Auckland University Professor Alex Sims on why the Government needs to get up with the play and start regulating cryptocurrencies 

By Jenée Tibshraeny

The Government is being accused of falling majorly behind the ball when it comes to the world of blockchain and cryptocurrencies.

As a relatively cashless nation, this is perhaps surprising.

Yet with Japan, China and now Australia moving to regulate cryptocurrencies, an academic leading a $50,000 New Zealand Law Foundation-funded research project on this very topic, is calling for the Government to follow suit.

Auckland University Commercial Law Head of Department, Associate Professor Alex Sims, says legitimising digital payment systems through regulation is the first step to being able to make the most of blockchain technology.

In her eyes, regulating cryptocurrencies is more than just about enabling bitcoin investors to trade on secure platforms. It’s about laying the groundwork for all sorts of sectors to use blockchain technology to automate transactions, and transform the economy.

With blockchain already disrupting the way we do business, Sims says we can either resist it, or use it to our advantage.

What is blockchain’s potential?

Right, let’s start from the beginning. What is blockchain?

A public blockchain is a digital ledger that chronologically and publicly records cryptocurrency transactions. Built into this is a consensus mechanism that allows people to transact without going through an intermediary.

Blockchain is the technology behind cryptocurrencies like Bitcoin, Ether, Dash and Litecoin.

IBM is one of the many multinationals using blockchain to push into unchartered territory.

For example, in March it announced it was partnering with transport company Maersk to digitise, manage, and track shipping transactions using blockchain technology.

IBM says the system, which is expected to go live later this year, “enables the real time exchange of original supply chain events and documents through a digital infrastructure, or data pipeline that connects the participants in a supply chain ecosystem”.

This video is great explainer, which makes blockchain easier to understand:

Speaking to interest.co.nz in a Double Shot Interview, Sims says the technology, which allows smart or self-executing contracts to automate transactions, will revolutionise a range of sectors.

For example, it could eventually connect insurers to the police, so if you’re in an accident, and the police report this to the blockchain, your insurer makes an automatic payment to you without all the admin and paper handling that would currently be involved in this exchange.

She says our property registry could even be built on blockchain, so the payment and transfer of title when you buy or sell a property is done automatically without the use of a lawyer.

How does cryptocurrency fit into the picture?

While the most highly regarded platform to execute these smart contracts through, Ethereum, requires payments to be made using Ether, a cryptocurrency isn’t always necessary for the sort of smart contracts described above.

The blockchain technology shipping line Maersk is using for example, doesn’t hinge on a cryptocurrency.

Nonetheless, Sims says combining high-tech blockchain technology with the traditional banking system, when you could use a cryptocurrency, is like putting a 50cc engine in a fancy racing car. Using fiat currency simply prevents the efficiencies of the blockchain technology from being maximised.

For example, cryptocurrency transfers are almost instantaneous and don’t incur the costs associated with making cross border bank transfers.

A subsidiary of RWE, one of Germany’s biggest energy and gas providers, has also proven it is possible to make Ethereum-based systems more user-friendly.

It has created a system whereby the users of its electric vehicle charging stations can pay for this service with regular money, which is then transferred to Ether, for the system to be connected to Ethereum’s public blockchain.

Sims is also open-minded to the idea of the Reserve Bank issuing a cryptocurrency. Central banks in the likes of Canada, the UK and China are exploring this.

“The writing’s on the wall,” she says.

“The technological advances are compelling, which is extraordinary from something that only came up under 10 years ago. So yes, it’s going to happen. The question is when."

Sims says the devil of a central bank-issued currency is in the detail, with the Canada and the UK taking quite different approaches to this. 

“Depending how it’s set up, it could actually cut the retail banks out. So this is a reason why the retail banks should be working with people to actually get a bit of the action. Otherwise, leave it too long and the Reserve Bank could cut them out.”

What does regulation look like?

With these possibilities on the horizon, Sims maintains regulating cryptocurrencies is the first step.

“You can use digital currencies - there is no law against it,” she says.

“But in practice, businesses aren’t able to accept digital currencies, because if they do, they get their bank accounts closed down.”

Banks around the world have been wary of banking clients at risk of causing them to breach their ‘know your client’ responsibilities under tough new anti-money laundering legislation.

