Independent advisers to select committee crypto inquiry suggest 'coherent and consistent guidance on the treatment of digital assets under current law'

The long awaited report following a 2021 parliamentary select committee inquiry into cryptocurrencies is out, and it's recommending a cautious and careful regulatory approach featuring "coherent and consistent guidance on the treatment of digital assets under current law."

The Finance and Expenditure Committee's 112 page report features a series of recommendations from its independent advisers, lawyer and MinterEllisonRuddWatts Partner Jeremy Muir, and Associate Professor of Commercial Law at Auckland University Alexandra Sims.

In terms of regulatory frameworks, the report notes it's early days in the development of digital assets and blockchain.

"We recommend that the Government and regulatory agencies proceed carefully and do not design and implement a fully integrated and consistent regulatory framework for digital assets at this point in time. Instead, we recommend that problems are addressed as they arise. We recommend that the Government and regulators create coherent and consistent guidance on the treatment of digital assets under current law," the report says.

Muir and Sims also say they prefer the term “crypto asset” for cryptocurrencies, and “digital assets” for both cryptocurrencies and other assets secured and supported by blockchain technology, such as NFTs or non-fungible digital tokens.

The full list of recommendations is below.

Recommendations

The Finance and Expenditure Committee has conducted an inquiry into the current and future nature, impact, and risks of cryptocurrencies, and recommends that the Government take note of and consider each of the following recommendations made by the independent advisers:

Policy settings

1. We recommend that the Government adopt policy settings to encourage developments in digital assets and blockchain in New Zealand.

Regulatory frameworks

2. Because it is early in the development of digital assets and blockchain, we recommend that the Government and regulatory agencies proceed carefully and do not design and implement a fully integrated and consistent regulatory framework for digital assets at this point in time. Instead, we recommend that problems are addressed as they arise. We recommend that the Government and regulators create coherent and consistent guidance on the treatment of digital assets under current law.

Regulation and resources to protect consumers in New Zealand

3. We recommend that the Government ensure that regulators (in particular, the Financial Markets Authority (FMA) and the Commerce Commission) are well resourced to deal with bad actors in the digital asset space, and ensure consumers have confidence interacting with digital assets, whether for investment, business, or enjoyment. Information on digital asset scams is made easily available.

4. We recommend that the digital assets industry in New Zealand, in consultation with regulators, develops a best practice code or guidance with minimum standards for the custody of digital assets.

5. We recommend that the Government direct the Ministry of Business, Innovation and Employment (MBIE), in consultation with the FMA and the industry, to use its regulation-making powers to add a defined class of digital assets which are used for investment purposes as a new category of “financial advice product” (but not, to be clear, a new “financial product”) to bring them into the regulated financial advice and client money–client property services regimes.

Regulation to encourage industry growth

6. We recommend that the Government adopt a technologically neutral approach to regulation of the digital asset space, tailoring measures in relation to digital assets and related services and technology as required to deal with material risks associated with them.

7. We recommend that the Government direct the FMA (as lead agency) to 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.

Primary regulator role

8. We recommend that there should be no primary regulator for digital assets, as digital assets cover a spectrum of use cases, well beyond investment.

9. We recommend that the Government direct the FMA (as lead agency) to create a sub-committee of the Council of Financial Regulators for digital assets and virtual asset service providers, comprising a cross-agency team, including the present members (FMA, Reserve Bank of New Zealand, Commerce Commission, MBIE and the Treasury) and the Department of Internal Affairs (DIA). The group would be active and provide coordinated responses to issues facing the industry and contribute guidance and resource, and to the development of the industry in New Zealand.

Digital Assets Cross-Agency Working Group

10. We recommend that the Government direct the creation of a cross-agency working group (Digital Assets Cross-Agency Working Group) to lead the Government’s work with the industry in developing a policy for digital assets in New Zealand. At a minimum, this should comprise members from the FMA, MBIE, DIA, the Treasury, Inland Revenue, the Ministry of Justice, the Government Communications Security Bureau (GCSB), the New Zealand Police’s Financial Intelligence Unit, the Reserve Bank of New Zealand, and Callaghan Innovation. We recommend that the leadership (chair) of the Digital Assets Cross-Agency Working Group should rotate between the member agencies.

