Touchdown! NZ recommends new approach to digital assets
The New Zealand Parliament's Finance and Expenditure Committee has released a report on its Inquiry into the current and future nature, impact and risks of cryptocurrencies (the Report). The Report endorses 22 recommendations to Government prepared by independent advisors who were tasked with researching and reporting on various policy matters relating to cryptocurrency.
The Report's recommendations provide a comprehensive framework to enable New Zealand to nurture the burgeoning digital assets and blockchain sectors. The report encourages a cautious and flexible approach to regulation that evolves with the technology, suggesting that a fully integrated and consistent regulatory regime for digital assets may be premature at this stage.
This cautious approach aims to address problems as they arise rather than preemptively stifling innovation with overly strict rules. On the other hand, there is a clear focus on consumer protection with proposals to resource regulatory bodies like the Financial Markets Authority to act against bad actors in the digital asset space.
Some of the key recommendations from the Report are discussed below and include:
Recommendation 1: that the government of New Zealand adopt policy settings to encourage developments in digital assets and blockchain.
Recommendation 2: the Government and regulators create coherent and consistent guidance on the treatment of digital assets under current law.
Recommendation 4: that a best practice code or guidance with minimum standards is developed for the custody of digital assets.
Recommendation 8: that there is no primary regulator for digital assets, as digital assets cover a spectrum of use cases.
Recommendation 9-11: that there be enhanced coordination across Government to tackle policy challenges and foster the development of the industry.
Recommendations 18, 20-21: that steps be taken to address AML/CTF concerns and ensure access to banking services for organizations dealing in digital assets.
Recommendation 22: that the Reserve Bank of New Zealand continue with design work on its Central Bank Digital Currency.
The Overwhelming Message
In a measured response to the rapidly evolving digital assets landscape, New Zealand has so far adopted a “wait and see” regulatory approach. While this approach was intended to balance the risks and opportunities of digital assets, the Report indicates that New Zealand may risk missing out by being too passive.
The Finance and Expenditure Committee supported the recommendations made by the advisers which seek to encourage developments in digital asset policy, noting that regulatory uncertainty can be a barrier to the development of new products.
The Report suggests that creating a robust regulatory system may constrain future growth in the fast-changing industry, and instead there is room for consistent and informative guidance from government agencies about how existing policy applies to digital assets and associated technology.
Is “Cryptocurrency” the right term?
The Report relevantly questions whether “cryptocurrencies” is the correct term, and instead opts to refer to many of the products discussed as “digital assets” as they do not share the same characteristics as “currencies”.
This part of the Report speaks to the wider importance of increasing education and technical knowledge with respect to digital assets, not least among policy makers, but by all relevant professions.
Time for a Sandbox
The Report encourages the establishment of a regulatory sandbox for digital assets and related services. The proposal would allow innovators to test new products and services, and regulators to maintain visibility and consider policy options. The ultimate goal is to use these real-world tests to develop evidence-based, adaptive regulatory frameworks that can manage the opportunities and risks posed by rapidly advancing technologies.
The Report raises potential challenges and uncertainties that come with implementing a sandbox policy. These include defining the post-sandbox regulatory requirements and the limited scope and time for testing innovations, which may inhibit large scale testing. This notwithstanding, the Report mentions the success of similar initiatives in other countries, like the United Kingdom, to argue its effectiveness.
Decentralised Autonomous Organisations (DAO)
The report recommends that New Zealand continue to monitor international developments on legal recognition and treatment of DAOs and, in the meantime, adopt a tolerant approach to allow experimentation of new use cases.
New Zealand’s proactive approach to integrating digital assets into their economy extends to Immigration policy. The Report considers that one way integration may be accelerated is to expand the skills shortage list to include people with skills in the areas of digital assets and blockchain, promoting migration of those with these skills.
The Report refers to the Token Mapping Consultation Paper released by the Australian Treasury in February as “comprehensive” and notes that New Zealand can benefit from this without needing to conduct a similar exercise.
If adopted by Government, the Report's recommendations would position New Zealand as a front runner in terms of the country’s progressive attitude to adopting digital assets and blockchain technology. The Report contains a number of very sensible recommendations for policy action to support industry while tackling issues as they arise. With an election due in early October, it remains to be seen whether these recommendations are taken up by the next Government.