New Zealand should get on board with blockchain, including cryptocurrency, according to a report funded by the Law Foundation
A central bank-issued cryptocurrency, thriving cryptocurrency exchanges and the ability for businesses to trade in GST-free cryptocurrency are needed if Aotearoa New Zealand is to enjoy the vast potential benefits from this technology, the report finds.
Based on research funded by the Law Foundation’s Information Law and Policy Project, a team of legal and banking experts has recommended a regulatory framework for blockchain.
Their report recommends that the government actively support New Zealand becoming a blockchain and financial technology (fintech) hub.
“Cryptocurrencies are here to stay,” says principal researcher Alex Sims, Associate Professor of Commercial Law at the University of Auckland Business School.
“But New Zealand has fallen behind countries we like to compare ourselves with, including Australia, the United Kingdom and Japan.
“So now we need to live up to our reputation as nimble, agile and innovative and rapidly follow the lead of those other countries.
“That’s the only way we can maximise the opportunities that blockchain offers.”
The authors argue that fast-moving technological advances and sensible regulation will address most concerns commonly raised about all types of currencies, including security, fluctuations in value, and potential for criminal abuse such as money laundering and financing terrorism.
Because the blockchain that underlies cryptocurrencies is a shared tamper-proof ledger of transactions, it removes the need both for buyer and seller to reconcile their records and for intermediaries to coordinate transactions.
Sims says “While not all blockchain applications require the use of cryptocurrencies, blockchain will not reach its full potential if cryptocurrencies are unable to be used, or their use made unnecessarily difficult.
“The New Zealand government has taken a hands-off approach to cryptocurrencies, when it should be actively fostering an ecosystem so that New Zealand is seen as an attractive country in which to base blockchain businesses.”
The report makes a range of recommendations, including the government continuing to allow cryptocurrencies to be traded and spent within New Zealand alongside greater advice and protection for consumers.
It also recommends GST be removed from cryptocurrencies that are used to pay for goods and services.
“This is a timely and very thorough report”, says Professor Steve Reeves, University of Waikato Associate Dean of Software Engineering.
He feels, however, there are some things which the report barely touches on which are currently very hot topics within the blockchain research community:
- The governance of blockchains … for all their vaunted transparency and immutability, issues around governance (basically: who gets to say what the rules are) are still very much up in the air. When things go wrong, who gets to decide what the repair should be and who gets to do it?
- The correctness of the programming (both the management of the chains themselves, and also the correctness of contracts) has, in the white heat of progress (and, to a large extent, hype) been largely ignored. Certainly, the techniques and knowledge of the last 60 years of software engineering have, until very recently, apparently been ignored when it comes to building and running blockchains. Recent work, for example, has found that, in the contracts sampled and due to errors in programming on the Ethereum blockchain: 6239 Ether locked inside contracts which have ‘died’, i.e. they are no longer running and the Ether is lost forever; and nearly 4905 Ether might have been stolen from other contracts.
“None of this, however, means that using blockchains for currency, or anything else, should be ignored by the New Zealand government,” Reeves concedes.
“If nothing else, we should follow the recommendations of this report in order that we have home-grown expertise, both on the law and financial side, so that we can be involved in the on-going work for point 1 above, but also in the computer science that is being developed and used to deal with the comments in point 2.
“To do otherwise will certainly leave us at the mercy of the very forces that government and officials seem so scared of.”
Dr John Williams, Senior Lecturer, Otago Business School, University of Otago, believes people who hold cryptocurrencies have a lot to gain from promoting adoption of this technology.
“The value of their holdings grows as demand for the currency grows, and they are able to realise value from their holdings by spending it within the cryptocurrency system.
“As the report notes, difficulties, delays, uncertainties and financial transaction costs arise when transferring currency to and from the established ‘normal’ currency system.”
That aside, Williams says the potential upsides for individual citizens and society as a whole from adoption of cryptocurrency are quite large, not least emancipation from an entrenched power system that many consumers distrust and dislike.
“However significant barriers remain, notably recourse if something goes wrong, in particular losing one’s keys,” he notes.
“Cryptocurrencies are the ultimate demonstration of the network effect: the value of the technology rises exponentially with the number of adopters.
“Until the serious challenges of a typical consumer using cryptocurrency alongside ‘normal’ currency are addressed, mass adoption is unlikely.”
The simple truth, Williams adds, is that no-one knows what will happen in the future. “We can but try.”
The New Zealand regulatory agencies seem to have adopted an unnecessarily cautious position with regard to cryptocurrencies, which must be taken into consideration by the banks, related financial institutions, and commercial interests as they seek to grow New Zealand’s economy, says Dr Stephen C Wingreen, Associate Professor of Information Systems and Decision Sciences, University of Canterbury; Lead Investigator of the Emerging Technologies and 21st Century Commerce Research Group.
“Free trade requires rational, flexible, and reasonable regulatory frameworks whose primary purpose is to encourage trade and commerce rather than stifle or impede it,” he observes.
Wingreen warns that “the field of cryptocurrency is moving so quickly that New Zealand risks being left behind” in what may become the greatest and most transformative technological innovation since the internet, unless the regulatory agencies quickly create a friendly, open, and efficient framework to support New Zealand-based cryptocurrencies.
“Blockchain, the technological platform that underlies all cryptocurrencies, was originally developed as a distributed ledger designed to solve the ‘double-spending’ problem, which is the cornerstone of accountability and transparency in business worldwide.
“People are by their nature rational economic beings, which means that accurate, secure, immutable, and transparent ledgers are absolutely foundational for an open and free society.
“As such, every day that is lost is another lost opportunity both for the people of New Zealand and New Zealand’s status as one of the most free and friendly economic environments in the world.”