New Zealand Law Foundation Report suggests accepting cryptocurrency
A recent report published by the New Zealand Law Foundation on regulating cryptocurrencies in New Zealand suggests the regulators of the country to start taking tax in crypto and trial a CBDC.
The report, that is commissioned by the New Zealand Law Foundation and written by the University of Auckland states that cryptocurrency is here for the long haul and that New Zealand could and should envelop the assets and its underlying blockchain technology. Notably, The full report in all its 179-page glory (PDF) is so detailed that New Zealand’s government could use it as blockchain bible for their decision makers.
The report addresses some of the main criticisms of cryptocurrency and lays down 10 regulatory recommendations for the future.
Often an argument presented by the other side – that cryptocurrency is not real money. The report chose to side with cryptocurrency and states that some governments have recognized it as a money equivalent, you can buy things with crypto, while some people are being paid in crypto; it is regarded as money by many.
Though it does not meet the traditional definition of money, it is serving more or less as a similar means. So, it is suggestible that the digital asset should be considered and regulated as money.
The report argues that dubbing a certain type of technology as evil is not a right way to go. Notably, the demise of Silk Road did not dampen bitcoin enthusiasm. Moreover, things like gift cards, self-published books on Amazon and good old cash are being used to launder money much more that cryptocurrency. The report indicated that bitcoin is most definitely not anonymous.
Referring to the issue that has plagued the blockchain technology, the report asked everyone to lend the technology a chance to grow and embrace itself. The report states:
“To judge cryptocurrencies by bitcoin would be akin to dismissing powered flight because the first aeroplanes by Richard Pearse and the Wright brothers were clumsy. The technology is still maturing, and is barely one decade old, yet in tests, Red Belly blockchain has shown that it can process payments considerably faster than Visa’s network.”
The report notes that banks serve as an important buffer against downturns and widespread defaults by creditors and a threat to bank profitability hinders this buffer. In saying that, cryptocurrency is just one fintech and business development that is pushing banks for adoption. A great many sources beyond cryptocurrency pose a threat to their profit margins, opposing digital currencies is not the most sensible way to deal with it.
The report firstly clarifies that cash still remains the most popular way for tax evasion purposes. It suggests that the sensible way to collect taxes from cryptocurrency is probably to legally require appropriate taxes to be paid on cryptocurrency.
Risky for consumers
The report affirms that volatility, irreversible transactions, forgotten passwords, cybersecurity concerns and a lack of regulation do pose risks for the consumer. But at the same time, the regulatory move and the ongoing advancement in technology and ecosystem infrastructure are working on minimizing the risk and instead of pulling back we should allow the tech to move forward.
1. “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.”
Though it might be counter-intuitive for central banks, the report suggests that adding a bit of marketplace competition to currency itself might help raise the bar. It quotes an expert saying:
“The threat of competition from private monies imposes market discipline on any government that issues currency. If a central bank, for example, does not provide a sufficiently ‘good’ money, then it will have difficulties in implementing allocations. This may be the best feature of cryptocurrencies. In a world in which we can switch to Bitcoin or Ethereum, central banks need to provide, paraphrasing Adam Smith, a tolerable administration of money. Currency competition may have a large upside for human welfare after all.”
2. “New Zealand-based cryptocurrency exchanges are to be encouraged and clear guidance provided as to their AML/CFT obligations by both the DIA and the FMA (that is, follow Australia’s example).”
The report states:
“It is generally safer for individuals and businesses to deal with cryptocurrency exchanges based in New Zealand than ones based overseas. Arguably, Japan and now Australia have clearly stated the requirements for cryptocurrency exchanges in terms of AML/CFT, and they have not created a bespoke regulation as occurred in New York with BitLicense. New Zealand regulators, principally the DIA, do not need to amend their laws for cryptocurrency exchanges; rather, they need to provide more guidance on what those laws are specifically for cryptocurrency exchanges. Australia serves as a good example.”
3. Greater advice and therefore protection provided to consumers on cryptocurrencies by the FMA, DIA and other organisations.
The report notes that while the New Zealand Department of Internal Affairs (DIA) is responsible for overseeing exchanges, it does not carry any valuable cryptocurrency information for consumers.
“Despite regulators and others preferring that people do not purchase cryptocurrencies, some people will. It is preferable that those who do buy cryptocurrencies do so in ways where risk is reduced. To that end, it is preferable that New Zealander’s purchase cryptocurrencies from New Zealand exchanges rather than ones based overseas, which may not be regulated.”
It concluded that it is far better to encourage exchange growth in New Zealand to allow for better consumer protection.
4. “Cryptocurrency exchanges and blockchain businesses that comply with AML/CFT and other requirements must have access to bank accounts with New Zealand banks.”
The report reiterates that it’s easier to protect consumers close to home and the bank’s refusal to offer services to crypto companies create trouble for local start-ups. The report recommends amending the banking code of practice to include a clear reason when they drop a crypto customer, coupled with clearer exchange regulation.
5. “Merchants must be able to accept cryptocurrency payments by people or organizations for under NZD 100 or payments made through a New Zealand exchange (or an overseas exchange) that complies with AML/CFT requirements, without the merchants losing their bank accounts.”
“The banks have made it clear to a number of merchants that if they wish to accept cryptocurrencies from their customers they will lose their bank accounts. Granted, the concerns are based on AML/CFT fears, yet the same banks allow those merchants to accept cash from their customers. One way to break the impasse is to stop banks from preventing merchants accepting cryptocurrency payments made through cryptocurrency exchanges or wallets that are registered in New Zealand, or ones registered overseas that meet the same or similar standards.”
6, 7, 8. Tax stuff.
First and foremost the report suggests ending the double taxation of cryptocurrency by evoking GST applied when crypto is used to pay for things:
“This double taxation cannot be justified, even less so when Australia changed its GST on cryptocurrencies to remove GST from certain cryptocurrencies. Not all of the Australian changes should be adopted, however. Stable coins, cryptocurrencies that are backed by other currencies and assets, including fiat and other cryptocurrencies, are not GST excluded in Australia. The purpose of such stable coins is entirely for use as currencies and should also be excluded from GST in New Zealand.”
The report went on to encourage to deploy clarity around crypto tax. Furthermore, it suggested the tax office envelope cryptocurrency by accepting virtual currencies for taxes paid on cryptocurrency trading.
“Requiring the IRD to accept cryptocurrencies as payment for taxes on income gained on the trading of cryptocurrencies should have the effect of collecting more tax. For, paying tax in cryptocurrency is arguably psychologically easier than paying in fiat currency. It would also ensure that there are exchanges in New Zealand so that the IRD can use those exchanges, thus driving further economic activity in New Zealand and not offshore. In addition, for New Zealand to be seen as a progressive country, the IRD should also allow the payment of cryptocurrencies for all taxes.”
9. “The RBNZ trials and the creation and issuance of a New Zealand CBDC.”
“In one comment, the RBNZ’s paper on cryptocurrencies hinted itself rather cryptically at work on a CBDD,” it says, citing an author who wrote “work is currently underway to assess the future demand for New Zealand fiat currency and to consider whether it would be feasible for the Reserve Bank to replace the physical currency that currently circulates with a digital alternative. Over time, analysis associated with this project will filter through into the public domain.”
10. Create a regulatory sandbox
“Although wider than cryptocurrencies, New Zealand should follow countries, such as the UK and Australia, and create a regulatory sandbox to ensure that the regulators work alongside fintech companies. While one government department could be the primary sponsor, it would be advantageous for it to be a cross-agency initiative.”
“That way the regulators can see first-hand the successes and roadblocks that fintech companies are experiencing. New Zealand needs to ensure that it is not left behind other countries. As Kiwibank’s Digital Advisor Peter Fletcher-Dobson has been reported as saying, “New Zealand needs to get a move on, otherwise we’ll miss out on the massive opportunity presented by cryptocurrencies,” and “regulatory sandboxes should potentially be created.”
The report has really comprehensively put forth the pro’s and con’s of the crypto-world. Notably, not just for New Zealand, with just a few tweaks the report could be a crypto-bible for governments willing to accept the digital assets.