Sims says: “The one exception is that you can get Visa and Mastercards that are loaded with cryptocurrencies… [Yet] very few people have those.”

As for how to go about regulating digital currencies, Sims maintains this would have to be carefully considered to get it right.

Australia’s Justice Minister last week announced plans to amend its Anti-Money Laundering and Counter-Terrorism Financing Act to bring digital currency exchange providers under the remit of its financial intelligence agency, the Australian Transactions and Reporting Analysis Centre (AUSTRAC).

This will even the playing field between cryptocurrency and existing dollar and cent currency exchanges, requiring them to do their due diligence on those using their platforms.

How far off is New Zealand?

Sims maintains New Zealand is two to three years behind where Australia is at.

She admits this often surprises people in other parts of the world who acknowledge New Zealand prides itself on being advanced.  

“I don’t know what happened, but we really dropped the ball…

“We’re behind, but we can catch up. We can follow what Australia is doing. And some government departments in New Zealand are looking very… closely at what Australia is doing.”

Are banks defending their patch under the guise of AML rules?

In the meantime, Sims joins the choir of people in the fintec and traditional money remittance spaces who think banks are taking their obligations under anti-money laundering legislation too far by closing the door on many of them.

Sims recognises that while banks are looking at how they can use blockchain to streamline their own systems (IE the SWIFT interbank payment system), they feel threatened by what cryptocurrencies could do to their business model.

She therefore worries they are using their positions to put “obstacles” in the way of start-ups.

“And that’s very very short-sighted.”

While cryptocurrencies have been used in the illegal trade of goods, Sims maintains they’re actually less risky than cash.

“What is ironic is that cryptocurrencies - most of them - are actually far more traceable than cash. So [with] cash, if you get the money, you don’t know where it’s come from. Whereas with cryptocurrencies, you can look back, look at all the transactions, and find out exactly where it is.

“Some people have been saying you’d be stupid to buy drugs or anything illegal with bitcoin, because you can be traced.”

The New Zealand Bankers’ Association has repeatedly denied claims its members apply “blanket de-risking” policies. Rather it says banks consider prospective clients’ risks on a case-by-case basis.

Sims concludes banks should embrace cryptocurrencies - even by acting as their custodians - to remain relevant.  

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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19 Comments

If you're keen to learn more about the fundamentals of how cryptocurrencies work, check out this website: https://www.basicsofcrypto.com/

This was super interesting. More please.

I read this web site and it made me think of the German hyperinflation, specifically how they stopped it through creation of a new currency backed to a trading good (then gold). It wasn't the new currency and it wasn't the real goods value, it was the combination of the two.

I imagine any large export industry (the wine industry for example) could create its own "clearing house" for goods trading using block chains and then back the whole thing with their own token of value (a new crypto currency).

So long as the system is transparent, secure and consistently backed to physical goods volumes at a reasonable exchange rate you have created a new trusted currency.

Better supply chain efficiency.
Better system transparency.
Less bank fees.

Wowser.

Come to think of it, if I were eBay I would be standing up my own currency asap. So long as the market place is big enough it works for consumers as well. The ultimate in loyalty payment systems.

There is a lot of evidence of blanket de-risking, especially overseas. Here, examples potentially include remittances by Somali refugees, FX operators, etc. But to be fair, the banks are between a rock and a hard place. The regulatory system in many countries (and here) is very much tick-box oriented. Banks are concerned they'll get pinged because the potential risk results in a ticked box. Even when it's not a real risk, the box has been ticked. So they de-risk, even if they might have wanted to retain the business. And with a genuine outcomes-oriented regulatory system might have been able to.

If people do want to get into crytocurrencies remember they are completely unregulated. Most consumers are not accustomed to the opportunities for fraud. Please understand how they work. Can you explain to someone why the bitcoin transaction limit is a problem? If you can't answer that question then you don't understand enough to look after your own interests.

I have been following the cryptocurrency scene from a distance for a while now, but am not at all convinced about it.

