New Zealand Finance and Expenditure Council Report:A new milestone in the development of crypto assets？

On June 30, 2021, the Finance and Expenditure Committee of the New Zealand House of Representatives launched an inquiry into the crypto asset industry. The investigation examined the process by which crypto assets are created and traded, the environmental impact of crypto assets, the risks faced by users and traders of crypto assets, the impact of crypto assets on New Zealand's monetary and financial stability, the ways in which crypto assets are used by criminal organizations, and whether means exist to regulate crypto assets through sovereign states, central banks or multilateral cooperation. Based on extensive research and professional consultation, on August 17, 2023, the Commission released a comprehensive report on the crypto asset industry: Inquiry into the current and future nature, impact, and risks of cryptocurrencies.

New Zealand's existing regulatory policy on crypto assets

The main legal basis for the regulation of crypto assets in New Zealand is the Financial Markets Conduct Act 2013. Crypto asset exchanges, brokers, service providers and businesses offering initial coin offerings (ICOs) are required to register with the financial service provider registry if they will provide financial services such as issuing or managing payment methods, value transfer services, representing others for safekeeping, and investing in cryptographic assets. If they deal with retail customers, they must also join a dispute resolution program. Financial services providers must comply with their fair dealing obligations under Part 2 of the Financial Markets Conduct Act 2013 (including not engaging in misleading or deceptive conduct and not making false, misleading or unsubstantiated statements about financial services).

Under the Financial Market Conduct Act 2013, crypto assets are not explicitly classified as financial products or financial advisory products. In some cases, specific crypto assets may have characteristics 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 of the Financial Markets Conduct Act 2013, the governance obligations in Part 4, and the licensing obligations in Part 6 may apply to the issuer of the crypto asset, depending on whether the asset is offered to New Zealand retail or wholesale investors. In addition, facilities providing access to crypto assets as financial products or trading financial products between clients, such as crypto asset markets, may constitute a "financial product market" and require a financial product market license under Section 7 of Part 5 of the Financial Market Conduct Act 2013.

If crypto assets do not meet the standards of a recognized form of financial product or financial advisory product, they will not be regulated under the Financial Market Conduct Act 2013. The lack of safeguards will increase the risk posed by scams and hackers, and could hinder New Zealand's participation in the crypto asset space. This series of issues has also prompted New Zealand to launch a study on the regulation of crypto assets, hoping to ensure that New Zealand keeps up with the innovation and development of crypto assets by building a clear regulatory framework.

Main contents of the report

The report lists some of the defining challenges faced by cryptocurrencies, as well as related areas of emerging financial technologies and products. There is considerable variation in the nature of these new products, and not all of them have the characteristics of "money" in the ordinary meaning. Therefore, the report prefers to use the term "crypto asset", which makes the definition more diverse.

According to the report, crypto asset is a new type of financial product with characteristics such as decentralization, anonymity and high risk. Crypto assets and related technologies are used in many different contexts around the world and are expected to continue to evolve in the future. And it's already having an impact on the global economy and financial system. However, due to the lack of adequate regulation and norms, there is a lot of volatility and instability in the crypto asset market, which investors need to be cautious about.

News stories about crypto assets tend to focus on the huge price swings, or high-profile crises, of certain cryptocurrencies like Bitcoin. These reports demonstrate some of the risks and challenges associated with crypto assets, but they do not fully represent the impact that crypto assets and their associated technological developments could have on New Zealand. As such, the report argues that New Zealand cannot choose to ignore these developments, especially in the context of crypto assets already interacting with existing legislative and regulatory frameworks. Considering that the development of crypto assets and related technologies may provide additional opportunities for the technology sector, which is New Zealand's second largest export industry, it is imperative that the government continue to work in this area and adopt a more proactive approach.

