Virtual asset advisory

The world of cryptocurrency saw more controversy this year with NFT markets collapsing, Sam Bankman-Fried being found guilty of a range of charges that could land him in prison for over 115 years, and Binance - the world’s largest exchange - agreeing to one of the biggest settlements in US history after violating anti-money laws and sanctions violations, by allowing terrorist groups to trade on its platform. And so cryptocurrency’s renaissance begins … Despite all the negativity, most cryptocurrency markets are up year on year in terms of price appreciation. This could be for a variety of reasons - speculation, artificial unregulated markets, or the maturity of the cryptocurrency industry increasing the confidence in the underlying asset. One element fuelling the fire of cryptocurrency markets is institutions looking to create financial products that allow traditional investors to get a piece of the virtual currency pie. Some of these include cryptocurrency spot exchange-traded funds (ETFs) or even the ability to gain crypto exposure in KiwiSaver. A cryptocurrency spot ETF is a type of investment fund designed to directly track the price of digital currencies like Bitcoin for example. It is a regulated and stock exchange-traded product, which means it is subject to oversight by regulatory authorities. In the U.S. this is the Securities and Exchange Commission (SEC), and would be the Financial Markets authority (FMA) if such a product was ever to launch on the NZX. Spot ETFs are typically structured to hold actual cryptocurrency, and investors buy and sell shares of the ETF which should mimic the spot prices of the cryptocurrency. Other opportunities already exist for New Zealand investors with the highest-performing KiwiSaver in terms of short-term (last 12 months) returns through Kouras’s Carbon Neutral Cryptocurrency Fund, with a one-year return of 66.52%. This fund invests in institutional investments that have direct bitcoin exposure. Allowing KiwiSaver investors to put up to 10% of their portfolio into this. It is definitely for those with a more aggressive growth strategy with the fund's Statement of Investment Policy and Objectives (SIPO) outlining the fund “is only appropriate for investors that have a very long investment horizon and who are willing and able to withstand significant volatility. The Fund is expected to deliver a 50% loss every 1-2 years.” While these developments demonstrate how the industry is maturing, this evolution contradicts the founding principle of cryptocurrency: decentralisation. Bitcoin and other digital currencies were never intended to become investment assets sold on a stock exchange, unlike these newer products which rely on centralised institutions controlling and holding large amounts of cryptocurrency. It’s time to start regulating the renaissance All of this points to a growing imperative for regulatory intervention. A hybrid strategy is being explored by The Reserve Bank of New Zealand (RBNZ) to impose regulations on products that inherently have a lack of regulatory oversight. It has proposed a regulatory approach for the opportunities and challenges of new forms of private money like crypto assets. Having experienced the challenges of a deregulated market during our work liquidating failed exchanges like Cryptopia and our views about stablecoins (a type of cryptocurrency), Grant Thornton New Zealand submitted an alternative approach in a submission to RBNZ. Our perspectives recognise the potential significance to private money that stablecoins could have in the current financial landscape. Having seen the wild west of cryptocurrency, we remain advocates of the potential benefits of Distributed Ledger Technology (DLT) to revolutionise the financial industry. To advance products based on this technology, there is a need for robust regulation and risk management to protect New Zealand's monetary sovereignty, and to maintain trust in the global monetary system. Given the global nature of cryptocurrency, we believe that a coordinated, international approach is necessary to effectively address these risks. On 30 June 2023, RBNZ published the outcome of its public consultation. The submissions reinforced RBNZ’s view that there are significant risks and opportunities with treating virtual assets as money. They have now decided against proposing a regulatory response at this point in time. Another reason outlined for taking a cautious approach lies in regulatory developments globally. There is likely to be real advantages to aligning crypto asset regulation throughout the world. As various overseas regimes are implemented, best practice for regulating crypto assets may become clearer. This was reflected in our submission which stated the limited adoption of these new forms of private money including cryptocurrency means it is too early to develop a robust and futureproof approach to capture all potential risks associated with a new form of private money. The UK is signalling they intend to regulate crypto activities in 2024 through formal legislation. Australia is currently running a consultation process for making crypto exchanges and digital asset platforms subject to its existing financial services laws; this will require platform operators to obtain an Australian Financial Services Licence. These developments mean the RBNZ may be forced to change tactics and follow global changes. In the meantime, we will have to see what 2024 brings in the world of cryptocurrency.

Cryptocurrencies: Are you tax compliant?

In September 2021, The Reserve Bank of New Zealand released an issues paper that considers the introduction of a New Zealand Dollar-issued digital currency that could be used to innovate and support central bank money. The risk of New Zealand falling behind international standards exists if we don’t innovate and adopt a robust CBDC.