One reason for this, if you live in Toronto like me (or anywhere else for that matter), is that there's basically nowhere to spend digital coins in the real world. Coinmap, a service that maps bitcoin-accepting locations all over the world, shows a few places that accept bitcoin in Toronto, but it's clearly out of date -- I called several businesses listed on the site and they had no idea what bitcoin even is. A bigger problem is perfectly illustrated in a Reddit post from Wednesday morning complaining that a bitcoin transaction worth just $9 still hasn't gone through the network after two days of waiting. Two. Days. The likely reason is that the fee attached to the transaction in order to incentivize faster confirmation -- 50 cents, which is about as much of a premium as I'd pay for a $9 transaction -- simply wasn't enough. "Should I have paid $3 on a $9 transfer to get it processed?" the person wrote.
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With the advent of multiple payment cards supported by Visa and Mastercard it's becoming largely irrelevant if a retailer or whoever accepts cryptocurrencies or not. You pay in crypto they receive fiat, everyone's happy.

Also Bitcoin is now only 45% of the cryptocurrency market (by market-cap). There are much better coins for transacting at speed. Bitcoin is a far better store of value. Ripple has a 4 second block-time and Ether has a 16 second block time, for example.

Banks will resists the introduction of alternative payment methods like Telecom resisted the deregulation of the telephone market - other payment methods will greatly reduce their profits. There is no reason in NZ that couldn't be using blockchain for payments such as there are in other countries.

Government and Banks think they can regulate/co-opt Bitcoin but they are mistaken. The value in Bitcoin is that it is not part of the government or corrupt banking system. By the time they get around to trying to fix Bitcoin with regulation there will the a different crypto network to circumvent their efforts.

They might as well just give up and accept that this technology works just fine without them and will one day replace them.

@moneyphobe cryptocurrenncy may be the future, time will tell. But what I am interested in is the transition. People with $ or pounds in the bank will have to convert theirs across to crypto.

It will also be interesting to see if a middle man will be needed, or make themselves needed in the cryptospace?

Also, cash won't be replaced completely, similar to books I would have thought. They all have there uses which is better than the other.

The vast majority of cryptocurrency owners are either Chinese or South American. It is the currency of crime as long as there is no regulation. It's fine to invest in it but you need to have your eyes open that you might lose 90% of the value.

The governments don't want people to use cash or crypto because then they lose power. Look at the Defend Europe group, about 6 banks closed their accounts purely for political reasons. It has very little to do with crime which banks are involved in anyway if HSBC and CBA are anything to go by. The governments already have an Orwellian database of everything anyone does on the internet.

I thought crypto currency was meant to cut out the middle man. I recently used it to purchase something online but there was transaction fees, very small but still I thought that was the advantage? it was cheaper?

It looks to me that enabling efficiency also enables immorality (immorality is efficient). A world with AI, robots and crypto currencies would (in the end) send unwanted people to a meat works or render them for fertiliser?
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The internet gave us foreign buyers (and the end of the Kiwi dream). Globalisation gave us foreign diseases etc. You can download Tor and use bitcoin to purchase the most evil transactions you can imagine on the dark web.

Jh, you make a good point about efficiency, or technological advances, enabling immorality. You could add to that list, antibiotics, birth control, genetic engineering for food production, stomach stapling and many other medical interventions.
True AI will be very intolerant of human weakness and I wouldn't be surprised if AI programs have to be shutdown when their development starts to take a disturbing route. It may even become forbidden. Asimov predicted there would be a need to hard code limiters into advanced robots.
The film A.I. by Spielberg had a very interesting ending where humans had become extinct and the world was populated by advanced supermechs. They didn't hesitate to euthanise the main character who was a robot developing human characteristics. Most people thought the film had a happy ending but it didn't really.

Zachary,

Muddled thinking again..Immorality exists as part of the human condition and has nothing to do with technology. if you had said,that technology enables immorality to spread,then you would have had a point. Thus,you could go back to fire,or the wheel or boats.

I would argue that technology makes us human but then I am a computer guy. Technology can remove the bad consequences of immorality thus enabling it. Spreading, enabling, not much difference. It occurs to me that you could argue that if it has no bad consequences then it is not immoral ...I guess. Has technology made what was once immoral no longer immoral?

Zachary, have you seen this clip? Worth a look.

Rick, I'll check it out, thanks.