New Zealand's central bank is preparing for a future that includes the widespread use of cryptocurrencies.
Late last year, the Reserve Bank of New Zealand (RBNZ) published an issue paper, Private Innovation: Innovation, about digital currencies. The document provoked a wide discussion on the development of the cryptoactive market and how to respond to the challenges it presents.
The RBNZ received 50 submissions on its paper, and the consultation ended in April. TO summary of the presentations was recently published.
We take a look at the key concerns of those who participated in the consultation and what these concerns could mean for the acceptance of cryptocurrencies in New Zealand.
The future of money in New Zealand
The RBNZ has mapped out a near future where businesses could accept digital currencies for payments, reducing currency conversion issues for international customers. Cryptocurrencies could also be used to expedite payments to vendors or employees, particularly those abroad.
And by taking advantage of blockchain transparencybusinesses could improve trust through efficient tracking of 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.
Outlining a path for cryptocurrencies, the RBNZ pointed to the challenges of regulating organizations that are fully digital and decentralized. The bank also raised the question of how New Zealand's existing rules on money laundering and terrorist financing would apply to cryptocurrencies.
The main obstacles for cryptocurrencies
Five key themes emerged from the submissions received by the RBNZ. These central themes highlighted the concerns of regulators, businesses and everyday New Zealanders.
- A clear but flexible regulatory framework
Investigation in other markets it has shown that regulations cannot be static. Rules must evolve with technology. That being said, regulations should initially be quite prescriptive.
The New Zealand Financial Markets Authority (NZFMA) could establish 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 regulations, balancing the growth of the sector with risk management and consumer protection.
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The NZFMA could also require New Zealand residents to transact their crypto assets through New Zealand-based exchanges and thus under the country's regulations to build trust. These may relax once the market matures.
- Information and accessibility
The presentations also highlighted the need for clear, accurate and accessible information on cryptocurrencies. Some respondents expressed concern about the general lack of knowledge about cryptocurrencies and how they work.
The lesson of the collapse of the FTX digital trading platform is that New Zealand investors need to be protected, or at least aware of the risks of trading via exchanges in more lenient jurisdictions.
Risk and opportunities were also points of discussion. Respondents to the RBNZ article acknowledged the risks associated with cryptocurrencies, such as financial crime and the risk to the broader financial system.
At the same time, they saw a significant opportunity to improve competition and promote innovation in New Zealand.
Respondents supported the monitoring approach proposed by the RBNZ which underlined the principle of โsame risk, same regulationโ. This argues that if a crypto asset presents 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, thus creating a fair and balanced regulatory environment for all financial instruments, traditional or digital.
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The RBNZ has proposed to work closely with international regulators and private sector information providers: companies or organizations that provide data, analysis and information on the crypto market. This could include blockchain analytics companies, cryptocurrency exchanges, research institutions, and fintech companies.
Our own previous investigations supports the belief that external regulations are not enough. It is essential that financial intermediaries that trade crypto assets develop a corporate culture of โperformance with integrityโ, where every member of the organization is focused on the best interest of the client.
We need to monitor crypto asset businesses and make sure they have strong corporate governance. Another lesson from the FTX failure is that exchanges themselves cannot be custodians of client assets; this must be done by regulated third-party institutions.
Stablecoins, a type of cryptocurrency with a value tied to fiat currencies (a government-issued currency that is not backed by a commodity such as gold) or gold, drew interest during inquiries. Participants viewed its stability as beneficial. 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; he Terra stablecoin crash in May 2022 against the Tether resilience is testimony to this. Regulations must be very clear about the reserve assets in demand, and market supervisors must monitor these reserves very closely.
the future is digital
Although promising, the future of cryptocurrencies in New Zealand is not without its challenges. The RBNZ will need to keep a close eye on things. The central bank will have to walk a fine line between fostering new ideas and managing risk.
At the moment, the RBNZ is taking a cautious approach. While there will be no immediate policy changes, the RBNZ will improve its monitoring of the financial ecosystem, track global regulatory trends, and collaborate with financial organizations to address data gaps.
The goal should be to make sure people understand cryptocurrency, manage risk, and promote innovation. As one respondent said:
The future is digital. Let's accept it, understand it and make it work for us.
