Author: TaxDAO
On June 30, 2021, the Finance and Expenditure Committee of the New Zealand House of Representatives launched an investigation into the cryptocurrency industry, including how cryptocurrencies are created and traded, the environmental impact of cryptocurrencies, the risks faced by users and traders of cryptocurrencies, the impact of cryptocurrencies on New Zealand’s currency and financial stability, how criminal organizations use cryptocurrencies, and whether there are means to regulate cryptocurrencies through sovereign states, central banks, or multilateral cooperation. Based on extensive research and professional consultation, on August 17, 2023, the committee released a comprehensive report on the current and future nature, impact, and risks of the cryptocurrency industry – “Inquiry into the current and future nature, impact, and risks of cryptocurrencies”.
1. Existing Cryptocurrency Regulation Policies in New Zealand
The main legal basis for cryptocurrency regulation in New Zealand is the Financial Markets Conduct Act 2013. Cryptocurrency exchanges, brokers, service providers, and companies that offer initial coin offerings (ICOs) are required to register with the Financial Service Providers Register if they provide financial services such as issuing or managing payment instruments, value transfer services, acting as custodians for others, or investing in cryptocurrencies. If they deal with retail customers, they must also join a dispute resolution scheme. Financial service providers are required to comply with the fair dealing obligations in Part 2 of the Financial Markets Conduct Act 2013, including not engaging in misleading or deceptive conduct, and not making false, misleading, or unverified statements about financial services.
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Under the Financial Markets Conduct Act 2013, cryptocurrencies are not explicitly classified as financial products or financial advice products. In certain circumstances, specific cryptocurrencies may have features that meet the requirements of financial products, such as derivatives, managed investment products, or debt securities. This means that the disclosure obligations in Part 3, governance obligations in Part 4, and licensing obligations in Part 6 of the Financial Markets Conduct Act 2013 may apply to issuers of such cryptocurrencies, depending on whether the asset is offered to retail or wholesale investors in New Zealand. Additionally, providing facilities that give access to cryptocurrencies as financial products or trading financial products between clients, such as cryptocurrency markets, may constitute a “financial product market” and require a financial product market license under Part 5, section 7 of the Financial Markets Conduct Act 2013.
If cryptocurrencies do not meet the recognized standards of financial products or financial advice products, they will not be regulated under the Financial Markets Conduct Act 2013, and the lack of safeguards will increase the risks of fraud and hacking, and may hinder New Zealand’s participation in the cryptocurrency field. These issues have prompted New Zealand to conduct research on cryptocurrency regulation, with the aim of establishing a clear regulatory framework to ensure that New Zealand keeps up with the innovation and development of cryptocurrencies.
2. Main Content of the Report
The report lists some defining challenges faced by cryptocurrencies, as well as the relevant areas of emerging financial technologies and products. The nature of these new products has undergone considerable changes, and not all of them possess the conventional meaning of “currency”. Therefore, the report tends to use the term “cryptographic assets” to make the definition more diverse.
The report believes that cryptographic assets are a new type of financial product that features decentralization, anonymity, and high risk. Cryptographic assets and related technologies are used in various environments around the world and are expected to continue to develop in the future. They have already had an impact on the global economy and financial system, including payment systems, financial institutions, and investors. Due to the lack of sufficient regulation and standards, the cryptographic asset market is subject to a large amount of volatility and instability, and investors need to exercise caution.
News reports about cryptographic assets often focus on the huge price fluctuations of certain cryptocurrencies such as Bitcoin, or attention-grabbing crises such as the recent collapse of the FTX cryptocurrency exchange platform or the regulatory challenges faced by another large cryptocurrency exchange platform, Binance. These reports highlight some risks and challenges associated with cryptographic assets, but they cannot fully represent the potential impact of cryptographic assets and their related technological developments on New Zealand. Therefore, the report believes that New Zealand cannot choose to ignore these developments, especially in the context of cryptographic assets already interacting with existing legislation and regulatory frameworks. Considering that cryptographic assets and their related technologies may provide more opportunities for the technology sector, which is New Zealand’s second-largest export industry, the government must continue to work in this area and take a more proactive approach.
