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Few areas of finance are developing faster than crypto-assets, a category that includes cryptocurrencies, securities tokens and utility tokens, whose common feature is use of distributed ledger technology (DLT). Today there are more than 16,000 individual cryptocurrencies in circulation and daily trading volumes are estimated to be more than $275 billion on more than 400 platforms. Their rise has led to calls for better regulation because of potential investor protection, money laundering and market integrity risks.
This article provides an overview of crypto-asset regulation in New Zealand by Partner Jeremy Muir.
1) Which body regulates crypto-assets and related services?
The primary bodies to take an interest in the regulation of crypto-assets and related services in New Zealand are the Financial Markets Authority – Te Mana Tātai Hokohoko (FMA), Te Tari Taiwhenua – Department of Internal Affairs (DIA) and Inland Revenue – Te Tari Taake (IRD), although they are currently simply applying existing laws rather than crypto-specific legislation.
Other agencies who make take an interest depending on the nature of the assets or behaviour include the Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) and Te Komihana Tauhokohoko – The Commerce Commission (Commerce Commission).
The roles of each of these bodies is discussed further below.
2) Does any law regulate crypto-assets or crypto-asset service providers such as exchanges?
There are no specific laws which regulate crypto-assets or crypto-asset service providers, however laws of general application will apply. A short summary follows:
The Financial Markets Conduct Act 2013
The Financial Markets Conduct Act 2013 (FMC Act) regulates fair dealing in financial markets, offers of financial products, governance of debt issuances and managed investment schemes (MIS), secondary markets and exchanges, licensing of certain financial services (including financial advice and client money/property services) and financial reporting.
The application of many of the rules under the FMC Act to crypto-assets will turn on whether they are “financial products” (broken down into four categories: equity securities, debt securities, derivatives and managed investment products). Many crypto-assets will not be financial products.
As a general comment, the financial product definitions are relatively clear and circumscribed i.e. they are less widely framed in their application than, say, the definition of a “security” under United States law.
The FMA does, however, have a general power to designate an investment product which falls into a wider residual class of “securities” into one of the four regulated financial product categories. It has not used this power to date in respect of crypto-assets.
Crypto-asset exchanges generally operate in New Zealand by only listing coins or tokens which are considered not to be financial products (as otherwise they would require a financial products market licence from the FMA, which is not easy to obtain).
There is a second relevant definition of “financial advice product” which is the trigger for application of the financial advice and client money/property service rules. The financial advice product definition includes the four categories of financial product (above), together with consumer credit contracts and most insurance. The definition may also be added to be regulation.
The FMA has some guidance as to its views on the application of the FMC Act (and other legislation) on its website.
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) governs AML/CFT compliance for reporting entities.
Although the Act does not refer to crypto-assets specifically, the three AML/CFT supervisors in New Zealand (FMA for most wealth businesses, RBNZ for banks/non-bank deposit takers, and DIA for other businesses), consider that most virtual asset service providers (VASPs), such as exchanges, broking businesses and token issuers, are likely to be caught. This is on the basis of guidance from the Financial Action Task Force (FATF) that such businesses are likely to be either issuing/managing means of payment or providing a money or value transfer service. DIA will have supervisory responsibility for most VASPs of this kind.
The Financial Service Providers (Registration and Dispute Resolution) Act 2008
The Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act) requires financial service providers (FSPs) located or offering services in New Zealand to register on the Financial Service Providers Register and, if they provide services to retail clients, to join a dispute resolution scheme.
Most entities that fall within the VASP definitions discussed in relation to the AML/CFT Act above will be FSPs, in addition to other investment related businesses, and required to register under the FSP Act.
The Income Tax Act 2007 and Goods and Services Tax Act 1985
The Income Tax Act 2007 and Goods and Services Tax Act 1985 provide the core of our tax system and are administered by the IRD.
Both Acts were recently amended to provided additional clarity in relation to the treatment of crypto-assets. See the discussion further under 3 below.
The Fair Trading Act 1986 (FT Act) and Consumer Guarantees Act 1993
The Fair Trading Act 1986 (FT Act) and Consumer Guarantees Act 1993 are general consumer protection laws, administered by the Commerce Commission and which may apply to crypto assets (particularly if they are not financial products, where coverage overlaps with the FMC Act).
