Regulating Cryptocurrencies in New Zealand

Abstract

Cryptocurrencies, in particular bitcoin, have captured the public’s attention. It is hard to find a person who has not heard about bitcoin, albeit blockchain, the technology that the creators of bitcoin devised, is still a mystery to most. (Blockchain is just one form of distributed ledger technology (DLT). For the sake of simplicity the term blockchain is used throughout this report.) Prior to bitcoin, people who wanted to transfer value between themselves needed to do it face-to-face or rely on trusted third parties. Even transacting face-to-face often required the use of bank notes (cash) issued by central banks – and good luck trying to get someone in New Zealand to accept Moroccan dirham for a cup of coffee. Cryptocurrencies allow people to transfer value in seconds – if using a newer cryptocurrency than bitcoin – between themselves even if they are on opposite sides of the world without using third parties: something which conventional banking systems cannot do. Not only can value be transferred, but there are considerable cost savings: a blockchain is a shared tamper-proof ledger which means the parties do not need to reconcile their records. Conventional payment systems have not caught up with the internet age. We take it for granted that we can send digital files, such as photographs and documents, across the world in seconds. Moreover, the use of cryptocurrencies goes well beyond mere transfers of value; it can transform how we transact. The provision of goods and services, including the transfer of legal title and the payment, can be done in one transaction. So compelling are the opportunities that blockchain technology allows that large corporations are already using cryptocurrencies in their operations to move value around the world and central banks are actively working on creating central bank-issued cryptocurrencies, which we refer to as CBDCs. Fears of the dangers of technology are understandable, such as the ability for criminals to use cryptocurrencies to launder money and finance terror; however, any technology can be used for good and bad. If early humans had turned their backs on fire due to the very real risk of harm, none of us would be reading this report. Indeed, criminals are using the current banking and corporate/trusts systems more than cryptocurrencies. While cryptocurrencies are tolerated in New Zealand, as they are in most countries, in practice they are difficult to obtain and use. Many New Zealand cryptocurrency exchanges, where people can purchase cryptocurrencies with New Zealand dollars (fiat currency), find it difficult to obtain bank accounts, and when they do, the exchanges’ bank accounts are often closed down. Businesses find it extremely difficult to operate without bank accounts. In turn, consumers are potentially harmed if they purchase cryptocurrencies from overseas exchanges, which may not be subject to the same level of regulatory oversight as New Zealand exchanges. The risk increases if those cryptocurrencies are stored by the overseas exchanges. Businesses that want to receive and pay in cryptocurrencies also find it difficult to obtain and keep bank accounts in New Zealand. As a result, businesses, and the resulting economic activity, migrate to those countries that are actively fostering their blockchain ecosystem. New Zealand has an opportunity to be a blockchain and financial technology (fintech) hub, which would fit well with New Zealand’s perception as a nimble, agile and innovative country. However, for New Zealand to realise its potential, change is required. Recommendations: 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. 2. New Zealand-based cryptocurrency exchanges should be encouraged, and clear and detailed guidance provided as to their anti-money laundering/counter-the funding of terrorism (AML/CFT) obligations by both the Department of Internal Affairs (DIA) and the Financial Markets Authority (FMA). That is, follow Australia’s example. 3. Greater advice and therefore protection should be provided to consumers on cryptocurrencies by the FMA, DIA and other organisations. 4. Cryptocurrency exchanges that comply with AML/CFT and other requirements must have access to bank accounts with New Zealand banks. 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. 6. GST is removed from cryptocurrencies that are used for the payment of goods and services. 7. The Inland Revenue Department (IRD) clarifies other taxation rules around the use of cryptocurrencies. 8. The IRD should accept cryptocurrencies for the payment of taxes. 9. The Reserve Bank of New Zealand (RBNZ) should trial the creation and issuance of a New Zealand CBDC. 10. Although this point goes wider than merely cryptocurrencies, New Zealand should follow countries such as the United Kingdom (UK) and Australia, and create a regulatory sandbox and ensure that the regulators work alongside fintech companies.

Keywords: cryptocurrencies, blockchain, regulation, tax, bitcoin, ethereum, smart contracts, central bank issued cryptocurrencies

JEL Classification: G20, K20,