This year’s crashing Bitcoin price has led many would-be investors to question the wisdom of jumping on the cryptocurrency bandwagon.
Now a group of legal experts has drawn attention to New Zealand’s woeful lack of preparation for this crypto revolution, criticising our hands-off regulatory approach and indifference towards the innovation thriving in this area.
In report Regulating Cryptocurrencies in New Zealand, funded by the New Zealand Law Foundation’s Information Law and Policy Project, the University of Auckland’s associate professor of commercial law Alex Sims and colleagues, argue that New Zealand is falling way behind Australia, the United Kingdom, Japan and other countries in clearing the ground for digital currencies and the services surrounding them to thrive.
“We need to live up to our reputation as nimble, agile and innovative and rapidly follow the lead of those other countries. That’s the only way we can maximise the opportunities that blockchain offers,” says Sims, a consumer and intellectual property law researcher, who has come to specialise in the legal issues surrounding the rise of cryptocurrencies and the blockchain.
The 180-page report includes ten recommendations from the researchers which, if enacted, would speed adoption of cryptocurrencies for financial transactions across the economy and the use of blockchain technology and so-called ‘smart contracts’ to authenticate, record and complete digital transactions.
A central cryptocurrency
Key among the recommendations is that the Reserve Bank develop and trial a central bank digital currency (CBDC) which would serve to legitimise widespread use of cryptocurrency alongside the New Zealand dollar.
The establishment of New Zealand-based cryptocurrency exchanges should be encouraged to avoid Kiwis having to go offshore to buy and trade coins and all merchants should be able to accept cryptocurrency payments up to $100 through trusted exchanges.
The removal of GST from cryptocurrency payments for goods and services is also recommended to remove the double taxation that currently exists and allowing individuals and businesses to pay IRD in cryptocurrency would encourage tax compliance.
Finally, the researchers call for better information and advice for consumers about cryptocurrencies to cut through the confusion surrounding them and urge regulators to work alongside financial technology companies to create an appropriate “regulatory sandbox” to govern the use of cryptocurrencies.
Encouraging the uptake of cryptocurrencies will involve taking the hassle out of buying Bitcoin and the multitude of other coins, which for New Zealand users more often than not involves trading through overseas exchanges such as Coinbase, facing international transaction fees and uncertain legal protection in the process.
Local coin exchanges have been slow to emerge, due in no small part to the hostile approach from New Zealand banks, which have shut down accounts processing financial transactions related to cryptocurrency trading where coins are exchanged for dollars.
The banks, say the researchers, are wary of the “grey area” surrounding cryptocurrency regulation and potentially breaching anti-money-laundering and funding of terrorism laws. But there’s a level of self-interest on the part of the banks too. Cryptocurrencies could potentially undermine their role as gatekeepers of people’s money - and the lucrative fees and interest that go hand in hand with that.
While New Zealand has seen a few companies emerge in the crypto space, such as MyCryptoSaver and Centrality, which in January claimed to have raised US$80 million in cryptocurrency in an initial coin offering (ICO) to fund its expansion.
But the researchers note that even the Financial Intelligence Unit of the New Zealand Police point out that cryptocurrencies have failed to take off in New Zealand to the extent they have in other countries, due to the “high levels of scrutiny from the traditional financial sector”.
“MyCryptoSaver managed only to secure a stable bank account after two previous bank accounts with different banks had been closed down and the businesses had to suspend operations for weeks while banking arrangements were sorted out,” they write.
On the other hand, banks such as ANZ, Westpac and Kiwibank are investing in blockchain technology with a view to using it to modernise their services. The blockchain is a digital ledger of transactions secured by cryptography and not requiring any trusted, centralised party to verify transactions.
Before you can expect to easily pay for your groceries with Bitcoin or buy a drink at the pub with Ethereum, the banks will have to agree to translate those payments into dollars in the bank accounts of merchants. That will require clear guidance from the Government that crypto is a legitimate way of doing business and industry support that is currently lacking.
