New Zealand Law Foundation says it’s time to do cryptocurrency
Among other recommendations, the report suggests that NZ start taking tax in crypto and trial a CBDC.
A recent report written by the University of Auckland and commissioned by the New Zealand Law Foundation, concludes that cryptocurrency is here to stay and that New Zealand could and should be doing more to get on the blockchain train.
The full report in all its 179-page glory (PDF) is so comprehensive that it could probably work as an adequate primer to bring a keen reader up to speed on how the technology works, to better make sense of its recommendations. It might have been intended to serve as New Zealand's blockchain bible for government decision-makers.
It concludes by addressing some of the main criticisms of cryptocurrency, and laying out 10 regulatory recommendations for the future.
It strolls through some of the main objections against cryptocurrency, many of which are the same old arguments repeated over and over again by people who should know better.
It's not money!
Actually it kind of is, the report says. People are getting paid in crypto, other governments have declared it to be a money equivalent, you can buy things with crypto and many people regard it as money.
Whether or not it meets some particular definition of money is irrelevant when it's being used as such, so it's worth considering it and regulating it as such.
Crypto is for criminals and terrorists
Nah, the report says.
It notes that the demise of Silk Road did little to dampen bitcoin enthusiasm, and that arguments about a certain type of technology being inherently evil tend not to hold much water.
It gives examples of gift cards, self-published books on Amazon and good old cash being used to launder money far in excess of what's realistically attributable to cryptocurrencies. Plus, it says, bitcoin is most definitely not anonymous.
Cryptocurrencies cannot scale
"To judge cryptocurrencies by bitcoin would be akin to dismissing powered flight because the first aeroplanes by Richard Pearse and the Wright brothers were clumsy," the report says. "The technology is still maturing, and is barely one decade old, yet in tests, Red Belly blockchain has shown that it can process payments considerably faster than Visa’s network."
Crypto may result in financial instability
Banks serve as an important buffer against downturns and widespread defaults by creditors, the report notes, so threats to bank profitability may also pose a threat to the reliability of this buffer.
At the same time, being too big to fail is also a risk to financial stability, as seen in the GFC, and cryptocurrency is just one fintech and business development that's forcing banks to adapt. Their profit margins are under threat from a great many sources beyond cryptocurrency, and tying the use of new technologies to bank profits is just not a good recipe for innovation.
It's a potentially very real problem, but it goes beyond cryptocurrency and a reflexive opposition to digital currencies isn't a sensible way of handling it.
Crypto can be used for tax evasion
The report reminds readers that cash is a thing which is still much more popular for tax evasion purposes.
Plus, the most sensible way to collect taxes from cryptocurrency is probably to legally require appropriate taxes to be paid on cryptocurrency.
Risky for consumers
Volatility, forgotten passwords, irreversible transactions, cybersecurity concerns and a lack of regulation all pose serious consumer risks, the report notes.
But between ongoing advances in technology and ecosystem infrastructure, and regulatory moves, the authors point out that moving forward helps mitigate risks more effectively than pulling back.
1. "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."
It might be counter-intuitive for central banks, but adding a bit of marketplace competition to currency itself might help raise the bar, the report suggests. It quotes an expert saying:
"The threat of competition from private monies imposes market discipline on any government that issues currency. If a central bank, for example, does not provide a sufficiently 'good' money, then it will have difficulties in implementing allocations. This may be the best feature of cryptocurrencies. In a world in which we can switch to Bitcoin or Ethereum, central banks need to provide, paraphrasing Adam Smith, a tolerable administration of money. Currency competition may have a large upside for human welfare after all."
2. "New Zealand-based cryptocurrency exchanges are to be encouraged and clear guidance provided as to their AML/CFT obligations by both the DIA and the FMA (that is, follow Australia’s example)."
"It is generally safer for individuals and businesses to deal with cryptocurrency exchanges based in New Zealand than ones based overseas. Arguably, Japan and now Australia have clearly stated the requirements for cryptocurrency exchanges in terms of AML/CFT, and they have not created a bespoke regulation as occurred in New York with BitLicense," the report says.
"New Zealand regulators, principally the DIA, do not need to amend their laws for cryptocurrency exchanges; rather, they need to provide more guidance on what those laws are specifically for cryptocurrency exchanges. Australia serves as a good example."
3. Greater advice and therefore protection provided to consumers on cryptocurrencies by the FMA, DIA and other organisations.