“Blockchain-sprints”

11. We recommend that the Digital Assets Cross-Agency Working Group hold “blockchain-sprint” equivalent or similar events to develop new ideas and strategies for industry growth.

Holding to account and assessment of progress

12. We recommend that the Government, via Callaghan Innovation, appoint an independent person or organisation to prepare a yearly report on the blockchain sector in New Zealand for the next six years.

Immigration

13. We recommend that the Government direct Immigration New Zealand and related departments, in consultation with industry, to continue to expand where necessary the skills shortages list to include persons with skills in the areas of digital assets and blockchain more generally.

Education

14. We recommend that secondary and tertiary educational institutions consider developing courses in relation to digital assets, blockchain, and the broader Web3 context, as part of a wider focus on technology (and its place in New Zealand’s future).

15. We recommend that the Government and the digital assets industry in New Zealand develop training and educational resources, including:

a) professional bodies, such as accountants and lawyers to ensure their members receive the necessary training in relation to blockchain and digital assets

b) Te Kura Kaiwhakawā (Institute of Judicial Studies) to ensure that judges receive training in blockchain and digital assets

c) training in blockchain and digital assets to be made available to government departments with a number of people within each agency receiving training

d) financial dispute resolution schemes to train their staff in relation to disputes involving blockchain and digital assets.

Taxation

16. We recommend that Inland Revenue explore, in consultation with the digital assets industry in New Zealand, whether tax incentives for digital asset service providers are necessary or appropriate, in addition to continuing work to provide clarity around the treatment of digital assets within the tax system, to encourage investment of capital in New Zealand, as well as enhance the competitiveness of the New Zealand tax system.

Other legal issues

17. We recommend that MBIE explore whether a legislative intervention as proposed by the UK Law Commission in its initial consultation should be adopted in New Zealand to remove uncertainty through the creation of:

a) a third category of personal property (“data assets”)

b) an innocent acquisition rule

c) a general pro rata shortfall allocation rule for comingled holdings of cryptotokens when a custodian becomes insolvent.

Anti-money laundering and countering financing of terrorism

18. In assessing its response to the issues raised in the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act) review, and in consultation with the proposed Digital Assets Cross-Agency Working Group and industry, we recommend that the Ministry of Justice’s continuing process of amendments to the AML/CFT Act and regulations and guidance balances combatting genuine moneylaundering and terrorism financing risks against the threats to innovation and industry of overly strict rules. Without an appropriate balance, overly strict rules threaten innovation and industry in New Zealand as businesses wishing to use digital assets (such as tokens) may relocate to other jurisdictions where rules are clearer or more light-touch.

Clear territorial application rules are also needed to ensure cross-border commerce is easy for overseas businesses regulated for AML/CFT in their home jurisdictions, where those jurisdictions follow the same FATF principles as New Zealand.

Decentralised autonomous organisations (DAOs)

19. We recommend that the proposed Digital Assets Cross-Agency Working Group monitor closely international developments on the legal recognition and treatment of decentralised autonomous organisations (DAOs) and be ready to move quickly (as a “fast follower”) if a consensus emerges. In the meantime, we recommend that regulators should (whether through a sandbox or otherwise) be patient and tolerant with industry “hacking” existing structures to explore the use cases for DAOs.

Access to banking services

20. We recommend that the Reserve Bank (either alone or as part of the Digital Assets Cross-Agency Working Group) develop a scheme for the New Zealand context to address due diligence requirements of banks to ensure organisations dealing with digital assets are able to access banking services.

21. For organisations found to have been improperly de-banked, we recommend that the Government ensure they can access banking services, whether through the bank found to have improperly de-banked them, or through a government-owned entity such as Kiwibank.

Central bank digital currency

22. We recommend that the Reserve Bank continue with design work on its central bank digital currency.

*Muir featured in an episode of interest.co.nz's Of Interest podcast last year: Why there's no silver bullet law for the crypto & blockchain industry.