Cryptocurrencies – deciphering New Zealand’s approach to regulating digital tokens

If you’re thinking about providing a financial service in relation to cryptocurrencies, it’s critical that you understand how New Zealand’s legal framework regulates such services.  In this article, we outline:

  • What cryptocurrencies are defined as according to New Zealand’s financial markets regulator, the Financial Markets Authority (FMA);
  • The ins and outs of the position that the FMA has taken in relation to cryptocurrencies, including the pieces of legislation that providers of cryptocurrency services should consider; and
  • Other important points to note if you are considering undertaking activities in New Zealand in relation to cryptocurrencies.

What are cryptocurrencies?

Cryptocurrencies are digital tokens that you can purchase through an online exchange or coin offering.  The word ‘cryptocurrency’ is a portmantaeu of the words ‘crytpographic’ and ‘currency’, and this reflects the fact that cryptocurrencies use encryption technology to control the amount of currency issued and record ownership of payments.  Bitcoin, litecoin, and ethereum are all examples of cryptocurrencies available on the internet.  It’s worth noting that cryptocurrencies fall under the umbrella definition of “digital token”, and we reference this term where appropriate below.

Cryptocurrencies do not exist physically as notes and coins.  In the eyes of the FMA, cryptocurrencies are not legal tender (in other words, money that must be accepted as payment).  When you buy cryptocurrency it is sometimes held in a digital wallet, and if you later choose to sell your cryptocurrency you can do so on a cryptocurrency exchange.  If a business or investor is looking to raise money for an online venture, that business or investor might offer digital tokens for purchase as an investment through an “initial coin offering”.

What is the FMA’s position in relation to cryptocurrencies?

Wallets, exchanges, and initial coin offerings

The FMA has advised that wallet services, exchange services, and initial coin offerings are regulated in New Zealand.  Such regulation includes but is not limited to registration as a financial services provider, subscription to a specified dispute resolution scheme, and compliance with fair dealing obligations.  If you are considering providing such a service in or from New Zealand, we recommend you seek legal advice in relation to your obligations under (for example) the Financial Service Providers (Registration and Dispute Resolution) Act 2008, the Financial Advisers Act 2008, and the Financial Markets Conduct Act 2013.

Financial products

The FMA has stated that some digital tokens might be “financial products” under the Financial Markets Conduct Act 2013.  The test to determine whether a particular digital token meets the definition of a “financial product” turns on an assessment of the specific characteristics and economic substance of that token.

In view of the FMA’s commentary, we recommend that you contact us prior to engaging in any activities that involve an offer of a cryptocurrency or digital token.  In addition, if you offer a type of financial product known as a “debt security”, in certain circumstances you could attract obligations under the Non-bank Deposit Takers Act 2013.

Reporting entities

If your proposed business meets the definition of a “reporting entity” under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, you are likely to be subject to a number of obligations designed, as the name of this piece of legislation suggests, to curb the incidence of money laundering and the financing of terrorism.

What else should I be aware of?

If you’re a buyer or seller of cryptocurrencies, it’s important to note that cryptocurrencies and the people who use them are commonly the targets of fraud or scams.  The FMA has issued a number of helpful guidelines designed to be read by any person considering investing in cryptocurrencies or digital tokens, and we include links to these articles below.

It is also important to note that the FMA has the power to declare that cryptocurrencies or digital tokens are financial products.  The corollary is that it is crucial to keep your eyes peeled for any regulations or further guidance issued in relation to cryptocurrencies or digital tokens.  Your legal adviser will be able to keep you abreast of such changes.

More broadly, New Zealand’s financial markets law is also subject to change – for example, the Financial Services Legislation Amendment Bill 291-1 (currently before New Zealand’s Parliament) proposes to make a number of changes to registration requirements for financial service providers.

We lastly point out that the FMA encourages any person considering undertaking a financial service or offering a financial product to engage with it.  If you are unsure whether your cryptocurrency services or other activities are regulated in New Zealand, we recommend that you seek advice on your proposed activities in the first instance.

Concluding remarks

In our experience, the regulation of cryptocurrencies necessitates careful consideration of the economic substance of a token and the specific features of the arrangements which you are purporting to undertake.  Though such regulation does, on its face, appear to be a complex area of law, your legal adviser will be able to step you through the legislative regimes that are applicable to your proposed activities.

Click the buttons below to read the FMA’s guidance in relation to cryptocurrencies.

FMA – Cryptocurrencies

FMA – Cryptocurrency services

FMA – Initial coin offers

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