A central bank-issued cryptocurrency, thriving cryptocurrency exchanges and the ability for businesses to trade in GST-free cryptocurrency are needed if Aotearoa New Zealand is to enjoy the vast potential benefits from this technology, a new report finds.
Most people have heard of Bitcoin after its spectacular rise and crash, but it is just one of hundreds of cryptocurrencies – some much faster and cheaper. And cryptocurrencies are just one use of blockchain – a game-changing technology.
Based on research funded by the New Zealand Law Foundation’s Information Law and Policy Project, a team of legal and banking experts has recommended a regulatory framework for blockchain.
Their report, out today, warns against the Government attempting to ban the use of cryptocurrencies and argues the Government should instead actively support New Zealand becoming a blockchain and financial technology (fintech) hub.
“Cryptocurrencies are here to stay,” says principal researcher Alex Sims, Associate Professor of Commercial Law at the University of Auckland Business School.
“But New Zealand has fallen behind countries we like to compare ourselves with, including Australia, the United Kingdom and Japan. So now we need to live up to our reputation as nimble, agile and innovative and rapidly follow the lead of those other countries. That’s the only way we can maximise the opportunities that blockchain offers.”
There is a lot of denial about how disruptive blockchain will be, but this is not a flash in the pan. It will be more transformative than the internet.”Associate Professor Alex Sims
University of Auckland Business School
So compelling are these opportunities, countries such as Sweden and the Marshall Islands are looking to introduce their own central bank-issued cryptocurrencies. Meanwhile, large corporations such as IBM are already using cryptocurrencies to shift value around the world.
“Many New Zealand cryptocurrency exchanges, where people can purchase cryptocurrencies with New Zealand dollars, have trouble getting bank accounts, or they open accounts only for the bank to close them down,” says Sims.
“Banks say they’re taking a risk-averse stance, but in the guise of protecting consumers they may be exposing them to even greater risk, as it forces them to go offshore to buy cryptocurrencies, where they have little or no protection. In addition, the rules and procedures for setting up cryptocurrency exchanges are not as clear as they are in Australia and Japan.”
Another roadblock is that businesses that accept payments in cryptocurrencies and New Zealand exchanges are potentially subject to GST – meaning they pay GST twice, on the currency and on the goods and services.
“This double taxation cannot be justified,” says the report, authored by Sims, Dr Kanchana Kariyawasam of Australia’s Griffith University Business School and the late David Mayes, Professor of Banking and Finance from the University of Auckland Business School, to whom it is dedicated.
The authors argue that fast-moving technological advances and sensible regulation will address most concerns commonly raised about all types of currencies, including security, fluctuations in value, and potential for criminal abuse such as money laundering and financing terrorism. They point out that the UK Treasury has found that criminals use the current banking and corporate/trusts systems more than cryptocurrencies, with billions of dollars laundered through banks every year.
As well as criminal use, significant problems with the current banking system include slow transactions, high transaction fees, credit card fraud and identity theft.
“Fears about new technologies are understandable, but most technologies are not inherently ‘bad’ or ‘good’. Fire can cook and burn, knives can cut food and cut people. What matters is how the technology is used, for what purpose and with what safeguards.”
Because the blockchain that underlies cryptocurrencies is a shared tamper-proof ledger of transactions, it removes the need both for buyer and seller to reconcile their records and for middle men to co-ordinate transactions.
Beyond changing the way we pay for things, the use of cryptocurrencies in combination with smart contracts (which also utilise blockchain technology) has the potential to profoundly transform everyday commerce, Sims says.
Smart contracts are self-executing computer programmes embedded in a blockchain. Smart contracts allow for some cryptocurrencies, such as ether, to be programmed so that they can only be accepted by certain people or organisations, and the limitations can remain for a set period or forever – “something which conventional money simply cannot do”, says Sims.
Smart contracts are not limited to cryptocurrencies. They are being used, or are planned to be used, in everything from the secure storage of patient health data, clinical trials, and electronic voting to health and safety. Smart contracts can also be used to track products from source to consumer, offering unparalleled transparency around provenance, food safety, fair trade and sustainability.
“The genie is out of the bottle – there is a lot of denial about how disruptive blockchain will be, across all industries and sectors. But this is not a flash in the pan; it will be more transformative than the internet has been,” says Sims.
“While not all blockchain applications require the use of cryptocurrencies, blockchain will not reach its full potential if cryptocurrencies are unable to be used, or their use made unnecessarily difficult. The New Zealand Government has taken a hands-off approach to cryptocurrencies, when it should be actively fostering an ecosystem so that New Zealand is seen as an attractive country in which to base blockchain businesses.”
The report’s recommendations are:
- 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
- Greater advice and protection for consumers on cryptocurrencies by the Financial Markets Authority (FMA) and Department of Internal Affairs (DIA) and others
- The Reserve Bank of New Zealand (RBNZ) trials the creation and issuance of a New Zealand cryptocurrency
- New Zealand-based cryptocurrency exchanges be encouraged, with clear and detailed guidance provided as to their anti-money laundering/counter-terrorism financing obligations by both the DIA and FMA
- Cryptocurrency exchanges that comply with these safeguards must have access to bank accounts with New Zealand banks
- Merchants must be able to accept cryptocurrency payments for under NZD100 or payment through a compliant exchange
– GST is removed from cryptocurrencies used to pay for goods and services
- The Inland Revenue Department accepts cryptocurrencies for the payment of taxes
- New Zealand should follow countries such as the UK and Australia in creating a regulatory sandbox and ensure that the regulators work alongside fintech companies
Read the full report, “Regulating Cryptocurrencies in New Zealand”.
Source: The University of Auckland
Author: Associate Professor Alex Sims in the Department of Commercial Law at the University of Auckland Business School