On 17 August 2023, the Finance and Expenditure Committee published their final report on their inquiry into the current and future nature, impact, and risks of cryptocurrencies (Final Report). The Final Report sets out key recommendations for the Government, which arose out of public submissions and the research and recommendations of independent advisers. The Final Report explains that "cryptocurrencies are not necessarily the right term", as some of the new products in this space do not embody the traditional characteristics of "currencies". Therefore, the report uses the term "crypto asset" for cryptocurrencies and "digital assets" for "both cryptocurrencies and other assets that are secured and supported by blockchain technology, such as non-fungible digital tokens (NFTs)". For the rest of this article, we have also adopted this approach and use the term digital assets instead of cryptocurrencies, unless we are specifically referring to cryptocurrencies.
This article sets out the current regulatory approach to digital assets in New Zealand and key recommendations for the Government in the Final Report, signifying the direction New Zealand may take with digital assets.
How the Financial Markets Conduct Act 2013 (FMCA) currently regulates digital assets
In general, New-Zealand based platforms, which can include digital asset exchanges, brokers, wallet providers, and businesses offering initial coin offerings (ICOs), must be registered on the financial service providers register, as they will be providing a financial service by issuing or managing the means of payment, operating a money or value transfer service, and/or keeping, investing, administering, or managing money, securities, or investment portfolios on behalf of other persons. They must also belong to a dispute resolution scheme if they deal with retail clients. Financial service providers are required to comply with the fair dealing obligations in Part 2 of the FMCA (which, in summary, include not engaging in misleading or deceptive conduct nor making false, misleading, or unsubstantiated representations in relation to a financial service).
Digital assets are not specifically categorised as a financial product or a financial advice product under the FMCA. There are instances where a particular digital asset may have characteristics that meet the requirements of recognised financial products, such as derivatives, managed investment products or debt securities. This means that the disclosure obligations in Part 3, governance obligations in Part 4 and licensing obligations in Part 6 of the FMCA may apply to an issuer of that digital asset, depending on whether the asset is being offered to New Zealand retail or wholesale investors. In addition, providing a facility to enter into digital assets which are financial products, or to trade financial products between customers such as a digital asset marketplace, may constitute a "financial product market" which may require a financial product market licence under Subpart 7 of Part 5 of the FMCA.
As explained in the Final Report, where digital assets do not satisfy the criteria of the recognised forms of financial products or financial advice products, they will not be regulated under the FMCA, and the lack of safeguards may discourage New Zealanders from participating in the digital asset market due to the risks of scammers and hackers. The Final Report also explains that regulation will ensure that New Zealand keeps up with the innovation and development of digital assets, as initiatives supervised by the Government can be set up to fund research and testing.
The direction recommended by the Finance and Expenditure Committee
The key recommendations made by the independent advisers and restated by the Finance and Expenditure Committee in the Final Report are:
- The Government and regulators are recommended to address problems as they arise, as digital assets and blockchain are still in their early days of development. The Government should consult with regulators to develop guidance setting out the minimum standards for digital assets to ensure they are consistently treated under current law
- The Government should ensure that regulators (the Financial Markets Authority (FMA) and the Commerce Commission) and the public are well-informed and resourced to deal with scammers or fraudsters in the digital asset space
- The Government should ensure that MBIE consults with the FMA and industry to add a class of digital assets for investment purposes as a "financial advice product" to be captured by provisions in the FMCA relating to client-money or property services and regulated financial advice
- The Government should ensure that the FMA establishes a formal regulatory "sandbox" to enable organisations to test developments (such as new products and technologies in digital assets and digital asset services) to show that New Zealand is making progress and to help regulators stay up to date in this area
- Some other recommendations include blockchain-sprint events (where the Government creates a "cross-agency working group" comprised of several public and private organisations who consult with the digital asset industry on legal, regulatory, and technical issues), preparing yearly reports on the blockchain industry and encouraging institutions to provide more education on digital assets, blockchain and Web3
- The Government should ensure that Immigration New Zealand and other organisations consult with the industry to include persons who are skilled in digital assets and blockchain on the skills shortages list.
Please contact our financial services regulation team if you have any questions about how the recommendations in the Final Report may affect your business, or about any of the other topics mentioned in this article.