Regulatory Approaches to Cryptoassets & ICOs in New Zealand
Cryptocurrencies have become extremely popular in New Zealand and this country is the first to legalize cryptocurrency salaries. Despite the growth of these digital currencies, the nation hasn’t yet set laws to regulate any activities that these digital assets are involved in. Nonetheless, it doesn’t mean that these sectors are not subject to regulation. According to the Financial Markets Authority (FMA), the activities associated with cryptocurrencies undergo the requirements of the “fair dealing” in the Financial Markets Conduct Act 2013.
The tokens offered to retail investors are classified in the financial goods so they have to comply with financial markets legislation. When there is no financial product or financial service involved in a token, the communications related to offers of cryptocurrencies are subject to the Fair Trading Act 1986. As Cryptocurrency exchanges are classified to be “money changers”, these activities are regulated by the Anti-Money Laundering and Counter-Terrorism Financing Act 2009 to prevent money laundering and countering the financing of terrorism. Here is the review of the regulatory approaches to crypto assets & ICOs in Aotearoa.
Financial Regulation and Consumer Protection
In October 2017, the Financial Markets Conduct (FMA) published online regulation related to cryptocurrencies for the purpose to ensure the regulation of these digital currencies. This legislation is supported by the Financial Markets Conduct Act 2013. Thus, any entity that offers a financial service associated with cryptocurrencies must comply with this act. Moreover, most of the new casino sites based in New Zealand or those that offer services to gambling clients are required to register on the Financial Service Providers Register.
Regarding the ICOs, the regulation states that each ICO is required to be verified. The majority of ICOs involve the financial service operating a value transfer service and issuing and managing payment methods. Not only can tokens be used to obtain services or goods but they are also acquired as legal tender including New Zealand dollars. Another additional guidance related to ICOs is a token that can be considered as a debt security, equity security, and interest in a managed investment scheme.
As stated by FMA, a regulated offer is a financial product provided to retail investors in New Zealand. However, tokens offered to wholesale investors or those based outside the country is not a regulated offer but it is still subject to the FMC Act. This regulated offer conducts more substantial compliance obligations such as licensing, governance, and disclosure requirements.
Anti-Money Laundering Law
The anti-money laundering obligations may also apply as stated by the FMA guidance on the regulation of cryptocurrencies and ICOs. However, no regulation refers specifically to cryptocurrency exchanges stated by the FMA and other government agencies. Nevertheless, the Department of Internal Affairs (DIA) has a list of reporting entities.
The cryptocurrency exchanges should be encouraged in New Zealand and clear and detailed anti-money laundering regulation by both the Department of Internal Affairs (DIA) and the Financial Markets Authority (FMA) should be implemented.
Regulations of Cryptocurrencies as Financial Securities
Under the FMA regulation on ICOs, a token is considered debt security if it gives rise to dividends or interest payments. To make a regulated offer of a debt security, here are the processes that the ICO issuer should follow:
- Register a product disclosure statement
- Appoint a licensed supervisor
- Meet fair dealing requirements
- Respect financial reporting obligations
The guidance further verifies if an asset-backed token could be debt security. Each ICO should be reviewed on an individual basis. As utility tokens can be traded on a cryptocurrency exchange or other secondary market, they are not classified in the managed investment products. Actually, the profits received by the investors when trading the utility tokens on a cryptocurrency exchange are not ‘rights to receive a financial benefit’ under a managed investment scheme.
As for Equity Securities, the FMA states that a token is equity security if investors buy, or have the option to buy. For instance, equity in a New Zealand incorporated company or any action corporate incorporated outside New Zealand. An offer of both the token and the equity share is a token that provides an option to buy a share. According to the FMC Act, the issuance of a token by an ICO will be considered a regulated offer.