No timeframe for select committee report to parliament following 2021 cryptocurrency inquiry with eyes on first US whole-of-government strategy

The parliamentary select committee that held an inquiry into cryptocurrencies, or crypto-assets, in 2021 is likely to report to parliament on the inquiry. However, it's not clear when.

Parliament’s Finance and Expenditure Select Committee last year held an inquiry into "the current and future nature, impact, and risks of cryptocurrencies." Initiated on June 30, submissions closed on September 2.

"It is likely that the Committee will make a report to parliament eventually, but there is no specific time line," Duncan Webb, committee chairman and Labour MP for Christchurch Central, says.

The terms of reference for the inquiry were:

• To inquire into, and establish the nature and benefits of cryptocurrencies:
• To establish how crypto-currencies are created and traded.
• To understand the environmental impact of ‘mining’ crypto-currencies.
•  To identify risks to users and traders of crypto-currencies.
• To identify the risks crypto-currencies pose to the monetary system and financial stability, including tax implications, in New Zealand.
• To establish how crypto-currencies are used by criminal organisations.
• To establish whether means exist to regulate crypto-currencies, either by sovereign states, central banks, or multi-lateral co-operation.

Not regulated

In its submission to the Committee the Financial Markets Authority (FMA), which regulates New Zealand’s financial markets, pointed out it doesn't regulate cryptocurrencies. However, some cryptocurrency activities can fall within the FMA's regulatory remit.

The FMA says it only regulates cryptocurrency issuers or service providers, such as exchanges, to the extent they are issuing cryptocurrencies that are financial products, or if they are in the business of providing a financial service.

"As a general observation, most offers of cryptocurrencies and most cryptocurrency exchanges deliberately structure themselves to operate outside of the reach of mainstream markets or securities regulation," the FMA says.

"There has not been a regulated offer of cryptocurrencies yet in New Zealand nor is there a regulated financial product market here. We have however seen a number of offers made in other jurisdictions that may have been taken up by people in New Zealand. The regulatory protections available in such circumstances are very minimal," the FMA says.

US unveils whole-of-government strategy

Earlier this month US President Joe Biden issued an Executive Order on Ensuring Responsible Development of Digital Assets. As MinterEllisonRuddWatts partner Jeremy Muir puts it, the order outlines the first ever US whole-of-government strategy to address the risks, and harness the potential benefits, of digital assets and their underlying technology.

Muir, an external adviser to the NZ Select Committee in relation to its inquiry, describes Biden's order as marking a turning point towards a more coherent US federal response to the digital asset industry, including cryptocurrencies. 

"The proposed approach in prioritising the research and development of policies to address risks and benefits of digital assets should prompt other states, including New Zealand, to do the same. This is particularly important given questions raised by digital assets have cross-border aspects and implications and the US has signalled they intend to reach out and work with international partners to promote robust standards and a level playing field," says Muir.

"It is significant that the US Executive has formally acknowledged the rapid growth of and potential benefits of adopting digital assets into the mainstream financial system. Players in the crypto industry can expect to see more engagement, action from regulators on gaps in the law, and clarity in the coming months and years, and can move to take full advantage of the opportunities."

"The timing of the Order is also pertinent as governments globally come to terms with the role of digital assets in geopolitical conflict in the context of the imposition of sanctions against Russia. In New Zealand, the Russia Sanctions Act 2022 even goes as far as to identify cryptocurrencies as a type of asset, and a service relating to cryptocurrency as a type of service, which the Governor General can designate to be targeted by sanctions," Muir says.

"In particular, the Order outlines the US' desire to reinforce leadership in the global financial system and safeguard national security tools like sanctions and anti-money laundering frameworks."

Central Bank Digital Currency being assessed

Muir also points out the Order places urgency on research and development of a US Central Bank Digital Currency (CBDC), should it be deemed in the national interest. 

"The Order directs the US government to assess the technological infrastructure and capacity needs for a US CBDC in a manner that protect Americans’ interests. Also, the Order encourages to the Federal Reserve to continue its efforts for a US CBDC and develop plans for broader US governmental action to support their work so the US can participate in experiments with other countries and promote its leadership internationally on CBDC development," says Muir.

"The direction to the Federal Reserve in relation to a CBDC also resonates in the context of our own Reserve Bank of New Zealand’s announcement that it has commenced design work on an NZ CBDC."

"Finally, as our Finance & Expenditure Select Committee ponders the extensive submissions it has recently received in relation to its enquiry into cryptocurrencies and considers how to frame its report to Parliament, the calls to action of our international friends, including Australia in its October 2021 report here, and now the US, can help lay the groundwork for New Zealand’s regulatory response in this increasingly important area," Muir adds.

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