While smoothing the way for exchanges to flourish and banks to facilitate crypto transactions would jumpstart the sector, a huge boost would come in the form of the Reserve Bank issuing its own official cryptocurrency to sit alongside the New Zealand dollar, the eKiwi if you like.
It may sound radical, but many governments are progressing down the track of implementing their own cryptocurrency. There’s no suggestion it will usurp their national currency anytime soon, but central banks risk losing control of monetary flows if cryptocurrencies that they have no direct influence on, grow in popularity.
A Reserve Bank report released last year explored the implications of cryptocurrencies, but the researchers say the Reserve Bank has “no immediate plans” to trial a central bank digital currency (CBDC). If they do go down that path as other governments are seriously considering, the researchers argue that retail banks should not be a required intermediary. In other words, you could buy your crypto directly from the Reserve Bank or complete eKiwi transactions completely independently of the Reserve Bank and the retail banks, much as people do with Bitcoin transactions now.
“Requiring holders of a New Zealand CBDC to have a bank account with either a NZ retail bank or the RBNZ would greatly reduce the utility of a NZ CBDC for cross-border payments,” they write.
The National Government showed little interest in cryptocurrency developments during its term and Labour’s efforts to grapple with disruptive technologies has been hampered through the departure of digital minister Clare Curran and shelved plans to appoint a chief technology officer.
Curran at least had signalled the coalition Government’s intention to develop oversight of the use of algorithms across government, so cryptocurrencies, the blockchain and smart contracts should equally be in its sights as a disruptive technology.
Researchers who didn’t contribute to the report welcomed its recommendations.
"The field of cryptocurrency is moving so quickly that New Zealand risks being left behind in what may become the greatest and most transformative technological innovation since the internet, unless the regulatory agencies quickly create a friendly, open, and efficient framework to support New Zealand-based cryptocurrencies,” says Stephen C Wingreen, associate professor of information systems and decision sciences at the University of Canterbury.
University of Otago School of Business senior lecturer Dr John Williams invested less than $10,000 in cryptocurrencies himself last year and says there are significant barriers to widespread adoption of cryptocurrencies for day to day financial transactions, including figuring out what to do when something goes wrong.
“Until the serious challenges of a typical consumer using cryptocurrency alongside 'normal' currency are addressed, mass adoption is unlikely. The simple truth is that no-one knows what will happen in the future. We can but try."
The University of Waikato’s associate dean of software engineering, Professor Steve Reeves, also points out that the governance of blockchains, hyped as powering replacements of everything from paper contracts to the physical lock on your front door, is still very much “up in the air”.
Still, uncertainty at a technical level shouldn’t justify the Government sitting on its hands,” he says.
“If nothing else, we should follow the recommendations of this report in order that we have home-grown expertise, both on the law and financial side, so that we can be involved in the on-going work.”
- The New Zealand Government should continue to allow cryptocurrencies to be traded as well as used for the payment of goods and services within and outside New Zealand.
- New Zealand-based cryptocurrency exchanges should be encouraged, and clear and detailed.
- Greater advice and protection for consumers on cryptocurrencies by the Financial Markets
Authority (FMA) and the Department of Internal Affairs (DIA) and others.
- The Reserve Bank of New Zealand (RBNZ) trials the creation and issuance of a New Zealand cryptocurrency.
- New Zealand-based cryptocurrency exchanges be encouraged, with clear and detailed guidance provided as to their anti-money laundering/counter-terrorism financing obligations by both the DIA and FMA.
- Cryptocurrency exchanges that comply with these safeguards must have access to bank accounts with New Zealand banks.
- Merchants must be able to accept cryptocurrency payments for under NZD100 or payment through a compliant exchange.
- GST is removed from cryptocurrencies used to pay for goods and services.
- The Inland Revenue Department accepts cryptocurrencies for the payment of taxes.
- New Zealand should follow countries such as the UK and Australia in creating a regulatory sandbox and ensure that the regulators work alongside fintech companies.