The report states that so far, New Zealand has taken a “wait-and-see” approach to regulating cryptographic assets. This approach aims to balance the risks and opportunities associated with emerging financial technologies, the potential recognition of the speed of technological innovation, and the regulatory agency’s understanding of new products and methods. As explained in the report, the “wait-and-see” approach does not involve issuing specific regulations or guidelines on the cryptographic asset industry to allow it to develop freely. It usually combines existing laws and regulations with close monitoring to promptly formulate regulatory frameworks to address potential risks. The goal is to avoid stifling innovation in the early stages but at the same time maintain vigilance and be prepared to take action when necessary to maintain stability.
The report points out that one more proactive approach the government can take is the “sandbox” strategy. Regulatory sandboxes are a way to promote innovation and improve regulatory oversight of emerging technologies and their potential applications. They allow innovators and regulatory agencies to collaborate in a clear and limited space without being constrained by some existing rules, reducing the burden of compliance and uncertainty, while maintaining visibility for regulatory agencies. This enables organizations to create and test new products and technological applications in an environment that balances regulatory protection for consumers with encouraging innovation. By working with innovators, regulatory agencies can increase their knowledge of the relevant technology and development in the industry. The committee recommends that the government instruct the Financial Markets Authority to establish a formal sandbox as the primary institution, allowing organizations to test innovations related to cryptographic assets and cryptographic asset services.
The report also cited the Australian Treasury’s release of the Cryptocurrency Regulatory Consultation Paper. The report does not recommend conducting foundational work in New Zealand, mainly because New Zealand can benefit from work already completed in Australia. The committee hopes to draw the government’s attention to the Australian document, encourage relevant agencies to familiarize themselves with its findings, and apply relevant lessons to their own work.
3. Evaluation and Attitudes of All Parties
The report comprehensively assesses the nature, impact, and risks of cryptocurrency assets, covering various aspects including market participants, trading platforms, payment methods, and investor protection. The report points out that the challenges posed by cryptocurrency assets include price volatility, as well as criminals using cryptocurrency for money laundering, terrorism financing, or fraud (although these issues are not unique to cryptocurrency and often occur within traditional banking systems). The report also proposes a series of policy recommendations to guide the government and regulatory agencies in promoting the healthy development of the cryptocurrency asset industry, protecting the rights and interests of investors, and improving market transparency and standardization. However, there are also issues such as insufficient depth of risk analysis, failure to assess the risk level of different types of cryptocurrency assets in detail, failure to consider the uncertainties brought by the development of new technologies and new models to the cryptocurrency asset market, and the timeliness issue acknowledged by the committee itself.
The report has received widespread attention since its release. Ben Rose, General Manager of Binance Australia, New Zealand, and the Pacific Islands, said that seeing the government’s progress in this area is exciting. “We believe that the development of cryptocurrency assets, blockchain technology, and Web3 will provide important opportunities for job creation and economic development, and this report is a step in the right direction,” he said. “Deepening the understanding of cryptocurrency assets will enhance New Zealand’s competitiveness and stimulate higher levels of innovation, which is very important for the country’s efforts to overcome the cost of living crisis and high inflation environment.” At the same time, necessary regulation is inevitable. Rose welcomes the establishment of a cross-agency working group and hopes for an opportunity to cooperate with the government on cryptocurrency asset regulation to ensure that regulatory agencies have sufficient resources to deal with bad actors in the cryptocurrency asset field and instill confidence in the safe use and wider adoption of cryptocurrency assets in New Zealand.
However, Olivier Jutel, a lecturer at the University of Otago, believes that the committee’s investigation into cryptocurrency assets is based on hype and the desire for realization, rather than reliable records of cryptocurrency assets and Web3. Jutel believes that it is commendable to include cryptocurrency exchanges and traders in taxation, registration, and reporting systems, but the committee’s cautious attitude towards establishing a unified regulatory framework is questionable. The key rhetoric used by supporters of cryptocurrency assets to deny fraud, exploitation, and environmental harm is that it is “still in the early stages,” but this is not the case. The government needs to further promote the establishment of a unified framework to prevent the risks of cryptocurrency assets from expanding and affecting the development of the entire industry.
Australia, which is adjacent to New Zealand, formally rejected the cryptocurrency bill on September 6th, citing reasons such as insufficient details and certainty in the cryptocurrency bill, differences with the government’s position, and inconsistency with international frameworks. This has raised concerns about regulatory differences and the development of the cryptocurrency industry. The New Zealand government will respond to the committee’s report on November 10th, and it is still unknown whether several recommendations in the report will be implemented. TaxDAO will continue to follow the latest developments.
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