Juha Saarinen: Is New Zealand really missing out by being cautious with cryptocurrencies?

Does the crypto industry need regulating? Photo / 123RF

OPINION

Timed perfectly with the collapse of Dasset and the liquidation of Kim Dotcom’s Bitcache, with money being owed left, right and centre, the powerful Finance and Expenditure Select Committee (FEC) has released its inquiry into the current and future nature, impact and risks of cryptocurrencies.

Cryptocurrencies, or virtual money, is the business Dasset and Bitcache (which never got past the starting line) were in.

Beginning as a libertarian thought experiment in 2008 with Bitcoin, there are now over 20,000 cryptocurrencies, estimates suggest. Anyone can coin crypto, with no central authority in the way.

No banks, credit card issuers, payment networks, treasuries or financial regulators to worry about; just a computer to run cryptocurrency software and an internet connection.

There’s no need to trust anyone either, as transactions are verified by a majority of users’ consensus. You’ll see terms like ‘decentralised’, ‘secure’, ‘transparent’ and ‘peer-to-peer’ being used with cryptocurrency, and it all sounds rather techno-amazing at first.

In reality, the cryptocurrency experiment has demonstrated that your neighbour with a computer creating and handling “money” was almost certain to experience entirely predictable consequences, and none of them good ones.

Lots of people around the world have jumped onto the crypto bandwagon. They have sunk billions of dollars into an unregulated financial product, come a cropper financially, and now there are demands for regulation and protection.

Lately, the sector has started talking up “stablecoins”. Paypal issued its own this month, and the currency is supposedly backed by US dollars. Why? Because the wild exchange rate fluctuations cryptocurrencies experience made them practically unusable.

Tether is a popular stablecoin that was thought to be 100 per cent backed by US dollars. Figures released by Tether suggest the actual backing is just 2.9 percent, but nobody knows for sure.

Either way, you still can’t buy milk at the dairy with stablecoins, or any cryptocurrency for that matter.

Back to the FEC, which was asked to have a think about cryptocurrencies. The official inquiry began in 2021; only now is the report finished, however.

How much of the report is the select committee’s thinking is unclear, as it is written mostly by two independent advisers.

The two independent advisers are members of the executive committee of Blockchain NZ, an organisation that aims to “... provide New Zealand businesses and individuals opportunities for connecting, promoting and advancing in all things blockchain, crypto and decentralisation”.

Said independent advisers have gone through 263 submissions from organisations and individuals, including 18 oral ones, for the inquiry.

Spanning 112 pages, the report by the inquiry swiftly dismisses concerns submitters might have about cryptocurrencies and makes the case the industry should be taken seriously and be nurtured in New Zealand.

In support of that, the independent advisers have come up with a long list of recommendations the FEC agrees wholesale with.

To start with, consumer protection seems to have gone into the too-hard basket. This may seem unfair, but it’s hard to see how consumers could be protected if they speculate in crypto. The best protection would seem to not to dip your toes into potentially fraudulent waters.

The FEC suggests education, with secondary and tertiary institutions developing courses, and accountants, lawyers and judges getting training about the blockchain and crypto, along with government departments.

That’s quite an educational effort there, but if it teaches people at all levels how risky crypto is, maybe it’s worthwhile?

Billions of dollars have been sunk into cryptocurrencies, which are an unregulated financial product. Photo / 123RF

Making anti-money laundering and countering financing terrorism regulations more “light-touch” to foster New Zealand’s crypto industry, on the other hand, seems like playing with fire. It could potentially risk antagonising our allies, who are unlikely to support such a course of action.

There’s a fine irony in the recommendation that crypto and digital asset companies should have access to banking services. Banks are required to manage risk carefully, and often deem crypto-related companies don’t pass the sniff test.

This phenomenon has a name: “De-banking.”

The recommendation is that Kiwibank should step up and offer banking services to the de-banked, but why? The crypto crowd has been crowing about DeFi (decentralised finance) for years now as a valid alternative to banks. Just use DeFi then, and leave Kiwibank alone.

Creating visas to attract crypto and blockchain entrepreneurs might be a goer if it’s done on the condition they pay bonds for legal funds, to be held in government accounts. In real fiat money, not crypto.

