Cryptocurrencies: MPs hear the good, bad and ugly

Cryptocurrency advocates say embracing the new digital technology is a once in a generation opportunity while New Zealand's major financial regulators have adopted a more cautious approach to the controversial currency.

Tuesday, September 14th 2021, 6:17AM

by Matthew Martin

Parliament's Finance and Expenditure Committee met online recently.

Submissions to Parliament's Finance and Expenditure Committee inquiry into the current and future nature, impact, and risks of cryptocurrencies closed on September 2 with in-person online submissions starting on September 8.

Easy Crypto founder Janine Grainger says cryptocurrencies "...present a massive opportunity for NZ Inc, and should be taken seriously".

However, Grainger and other cryptocurrency advocates say they are curious as to the committee's negative terms of reference (see below) on the subject.

"The terms of reference for the committee had a clear emphasis on negative aspects (risk, environmental impact, crime etc), and only a passing reference to benefits," she says.

"Conversely, the benefits are immense. The economic benefit available to New Zealand if we position ourselves as a leader in this space is a once-in-a-generation opportunity."

She asked the committee to engage with the industry to genuinely understand the crypto space, and have open dialogue on its risks and benefits, and "...give thought to how NZ could leverage the opportunities presented by this truly revolutionary new tech, and encourage appropriate regulation that enables, not hinders innovation".

NZ Funds' chief executive Michael Lang told the committee that having a small amount of cryptocurrency in a retirement or investment portfolio makes for a better risk-adjusted portfolio than those without as it acts as a "stabiliser" because crypto-assets grow in a different cycle than traditional investment assets like shares and property.

He says KiwiSaver investments should have a wide and diversified range of investments, including those with some volatility.

Lang says one of the many uses of crypto assets is decentralised banking.

"This has the potential to provide banking services to a significant portion of the world’s population who are unbanked and, in doing so, will help relieve poverty, protect personal information, and work to prevent fraud and reduce crime."

Lang says there is considerable merit in enabling New Zealanders to access crypto assets as long-term investments by using appropriately qualified and regulated local asset managers.

"Put simply, if access to crypto assets were unduly restricted as an investment, it would place New Zealand investors at a severe disadvantage to their global peers."

However, the Reserve Bank of New Zealand (RBNZ) and the Financial Markets Authority (FMA) submissions drew attention to possible difficulties regarding the regulation of what the bank terms "crypto-assets".

The RBNZ submission focussed on "stablecoins", a subset of crypto-assets that "...have the most potential to crowd out existing forms of money".

"As such, stablecoins pose particular risks, including to monetary sovereignty and financial stability, which are central to the Reserve Bank’s mandate, in addition to market integrity, money laundering and other risks."

The bank also says popular crypto-assets such as Bitcoin exhibit a high and unpredictable volatility of exchange rates with conventional currencies.

"This volatility attracts and encourages speculation."

The FMA classifies Bitcoin as a high-risk investment and advises people to only invest in Bitcoin what they can afford to lose.

In its submission, the FMA's message to cryptocurrency investors was that cryptocurrencies are high risk and highly volatile, they’re not regulated in New Zealand, that they should use a New Zealand-based trading platform as they must be registered and belong to a dispute resolution scheme, and that crypto trading platforms and the people that use them are often the targets of hacking, online fraud and scams.

The FMA says some of the benefits include cheaper, fee-free payment options, significantly faster transactions and a diverse range of payment options, which can provide significant benefits to unbanked populations.

The committee received 266 submissions from individuals, fund managers, financial advisors, law firms, banks and regulators.

The committee's terms of reference were;

1. To inquire into, and establish the nature and benefits of cryptocurrencies:
    a. to establish how crypto-currencies are created and traded
    b. to understand the environmental impact of ‘mining’ crypto-currencies
    c. to identify risks to users and traders of crypto-currencies

2. To identify the risks crypto-currencies pose to the monetary system and financial stability, including tax implications, in New Zealand.

3. To establish how crypto-currencies are used by criminal organisations.

4. To establish whether means exist to regulate crypto-currencies, either by sovereign states, central banks, or multi-lateral cooperation.

Tags: cryptocurrency currency digital investment Easy Crypto FMA Janine Grainger Michael Lang NZ Funds