Yesterday, the Financial and Expenditure Select Committee (Committee) published its Final Report on its Inquiry into the current and future nature, impact, and risks of cryptocurrencies (Final Report). 

Partner Jeremy Muir was one of two independent advisers who prepared a report for the Committee that forms the significant second part of the Final Report, including 22 recommendations for government consideration (Advisers’ Report).

A link to the Final Report can be found here.

Who should read this? Why?

The relevance of the Final Report stretches across many industries – it is not just for financial institutions. In fact, the Final Report recommends that there should be no single primary regulator for digital assets given the spectrum of use cases, well beyond investment.

Further, the Final Report states one of its primary purposes is to release the Advisers’ Report “to the general public to facilitate more public debate on these matters”.

Submissions on the Inquiry ranged from individuals, digital asset businesses, and organisations supporting them, such as law firms, and a range of other organisations including government departments.

What does it cover?

The Final Report is split into two parts – the Officials’ Report and the Advisers’ Report.

The main takeaway from the Officials’ Report is that the Committee recommends to the Government that it consider all the recommendations set out in the Advisers’ Report, which we detail below.

The Officials’ Report also provides further comment on some of the points raised in the Advisers’ Report such as adopting a proactive approach to digital assets and a “sandbox” policy, and the use of the term ‘digital assets’ as opposed to ‘cryptocurrencies’.

The Advisers’ Report, prepared by Jeremy Muir and Alexandra Sims (Associate Professor, Commercial Law, University of Auckland), provides the Committee with a summary of the public submissions received as part of the Inquiry and a summary of the global and New Zealand industry, and key issues and regulatory approaches to cryptocurrency, digital assets and blockchain. 

Most notably, Jeremy Muir and Alexandra Sims make 22 recommendations to assist the Committee in its Inquiry (Recommendations), all of which were taken on by the Committee and put forward for Government consideration.

Definitional challenges

The Final Report discusses the challenges of the term ‘cryptocurrencies’ given the growing diversity of technologies and products in the digital space – they are not all ‘currencies’, hence the Final Report’s preferred use of the term ‘digital assets’. The Advisers’ Report helpfully unpacks the meanings of various technological terms such as blockchain and smart contracts.

The importance of increasing New Zealand’s understanding of digital assets and the industry’s nuances is supported by the Advisers’ Report recommendations for educational institutions to consider developing courses on the subject, and for the development of training and educational resources for professional bodies and Government departments among other organisations.

Recommendations

The Recommendations cover the following areas:

• Regulation;
• Industry support and development, in relation to a ‘Digital Assets Cross-Agency Working Group’, immigration and education;
• Taxation;
• Other legal issues in relation to property law, anti-money laundering and countering financing of terrorism, and decentralised autonomous organisations;
• Access to banking services; and
• Central bank digital currency (specifically, that the Reserve Bank continues with the design of such a currency).

Regulatory recommendations

The Advisers’ Report recommends the Government adopts policy settings to encourage developments in digital assets and blockchain in New Zealand, and regulation to encourage growth of the industry.

They also recommend regulations and resources to protect consumers in New Zealand, such as adding a defined class of digital assets for investment purposes as a new category of “financial advice product” (not “financial product”) to bring them into the regulated financial advice and client money-client property services regimes.

As stated above, a single regulator is not recommended due to the wide-reaching nature and uses of digital assets across society. Instead, the creation of an active sub-committee of the Council of Financial Regulators was recommended (as detailed below).

Our view

Two recommendations from Jeremy Muir and Alexandra Sims to highlight were the recommendations for the Government to direct the FMA (as lead agency) to do the following: 

• “establish a formal sandbox to allow organisations to test innovations in relation to digital assets and digital asset services. A formal sandbox signals that New Zealand is keen to facilitate the growth of this industry and would assist regulators’ knowledge of the technology, developments and ventures in this area”; and
• “create a sub-committee of the Council of Financial Regulators for digital assets and virtual asset service providers, comprising a cross-agency team…which would provide coordinated responses to issues facing the industry and contribute guidance and resource, and to the development of the industry in New Zealand”. 

The Advisers’ Report has not recommended the immediate creation of a fully integrated and consistent regulatory framework for digital assets at this stage. The New Zealand digital assets industry is still nascent – regulation should develop with the industry, while taking into account overseas positions, to ensure an adaptable and workable regime.

What next?

The digital assets and related technologies industry is ever-evolving, as demonstrated by the need for the Advisers’ Report to be updated in August 2023 after it was originally given on 28 October 2022.

As stated in the Advisers’ Report, the Recommendations are “light on “quick fix” new legislation which is likely to become out-of-date by the time it is enacted.” Watch this space to keep up with the inevitable developments within the digital asset industry and its regulation during this formative period. 

If you have any questions about the Final Report or about the legal considerations for the digital assets industry generally, please contact one of our experts.

This article was co-authored by Hannah Cross, a Law Clerk in the Financial Services team.