"Despite regulators and others preferring that people not purchase cryptocurrencies, some people will. It is preferable that those who do buy cryptocurrencies do so in ways where risk is reduced. To that end, it is preferable that New Zealanders purchase cryptocurrencies from New Zealand exchanges rather than ones based overseas, which may not be regulated."
The report also notes with a bit of surprise that the New Zealand Department of Internal Affairs (DIA), which is responsible for overseeing exchanges, does not actually have any cryptocurrency information for consumers.
The NZ Financial Markets Authority (FMA) does, "although it could be improved".
Once NZ exchanges have more regulatory guidance, customers can start being more reasonably advised to look at NZ exchanges, it says. It also takes a brief moment to point out that the FMA currently advises consumers to check whether an exchange holds their NZ dollars in a trust account, but that there's no real way for someone to actually check.
Better to encourage exchange growth in New Zealand to allow for better consumer protection, it says.
4. "Cryptocurrency exchanges and blockchain businesses that comply with AML/CFT and other requirements must have access to bank accounts with New Zealand banks."
Once again, it's easier to protect consumers close to home, and when banks refuse services to crypto companies they're not helping.
As the report notes in a previous section, it's difficult to take banks seriously when they assure everyone that it's simply part of their de-risking process, when the same excuse has, in New Zealand, previously been used with the apparent effect of undermining competition.
Practically, the report recommends amending the banking code of practice to require banks to give a clear reason when they drop a crypto customer, coupled with clearer exchange regulation.
5. "Merchants must be able to accept cryptocurrency payments by people or organisations for under NZD 100 or payments made through a New Zealand exchange (or an overseas exchange) that complies with AML/CFT requirements, without the merchants losing their bank accounts."
"The banks have made it clear to a number of merchants that if they wish to accept cryptocurrencies from their customers they will lose their bank accounts. Granted, the concerns are based on AML/CFT fears, yet the same banks allow those merchants to accept cash from their customers."
"One way to break the impasse is to stop banks from preventing merchants accepting cryptocurrency payments made through cryptocurrency exchanges or wallets that are registered in New Zealand, or ones registered overseas that meet the same or similar standards."
6, 7, 8. Tax stuff.
The report recommends ending double taxation of cryptocurrency by removing GST when crypto is used to pay for things.
"This double taxation cannot be justified, even less so when Australia changed its GST on cryptocurrencies to remove GST from certain cryptocurrencies... Not all of the Australian changes should be adopted, however. Stable coins, cryptocurrencies that are backed by other currencies and assets, including fiat and other cryptocurrencies, are not GST excluded in Australia."
"The purpose of such stable coins is entirely for use as currencies and should also be excluded from GST in New Zealand."
It also encourages more clarity around crypto tax in general, and even takes the big step of suggesting that the tax office starts accepting cryptocurrency for taxes paid on cryptocurrency trading.
"Requiring the IRD to accept cryptocurrencies as payment for taxes on income gained on the trading of cryptocurrencies should have the effect of collecting more tax. For, paying tax in cryptocurrency is arguably psychologically easier than paying in fiat currency. It would also ensure that there are exchanges in New Zealand so that the IRD can use those exchanges, thus driving further economic activity in New Zealand and not offshore. In addition, for New Zealand to be seen as a progressive country, the IRD should also allow the payment of cryptocurrencies for all taxes."
9. "The RBNZ trials and the creation and issuance of a New Zealand CBDC."
Curiously, the paper might have spilled the beans on New Zealand's central bank already trialling a central bank digital currency (CBDC).
"In one comment, the RBNZ’s paper on cryptocurrencies hinted itself rather cryptically at work on a CBDD," it says, citing an author who wrote "work is currently underway to assess the future demand for New Zealand fiat currency and to consider whether it would be feasible for the Reserve Bank to replace the physical currency that currently circulates with a digital alternative. Over time, analysis associated with this project will filter through into the public domain."
It recommends that tests continue, or start if they haven't already.
10. Create a regulatory sandbox
"Although wider than cryptocurrencies, New Zealand should follow countries, such as the UK and Australia, and create a regulatory sandbox to ensure that the regulators work alongside fintech companies. While one government department could be the primary sponsor, it would be advantageous for it to be a cross-agency initiative."
"That way the regulators can see first-hand the successes and roadblocks that fintech companies are experiencing. New Zealand needs to ensure that it is not left behind other countries. As Kiwibank’s Digital Advisor Peter Fletcher-Dobson has been reported as saying, "New Zealand needs to get a move on, otherwise we’ll miss out on the massive opportunity presented by cryptocurrencies," and “regulatory sandboxes should potentially be created."
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA