The future of money is digital – but NZ needs a careful framework to avoid the pitfalls of cryptocurrency

By Abhishek Mukherjee, Paresha Sinha and Paul David Richard Griffiths* van The conversation

The conversation

Huge pile of cryptocurrencies in a circle with a golden bitcoin in the middle.  Cryptocurrencies in blockchain concept.  3D illustration

The banking system is slowly bringing cryptocurrencies into the mainstream.
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Analysis – New Zealand’s central bank is preparing for a future that includes the mainstream use of cryptocurrency.

Late last year, the Reserve Bank of New Zealand (RBNZ) published an issue paper, Private Innovation: Te Auahatanga, on digital currencies. The paper sparked a broad discussion about the development of the crypto asset market and how to respond to the challenges it brings.

The RBNZ received 50 submissions to its paper and consultation ended in April. A summary of the submissions has recently been published.

We looked at the top concerns of those who took part in the consultation and what these concerns could mean for the adoption of cryptocurrencies in New Zealand.

The future of money in NZ

The RBNZ has outlined a near future where businesses can accept digital currencies for payments, reducing currency conversion issues for international customers.

Cryptocurrencies can also be used to streamline payments to suppliers or employees, especially those abroad.

And by leveraging the transparency of blockchain, companies can increase trust by efficiently tracking transactions and supply chains.

But companies will need to improve their security measures to protect against online threats and manage the potential market volatility associated with cryptocurrencies.

In charting a path for cryptocurrencies, the RBNZ pointed out the challenges of regulating organizations that are fully digital and decentralized. The bank also raised the question of how New Zealand’s existing money laundering and terrorism financing rules would apply to cryptocurrencies.

The main hurdles for cryptocurrency

Five main themes emerged from the submissions received by the RBNZ. These core issues highlighted the concerns of regulators, businesses and ordinary New Zealanders.

A clear but flexible regulatory framework

Research in other markets shows that regulation cannot be static. The rules must evolve with the technology. That said, regulations need to be pretty prescriptive to begin with.

The New Zealand Financial Markets Authority (NZFMA) could set up a regulatory “sandbox” for crypto assets, allowing companies to test their crypto-related technologies in a controlled environment under close supervision. This would encourage innovation and help shape effective regulation, balancing industry growth with risk management and consumer protection.

The NZFMA could also require New Zealand residents to trade their crypto assets through exchanges based in New Zealand and thus under the country’s regulations to develop trust. These can be relaxed once the market matures.

Information and accessibility

The submissions also highlighted the need for clear, accurate and accessible information about cryptocurrencies. Some respondents expressed concern about the general lack of knowledge about cryptocurrencies and how they work.

The lesson from the collapse of the FTX digital trading platform is that New Zealand investors need to be protected, or at least made aware of the risks of trading through exchanges in milder jurisdictions.

Risks and opportunities

Risks and opportunities were also discussed. Respondents to the RBNZ paper recognized the risks associated with cryptocurrencies, such as financial crime and the risk to the wider financial system.

At the same time, they saw an important opportunity to strengthen competition and further innovation in New Zealand.

A monitoring approach

Respondents supported the monitoring approach proposed by the RBNZ, which underlined the principle of “same risk, same regulation”. This means that if a crypto asset carries similar risks to an existing financial product, it should be regulated in a similar way.

This implies a flexible regulatory stance that evolves based on the risk profile of the asset, creating a fair and balanced regulatory framework for all financial instruments, whether traditional or digital.

The RBNZ has proposed working closely with international regulators and private sector information providers – companies or organizations that provide data, analysis and insights about the crypto market. These could include blockchain analytics companies, crypto exchange platforms, research institutions, and financial technology companies.

Our own previous research supports the belief that external regulation is not enough. It is essential that financial intermediaries trading crypto-assets develop a corporate culture of “performance with integrity”, one in which every member of the organization is focused on the best interest of the client.

We need to monitor crypto asset companies and make sure they have robust corporate governance. Another lesson from the failure of the FTX is that exchanges themselves cannot be custodians of client assets – this must be done by regulated third-party institutions.

Stable coins

Stablecoins, a type of cryptocurrency whose value is pegged to fiat currencies (a government-issued currency that is not backed by a commodity such as gold) or gold, attracted interest during consultations. Participants viewed their stability as favorable. Stablecoins were seen as combining the benefits of cryptocurrencies with the stability of traditional currencies.

However, it should be noted that stablecoins differ in risk exposure depending on the collateral they use; the crash of the Terra stablecoin in May 2022 versus the resilience of Tether is proof of this. Regulations should be very clear about the reserves requested and market regulators should monitor these reserves closely.

The future is digital

While promising, the future of cryptocurrency in New Zealand is not without its challenges. The RBNZ will have to keep a close eye on things. The central bank will have to walk a fine line between encouraging new ideas and managing risk.

For the time being, the RBNZ is taking a cautious stance. While there will be no immediate policy changes, the RBNZ will enhance monitoring of the financial ecosystem, monitor global regulatory trends and work with financial organizations to address data gaps.

The goal should be to ensure that people understand cryptocurrencies, manage the risks and promote innovation. As one respondent put it: “The future is digital. Let’s embrace it, understand it and make it work for us.”

* This article first appeared on The conversation. Abhishek Mukherjee is a lecturer in Accounting and Finance at the University of Waikato; Paresha Sinha, Associate Professor, University of Waikato; Paul David Richard Griffiths is a professor of finance; (Banking, fintech, corporate governance, intangible assets), EM Normandie.

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