These Acts may have more application in relation to the sale of, for example, non-fungible tokens (NFTs).
3) Has a national law or regulation defined “crypto-asset” and/or “cryptocurrency”?
The only laws to define crypto-assets are the IT Act and GST Act, which define “crypto-asset” as follows for the purposes of those pieces of legislation only:
[C]rypto-asset means a digital representation of value that — (a) exists in — (i) a database that is secured cryptographically and contains ledgers, recording transactions and contracts involving digital representations of value, that are maintained in decentralised form and shared across different locations and persons; or (ii) another application of the same technology performing an equivalent function; and (b) is designed to be fungible.
4) What money laundering regulations, including any due diligence requirements, apply to crypto-assets?
As set out in 2. above, VASPs are generally considered to be captured as reporting entities subject to the AML/CFT Act and supervised by DIA. Other businesses such as investment funds which invest in crypto-assets may alternatively be supervised by the FMA.
Reporting entities are subject to various requirements (generally following FATF principles) under the AML/CFT Act, including to:
The travel rule has not yet been implemented in New Zealand.
5) What rules apply to the promotion of crypto-assets?
If crypto-assets meet the definition of financial products, an offer received in New Zealand may be subject to the FMC Act as either a regulated (e.g. retail) or non-regulated (e.g. wholesale) offer. Regulated offers generally require at least a heavily prescribed product disclosure statement and registration on the Disclose Register. Regulated offers of derivatives, debt securities, or MIS interests, may also require licensing and/or appointment of an independent trustee/supervisor.
For non-regulated offers, certain classes of investors may need to self-certify as “eligible investors” and, for others, an issuer may be able to obtain and rely on a “safe harbour” certificate.
For other crypto-assets (which are not financial products), promotion will be captured under either or both sets of “fair dealing” rules under the FMC Act or the FT Act. These require, in summary, avoidance of any communication or content which may be misleading, deceptive or contain unsubstantiated representations.
6) Do different crypto-asset rules apply to wholesale and retail markets, for example, on the sale of derivatives?
As noted in 5. above, if crypto-assets are financial products, the FMC Act distinguishes between regulated (retail) and non-regulated (wholesale) offers. Non-regulated offers are only subject to light-touch supervision, in particular the fair dealing rules described in 2. and 5. above. The FSP Act (other than membership of a dispute resolution scheme) and the AML/CFT Act will, however, still apply.
7) Does any existing or proposed national law impose requirements on issuers of stablecoins?
There are no existing or proposed national laws which are specific to stablecoins. The application of existing laws will depend on the design of the coin, with the first question being whether the coin is a financial product as defined in the FMC Act.
The first question is whether the coin should be treated as a “debt security” being “a right to be repaid money or paid interest on money that is, or is to be, deposited with, lent to, or otherwise owing by, any person”. If the holder of a coin has, therefore, a right to ask the issuer to redeem it for fiat currency, then it may be a debt security. If the debt security is offered under a regulated (i.e. retail) offer then appointment of an independent trustee and, potentially, licensing as a non-bank deposit taker may be required. Registered (with RBNZ) banks have the benefit of certain exemptions in relation to deposit taking. It is proposed that the bank and non-bank sectors will be subject to a new combined licensing regime, not yet in effect.
Stablecoins that are constructed with an interest in property held on trust for coin holders, however, may be treated as MIS or, in certain cases, not as financial products at all.
The FMA comments as follows on its website:
Are stablecoins financial products?
Stablecoins are crypto-assets that typically have a value directly linked or “pegged” to the value of a fiat currency or a basket of assets. Whether a stablecoin is a financial product will differ on a case-by-case basis, as they vary greatly in their structure and arrangement. However, if you are providing financial services in relation to stablecoins, you will have obligations under New Zealand law – see “Crypto-assets and financial services” for information on how to comply.
Where stablecoins operate as a payment system, the new Retail Payment System Act 2022 gives the Commerce Commission power to designate and regulate retail payment networks (RPNs). It is unlikely that these powers will be used until a network is of systemic importance.
Finally, following the Future of Money – Te Moni Anamata consultation process, the RBNZ has also begun design-work on a central bank digital currency.
This article was first published on Thomson Reuters Regulatory Intelligence on 24 August 2022.
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Financial Markets Conduct Act 2013 (New Zealand)
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