Regulating Cryptocurrencies in New Zealand
In September 2018 the Law Foundation published its report on cryptocurrencies. You can access the report by clicking here.
The report is lengthy. It canvases a number of aspects, in relation to both cryptocurrencies and blockchain more generally. This includes:
- the mechanics of cryptocurrencies and blockchain;
- a history of money and the evolution of cryptocurrencies;
- countries looking at a central bank issued cryptocurrency;
- the various arguments that other commentators have put forward against the use of these technologies;
- problems faced by some cryptocurrency businesses, such as the closing of bank accounts.
The report also contains an interesting section on the limitations of the current banking payment systems and how cryptocurrencies could solve them. The limitations discussed include high transaction costs, slow transaction times, lack of access to banking systems, identity theft and credit card fraud, slow rate of innovation, fragility in the banking system and money laundering.
Legal aspects of cryptocurrencies and blockchain technology
There are two main legal topics covered by the report.
The first is some discussion of smart contracts. The report provides examples of situations smart contracts are being used in already and dispels some myths, such as how the parties can address liability if the code cannot be altered (ie through the courts). The report also discusses how programming can be used to introduce a discretion to one party to deal with minor breaches (eg where a payment date is missed).
However, the primary legal content of the report covers what the current and proposed legal treatments of cryptocurrencies are in various jurisdictions (including Australia, UK, USA, Canada and Japan). For New Zealand, the discussion is mainly focused on the tax treatment of cryptocurrency transactions and GST, with some short comments on anti-money laundering and financial regulation.
The report concludes with a number of recommendations. These include:
- continuing to regulate cryptocurrency exchanges in relation to anti-money laundering, but proposing that better guidance on obligations is made available to those wanting to operate such exchanges;
- the provision of detailed guidance to enable exchanges and advisers to determine whether a particular blockchain token is a financial product;
- that exchanges and blockchain businesses that comply with anti-money laundering and other relevant regulations are not denied access to bank accounts with New Zealand banks, possibly introducing a simplified regime for the regulation of exchanges;
- that merchants be able to accept cryptocurrency payments without losing their bank accounts;
- removal of GST from cryptocurrencies used to pay for goods and services, the clarification of other taxation rules and a suggestion that the IRD accept cryptocurrencies to pay taxes;
- that the Reserve Bank create and trial a centrally backed cryptocurrency.
The report also proposes that New Zealand should follow the UK and Australian lead to create a regulatory sandbox to ensure that regulators work alongside fintech companies.
In summary, we think the report is extremely useful for those wanting to understand how blockchain and cryptocurrencies work, and seeing the approach that some of our key trading partners are taking in this area. What remains to be seen is what response the Government will give to the report, particularly whether it will take up any of the recommendations made or will continue with its current hands-off approach in this area.
If you want any further information on any of these matters please get in touch with your usual Lane Neave contact or a member of Lane Neave’s corporate team.
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