Next, a central bank digital currency (CBDC) is to be developed by Reserve Bank of New Zealand, the FEC suggests, overlooking that in other nations which have implemented such things, like Nigeria and the Bahamas, hardly anyone uses them.

‘Sanddollars’, ‘eNaira’ and ‘Bitcoin in El Salvador and Venezuela’ are great search terms to learn more about CDBCs and countries turning to crypto.

Furthermore, the inquiry recommends the Inland Revenue Department should consult with the digital asset industry on whether tax incentives for, er, digital asset providers, are necessary and appropriate.

Crypto and digital asset providers holding large amounts of funds and earning fees getting tax breaks seems a tough one to get over the line.

If we don’t implement the FEC recommendations, then what? Right, New Zealand will miss out, the inquiry suggests. Or will it? Has New Zealand missed out on anything useful when it comes to cryptocurrencies, or have we simply dodged some pretty major-calibre bullets, like the FTX scandal?

The inquiry did not consider that, and instead faulted our entirely sensible “wait and see” approach to crypto.

There’s a second prong to what’s being recommended in the report. Bitcoin came with a database called the “blockchain” in which all cryptocurrency transactions are recorded.

It’s immutable, meaning there’s no way to alter or delete data stored on the blockchain - except for when the software developers change it to roll back fraudulent transactions, for example.

There’s some interesting magic thinking around what the blockchain can do. Inquiry submitters suggested “using the technology behind cryptocurrencies for voting systems so they are fair, secure and convenient, and not able to be corrupted by rogue politicians”.

Not only that, but money saved from using the blockchain for things like voting could be reinvested to build infrastructure, submitters put forward.

As mentioned by the inquiry, it is possible to use the blockchain for other purposes than recording cryptocurrency transactions, as it’s a database that can store information.

Not that anyone should - if the answer is “blockchain”, you’re usually asking the wrong question. For the vast majority of use cases, there is better technology that actually works, as opposed to a slow and computationally expensive database that’s ever-expanding like the blockchain.

The inquiry document was “lightly updated” this month, but not with the monumental ASX fiasco. Why?

By the way, that’s the same ASX which strictly limits listings of companies with crypto-related activities.

It would be unfair to say cryptocurrencies are without their uses, but in many cases, they support activities we’re trying to suppress: the easy-to-transmit yet hard-to-trace virtual money that cannot be returned once gone has built lucrative enterprises for ransomware raiders and extortionists, as well as money launderers.

Crypto’s middlemen are like crime magnets as well. Most weeks there are reports about million-dollar sized exploits, hacks and frauds, particularly of crypto exchanges, where virtual money can be swapped for real world dosh that ransomware criminals can buy Lambos with.

The inquiry recognises the term “cryptocurrency”, as such, is indelibly tarnished, and seeks to rebrand it as a subclass of “digital assets”. For these, no regulatory framework is proposed, just “coherent and consistent guidance on the treatment of digital assets under current law”.

Digital assets are things like non-fungible tokens (NFTs), another speculative concept that’s been plagued by a rash of hacks and fraud. Look up the term ‘rug pull’ for examples.

We already have the bizarre legal idea computer files are a type of physical property. Now they should be deemed to have stored value as well, legally speaking, as digital assets. How very science fiction.

And yes, the Metaverse virtual world that Facebook has lost billions on makes an appearance. Oh, and Web3, another libertarian notion that has so far provided much entertainment via the excellent https://web3isgoinggreat.com/ site but not much else, pops up in the inquiry report too.

It will be interesting to see how the Government responds to the FEC report come November 10.

With the world’s largest crypto exchange Binance in American regulators’ crosshairs, FTX founder Sam Bankman-Fried in jail and ridiculous amounts of money disappearing in never-ending hacks, the inquiry’s recommendations look like a hard sell.

The inquiry points to the Australian Stock Exchange (ASX) as an example of how the blockchain could be put to different uses, with the bourse working on a core system replacement with the technology since 2017.

However, instead of showing off the techno-marvel that the blockchain is said to be, ASX’s effort became a very public bungle, making headlines everywhere since months ago.

Now, it would be unreasonable to expect the inquiry to be correct and up-to-date in every respect given how long ago the work on it started.