Cryptocurrencies are proving to be a headache for local and global regulators alike. In New Zealand, no decisions have yet been made on how to apply the law to these new technologies.
To help local regulators make those decisions, the Edmund Hillary Fellowship (EHF) has written a white paper with its recommendations. The paper was co-authored by a number of blockchain experts, including Coinbase co-founder Fred Ehrsam and Mark Pascall of blockchainlabs.nz.
The paper makes the case that New Zealand’s regulators should move quickly to create a legal framework for cryptocurrency and blockchain, so that we can attract overseas entrepreneurs and investors to our shores.
Thus far, few countries have a well defined regulatory environment for cryptocurrency. Switzerland, Singapore and Hong Kong are often mentioned as being ahead of the curve, but they’re the exception and not the rule.
Can New Zealand become a fast mover too?
The problem is, up till this point New Zealand has moved very slowly. Our Financial Markets Authority (FMA) has so far released just a few comments about cryptocurrency and ICOs. But those statements left investors with more questions than answers.
On the banking side, the Reserve Bank released an analytical note about cryptocurrencies last November. This paper called cryptocurrencies “not-so-funny moneys,” which tells you all you need to know about the RBNZ’s skeptical position. Meanwhile, New Zealand’s commercial banks have been cracking down on cryptocurrency businesses and offering no explanation why. So it’s fair to say our banking sector doesn’t much like the blockchain.
As for the IRD, it has been conspicuously silent so far on how cryptocurrencies should be taxed.
Clearly, there is a lot of work to be done in New Zealand to regulate this technology.
Let’s look then at the EHF paper and see what it has to offer.
One of the most interesting parts of the paper is its attempt to clarify what is meant by a “token,” the form of cryptocurrency most often used in an ICO (Initial Coin Offering). If you’re unfamiliar with ICOs, it’s when startups raise money by selling their own cryptocurrency token direct to the public. It’s not quite like owning shares though, which is partly why it’s so hard to regulate.
Basically, there are different kinds of tokens and they serve different purposes. Some tokens – and we can put Bitcoin into this category – are digital currencies. But many startups are selling tokens that aren’t designed to be currencies.
One example is the token offered recently by the controversial New Zealand ICO, Centrality (whose CEO Aaron McDonald is also a co-author of the EHF paper). Centrality describes its token, called CENNZ, as a “utility token.” This means it will be used to incentivize developers and users in Centrality’s marketplace.
The EHF paper recommends the FMA adopt a three-way classification system for blockchain tokens: currencies, securities, and assets.
In the above example, Bitcoin would be a currency while Centrality’s CENNZ would be an asset token.
I don’t fully agree with the EHF on this, because the way tokens work in the real world isn’t so cut and dried. Centrality’s token is being traded on at least one cryptocurrency exchange currently: SingularX, which Centrality partly owns. Because its token is being traded in a speculative environment, there’s a strong case to be made that CENNZ is a security as well as an asset token.
This is just one of many issues the FMA will need to grapple with. Certainly, the FMA’s current definition of a security seems inadequate when it comes to cryptocurrencies.
I should add that it’s not just the FMA and other New Zealand regulators who are struggling to define cryptocurrency. The US seems even more confused. As a recent popular tweet put it, “crypto is considered property by the IRS, money by the Treasury department, commodities by the CFTC, and securities by the SEC.”
The EHF paper has some good suggestions for the Reserve Bank. It recommends the RBNZ play a leadership role for our local banks in dealing with cryptocurrency. In particular, the Reserve Bank should “give local banks clarity as to when they can confidently onboard a legitimate blockchain business.”
That’s spot on, because so far our banks have been using the excuse of anti-money laundering laws to close down the accounts of local cryptocurrency exchanges. This has prevented many kiwi consumers from buying virtual currencies. Oddly, this hasn’t happened in Australia – even though we share many of the same banks.
Australia is also far ahead of New Zealand when it comes to taxing cryptocurrency. The EHF report notes that the Australia Tax Office “has issued three iterations of guidance on taxation of Bitcoin.” Our IRD has yet to issue anything.
So New Zealand has got a lot of work to do if we’re to catch up to the rest of the world in blockchain and cryptocurrency, let alone lead it. The Edmund Hillary Fellowship’s white paper is a good start, but now our regulators need to step up.