The report argues that New Zealand has so far taken a "wait and see" approach to regulating crypto assets. This approach aims to balance the risks and opportunities associated with emerging financial technologies, the potential recognition of the pace of technological innovation, and the related needs of regulators' understanding of new products and methods. As explained in the report: A "wait and see" attitude does not involve issuing specific regulations such as guidelines on the crypto asset industry to allow it to develop freely. It typically combines existing laws and regulations with close monitoring to develop a timely regulatory framework that addresses potential risks. The aim is to avoid stifling innovation at an early stage, but at the same time remain attentive and ready to act if needed to maintain stability.

One way the report says governments can be more proactive is through a "sandbox" strategy. The regulatory sandbox is a way to promote innovation and improve regulators' oversight of emerging technologies and their potential applications. They allow innovators and regulators to work with each other in a clear, limited space, unencumbered by some existing rules. This measure reduces the burden of compliance and uncertainty while ensuring regulators' visibility into the results. This enables organizations to create and test new products and technology applications in an environment that balances regulatory protection for consumers with encouraging innovation. As regulators work together with innovators, regulators can increase their knowledge of relevant technologies and developments in the industry. The Committee recommends that the Government instruct the Financial Markets Authority as the lead agency to establish a formal sandbox to enable organisations to test innovations related to crypto assets and crypto asset services.

The report also cites the Australian Treasury's release of a regulatory consultation paper on crypto assets. The report does not recommend that basic mapping work be carried out in New Zealand, mainly because New Zealand could benefit from the work already done in Australia. The Committee wishes to draw the attention of the Government to the Australian paper and encourages relevant agencies to familiarize themselves with its findings and apply relevant lessons to their own work.

 The evaluation and attitude of all parties

The report provides a comprehensive assessment of the nature, impact and risks of crypto assets, covering various aspects such as market players, trading platforms, payment methods, investor protection and more. The report notes that challenges posed by crypto assets include price volatility and the use of cryptocurrencies by criminals to launder money, finance terrorism or commit fraud (although these issues are not unique to cryptocurrencies and often occur within the traditional banking system). The report also makes a series of policy recommendations. We hope to guide the government and regulators to better promote the healthy development of the crypto asset industry, protect the rights and interests of investors, and improve the transparency and standardization of the market. However, there are also problems such as insufficient depth of risk analysis, lack of detailed assessment of the degree of risk of different types of crypto assets, failure to take into account the uncertainty brought by the development of new technologies and new models to the crypto asset market, and including the timeliness of the committee's own recognition.

The report received widespread attention after its release. Ben Rose, Binance's regional general manager for Australia, New Zealand and Pacific Islands, said it was heartening to see the progress the government was making in this area. "We believe that the development of crypto assets, blockchain technology and Web3 will provide significant opportunities for job creation and economic development." "This report is a step in the right direction," he said, adding that "a greater understanding of crypto assets will enhance New Zealand's competitiveness and spur higher levels of innovation, which will be important as the country struggles to emerge from the cost of living crisis and high inflation environment." At the same time, necessary regulation is inevitable. Rose welcomed the formation of an interagency working group and hoped for the opportunity to work with the government on regulation of crypto assets. The regulator should be adequately resourced to tackle bad actors in the crypto asset space and give the public confidence in the safe use and increased adoption of crypto assets in New Zealand.

But Olivier Jutel, a lecturer at the University of Otago, believes the commission's investigation into crypto assets is based on hype and wish fulfilment, rather than a solid track record of crypto assets and Web3. Jutel believes that the inclusion of cryptocurrency exchanges and traders in the tax, registration, and reporting regime is commendable, but the committee report's caution about establishing a consistent regulatory framework is worthy of scrutiny. The key rhetoric that proponents of crypto assets use to deny fraud, exploitation, and environmental harm is that "it's still early days." However, the government needs to further promote the establishment of a consistent framework to prevent the risk of crypto assets from growing and affecting the development of the entire industry.

Australia, which neighbors New Zealand, formally rejected the crypto asset bill on September 6 on the grounds that it did not provide enough detail and certainty, was different from the government's position, and was inconsistent with the international framework. This has raised concerns about regulatory differences and the development of the crypto asset industry. The New Zealand government is due to respond to the commission's report on 10 November, and it is unclear whether a number of its recommendations will be implemented. TaxDAO will keep up with the latest developments.