Many new technologies are treated with fear and suspicion. The first cars were limited to a speed of four miles per hour on public highways and two miles an hour in cities, towns and villages. A person was required to walk in front of the car carrying a red flag to warn riders and drivers of horses about the oncoming vehicle. Lifts are another example. The first lifts were controlled by lift operators, who pushed buttons manually and opened and closed the doors. When operators were removed due to technological advancements, many people refused to enter lifts not staffed by them. To overcome people’s fear, first music and then a voice informing people that doors were closing and which floor they were arriving at were used. It is no wonder then, that cryptocurrencies, and the underlying technology, blockchain, are treated with fear and concern. For example, the banking system is used to launder billions of dollars a year (for almost all laundered money passes through at least one bank) and also to fund terrorism. Nevertheless, the United States (US) Department of the Treasury Under Secretary, Sigal Mandelker, singled out bitcoin, observing that “law enforcement authorities recently arrested a woman in New York who used Bitcoin to launder fraud proceeds before wiring the money to ISIS”. If one incident was sufficient to shut down an organisation, few banks, if any, would be in existence, not to mention professional industries:accountants and lawyers can unwittingly play a part in money laundering.
It is vital to remember that the use of a technology for both legitimate and criminal means is nothing new. Looking around again at mundane items, kitchen knives are a useful tool, but they can be lethal in the wrong person’s hands. As the United Kingdom’s (UK’s ) Chief Scientific Adviser observed in relation to blockchain:
As with most new technologies, the full extent of future uses and abuses is only visible dimly. And in the case of every new technology the question is not whether the technology is “in and of itself” a good thing or a bad thing. The questions are: what application of the technology? for what purpose? and applied in what way and with what safeguards?
Notwithstanding the remarkable technology that Bitcoin created, blockchain now looks relatively dated compared to new DLTs such as IOTA and Hashgraph. However, for the purposes of this report the term “blockchain” will be used as a general term to describe DLT.
Not all blockchains require payment or rewards to be made: for example, IOTA has an elegant solution and requires anyone who wishes to make a transaction to validate other transactions.
IOTA: a distributed ledgerthat uses a tangle rather than a blockchain. Principally designed to be used for IoT devices, but its applications can be a lot broader. It does not rely on the normal consensus mechanisms such as proof-of -workor proof-of -stake. Rather, to make a transaction the person has to validate two other unrelated transactions. IOTA is claimed to be resistant to quantum computers. Transactions on IOTA are free
Executive summary and recommendations
Cryptocurrencies, in particular bitcoin, have captured the public’s attention. It is hard to find a person who has not heard about bitcoin, albeit blockchain, the technology that the creators of bitcoin devised, is still a mystery to most. (Blockchain is just one form of distributed ledger technology (DLT). For the sake of simplicity the term blockchain is used throughout this report.) Prior to bitcoin, people who wanted to transfer value between themselves needed to do it face-to-face or rely on trusted third parties. Even transacting face-to-face often required the use of bank notes (cash) issued by central banks – and good luck trying to get someone in New Zealand to accept Moroccan dirham for a cup of coffee. Cr yptocurrencies allow people to transfer value in seconds – if using a newer cryptocurrency than bitcoin – between themselves even if they are on opposite sides of the world without using third parties: something which conventional banking systems cannot do.Not only can value be transferred, but there are considerable cost savings: a blockchain is a shared tamper-proof ledger which means the parties do not need to reconcile their records.Conventional payment systems have not caught up with the internet age. We take it for granted that we can send digital files, such as photographs and documents, across the world in seconds. Moreover, the use of cryptocurrencies goes well beyond mere transfers of value; it can transform how we transact. The provision of goods and services, including the transfer of legal title and the payment, can be done in one transaction. So compelling are the opportunities that blockchain technology allows that large corporations are already using cryptocurrencies in their operations to move value around the world and central banks are actively working on creating central bank-issued cryptocurrencies, which we refer to as CBDCs. Fears of the dangers of technology are understandable, such as the ability for criminals to usecryptocurrencies to launder money and finance terror; however, any technology can be used for good and bad. If early humans had turned their backs on fire due to the very real risk of harm, none of us would be reading this report. Indeed, criminals are using the current banking and corporate/trusts systems more than cryptocurrencies. While cryptocurrencies are tolerated in New Zealand, as they are in most countries, in practice they are difficult to obtain and use. Many New Zealand cryptocurrency exchanges, where people can purchase cryptocurrencies with New Zealand dollars (fiat currency), find it difficult to obtain bank accounts, and when they do, the exchanges’ bank accounts are often closed down. Businesses find it extremely difficult to operate without bank accounts. In turn, consumers are potentially harmed if they purchase cryptocurrencies from overseas exchanges, which may not be subject to the same level of regulatory oversight as New Zealand exchanges. The risk increases if those cryptocurrencies are stored by the overseas exchanges. Businesses that want to receive and pay in cryptocurrencies also find it difficult to obtain and keep bank accounts in New Zealand. As a result, businesses, and the resulting economic activity, migrate to those countries that are actively fostering their blockchain ecosystem. New Zealand has an opportunity to be a blockchain and financial technology (fintech) hub, which would fit well with New Zealand’s perception as a nimble, agile and innovative country. However, for New Zealand to realise its potential, change is required.
- 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.
- New Zealand-based cryptocurrency exchanges should be encouraged, and clear and detailed guidance provided as to their anti-money laundering/counter- the funding of terrorism (AML/CFT) obligations by both the Department of Internal Affairs (DIA) and the Financial Markets Authority (FMA). That is, follow Australia’s example.
- Greater advice and therefore protection should be provided to consumers on cryptocurrencies by the FMA, DIA and other organisations.
- Cryptocurrency exchanges that comply with AML/CFT and other requirements must have access to bank accounts with New Zealand banks.
- Merchants must be able to accept cryptocurrency payments by people or organisations for under NZD100 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.
- GST is removed from cryptocurrencies that are used for the payment of goods and services.
- The Inland Revenue Department (IRD) clarifies other taxation rules around the use of cryptocurrencies.
- The IRD should accept cryptocurrencies for the payment of taxes.
- The Reserve Bank of New Zealand (RBNZ) should trial the creation and issuance of a New Zealand CBDC.
- Although this point goes wider than merely cryptocurrencies, New Zealand should follow countries such as the United Kingdom (UK) and Australia, and create a regulatory s