives in financial products or services, and which was created with the support of the IDB. It is expected to be a valuable point of contact in the Fintech ecosystem, helping with the understanding of the regulatory framework, information gathering and exchange.
While it is true that the challenges in the Central American region for the Fintech ecosystem are related to the size of the economies, innovation, entrepreneurship and the dynamism of the initiatives that are bringing solutions to market problems also stand out in Central American countries. Especially in Central America, as is becoming evident, there are opportunities for the development of the Fintech ecosystem. Despite the fact that the region does not have a robust regulatory framework, there is growing interest among regulators in the region in understanding the development of the ecosystem and fostering collaboration spaces, as well as promoting financial inclusion policies.