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.