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New Zealand needs to move on from its current approach of "wait and see" when it comes to crypto-assets, the country’s Finance and Expenditure Committee has said.
A New Zealand parliamentary report on digital assets written by a cross-party set of lawmakers has called for a more proactive approach from government and regulators.
“We recommend that the government adopt policy settings to encourage developments in digital assets and blockchain in New Zealand,” the report says.
The report looks into the current and future nature, impact and risks of crypto-assets and other forms of digital assets.
Parliamentarians conclude in the report that because crypto-assets and blockchain are early in their development, government and regulatory agencies should proceed carefully.
This means not designing and implementing a fully integrated and consistent regulatory framework for crypto-assets, but instead addressing problems as they arise.
“We recommend that the government and regulators create coherent and consistent guidance on the treatment of digital assets under current law,” the report said.
However, the document is markedly warmer than other politicians and regulators internationally have been on crypto-assets.
For example, UK parliamentarians on the Treasury Select Committee said that crypto-asset use should be regulated like gambling, which was also the conclusion reached by the European Central Bank’s Fabio Panetta.
Sandbox
Lawmakers in New Zealand, meanwhile, have pitched a sandbox policy to foster the sector’s development..
Regulatory sandboxes are a way to promote innovation and improve regulators’ understanding of emerging technologies and their potential applications.
They involve innovators and regulators working alongside each other in a defined and limited space that is free from some existing rules, which means reducing the burdens of compliance and uncertainty while regulators maintain visibility over outcomes.
This would allow organisations to create and test new products and technological applications in an environment where regulatory protections for consumers can be balanced against encouragement to innovate.
"Because regulators work alongside innovators, regulators can increase their knowledge of relevant technologies and developments in the sector," the lawmakers say.
"We believe there would be merit in New Zealand adopting a formal sandbox policy for digital assets and associated technologies," the report says.
Apart from encouraging innovation, the report also says that the sandbox approach could lead to evidence-based regulatory development by enhancing regulators’ knowledge of emerging technologies.
"Digital assets and associated technologies are good candidates for a sandbox approach because of their rapidly-evolving and relatively complex nature, and the challenges these may pose for regulators," the report says.
Sandboxes have been a success in other jurisdictions. For example, the UK established a regulatory sandbox in 2016 for blockchain companies to test their innovations.
By late 2021, the sandbox had supported 43 firms with blockchain or crypto innovations to undertake live market testing.
"We note the success of the UK’s sandbox and consider that it offers valuable guidance into how a similar process could work in New Zealand."
In the EU, meanwhile, the DLT Pilot Regime entered into force earlier this year, and hopes to promote distributed ledger technology (DLT) in securities trading and settlement, and to overcome limitations and regulatory gaps in existing regulation.
More regulatory cooperation
The committee calls for the government, currently headed by Labour’s Chris Hipkins, to ensure that regulators, in particular, the Financial Markets Authority (FMA) and the Commerce Commission, are well resourced to deal with bad actors in the crypto space, and ensure consumers have confidence interacting with these assets, whether for investment, business or enjoyment.
This includes ensuring that information on crypto-asset scams is made easily available.
The committee, which is chaired by Labour’s Ingrid Leary, has also recommended that there should be no primary regulator for digital assets, as digital assets cover a spectrum of use cases, well beyond just investment.
Instead, the reports says that the FMA (as lead agency) should be directed to create a sub-committee of the Council of Financial Regulators for digital assets and virtual asset service providers.
This would comprise a cross-agency team, including the present members (FMA, Reserve Bank of New Zealand, Commerce Commission, Ministry of Business, Innovation and Employment (MBIE) and the Treasury) and the Department of Internal Affairs (DIA).
Further, the report recommends that the government should create a similar cross-agency team to lead the government’s work with the industry in developing a policy for crypto-assets in New Zealand.
At a minimum, the report suggests that this should comprise members from the FMA, the MBIE, the DIA, the Treasury, Inland Revenue, the Ministry of Justice, the Government Communications Security Bureau (GCSB), the New Zealand Police’s Financial Intelligence Unit, the Reserve Bank of New Zealand and Callaghan Innovation.
Leadership of the Digital Assets Cross-Agency Working Group should rotate between the member agencies, the report says.
Parliamentarians have further said that the industry in New Zealand, in consultation with regulators, should develop a best practice code or guidance with minimum standards for the custody of crypto-assets.
In a sign of how much of a good opportunity the committee feels crypto-assets pose, the report recommends that the country’s central bank, potentially with other regulators, develops a scheme to address due diligence requirements of banks to ensure organisations dealing with digital assets are able to access banking services.
“For organisations found to have been improperly de-banked, we recommend that the government ensure they can access banking services, whether through the bank found to have improperly de-banked them, or through a government-owned entity such as Kiwibank,” the report says.
New Zealand’s lack of action in regulating crypto means that it is beginning to fall behind neighbouring countries.
The Australian government has been looking into crypto regulation for some time, and in February published a consultation paper exploring which elements of the cryptocurrency ecosystem require additional regulation.
The paper sets out the basis for a so-called "token mapping framework". This helps explain how various crypto-assets might fit into Australia's existing regulatory frameworks.
