Crypto-enthusiasts and FinTech businesses across the Oceania region would have been pleased to see both the New Zealand and Australian Parliaments taking more interest in cryptocurrencies, to the point where each is holding formal Inquiries, at select committee level.
The Senate of Australia is inquiring into the “opportunities and risks in the digital asset and cryptocurrency sector”, as part of broader work on growing Australia as a technology and financial centre. Meanwhile, in July the New Zealand Parliament announced it was launching an Inquiry into the “current and future nature, impact, and risks of cryptocurrencies”.
A wide range of issues, some controversial, are up for debate in these two Inquiries.
What Inquiries are underway (and how are they taking place)?
The Finance & Expenditure Select Committee is the Parliamentary body in charge of the New Zealand Inquiry. A period for public written submissions closed on 2 September 2021, and it has now begun hearing public/virtual oral submissions from interested parties.
The Select Committee on Australia as a Technology and Financial Centre is the recently renamed Senate body pressing into this area. It has already issued two interim reports, chock-full of recommendations to government. It expanded its terms of reference by an Issues Paper in May 2021 including explicit attention to “development of a comprehensive regulatory framework for cryptocurrency and digital assets”.
After receiving a large number of written submissions, this Inquiry has also been holding public hearings, and should report its findings at the end of October 2021.
It will be fascinating to see whether discussions between industry experts, and separate trans-Tasman groups of Members of Parliament, will lead to actual legislative reform. Could there even be some proper regulation of digital assets and rapidly evolving crypto-products in New Zealand and Australia?
What for? As wide as the blue yonder?
In both countries, the Inquiry process permits a very wide and flexible scope of topics to be examined.
The Terms of Reference for the Inquiry set out to address seven general areas (eight, if you suspect that tax might be its own separate world). The extremely broad nature of these Terms suggest a wide-ranging gallop across the vast crypto “Wild West” territory (as the Chair of the US Securities & Exchange Commission recently called it):
- To inquire into, and establish the nature and benefits of cryptocurrencies:
- To establish how crypto-currencies are created and traded.
- To understand the environmental impact of ‘mining’ crypto- currencies.
- To identify risks to users and traders of crypto-currencies.
- To identify the risks crypto-currencies pose to the monetary system and financial stability, including tax implications, in New Zealand.
- To establish how crypto-currencies are used by criminal organisations.
- To establish whether means exist to regulate crypto-currencies, either by sovereign states, central banks, or multi-lateral co-operation.
The Member of Parliament (MP) chairing the Inquiry, MP Duncan Webb (Labour), stated that “committee members look forward to engaging with some of New Zealand’s cryptocurrency experts”. That suggests an expectation that the politicians are willing to listen and learn from experts in the field, although there could be quite a bit of up-skilling to do. Does the Committee merely want to ‘pick the brains’ of industry figures? Or does it have a particular view of regulatory settings, or preferred outcomes to be tested?
Theoretically, the Terms of Reference for the Australian Inquiry are much broader. They include the opportunities and barriers for the RegTech and FinTech sectors generally. But with two chunky Interim Reports under its belt, the remaining topics of interest have significant definition by now. Within the limits of this article, I focus on the opportunities and risks in the digital asset and cryptocurrency sector.
The Issues paper says that the Committee is interested in:
- the economic opportunities posed by blockchain technology and digital asset technology in particular. Thus far, the committee has heard blockchain has applications across sectors and industries.
- policies for enhancing these opportunities to promote Australian investment and jobs. In particular, the committee will be assessing options for the development of a comprehensive regulatory framework for cryptocurrency and digital assets. Existing regulatory schemes, especially those in comparable jurisdictions, will be examined. For example, the Committee is interested in getting a better understanding of the relative sophistication of the policy and legal landscape in Australia compared to similar jurisdictions.
- approaches taken by policymakers in Canada, Singapore, the United Kingdom and the European Union. We want to know what type of policy provision and legal certainty is needed to drive private investment into Australian digital assets rather than the investment occurring offshore.
Public hearings commenced in August 2021, chaired by Senator Andrew Bragg (Liberal, NSW). It has a clear directive to grow these fledgeling Australian economic sectors, which suggests a relatively pro-business stance. Bragg said in a media release that “while participants held different views on the best course of action, all are committed to developing a plan that builds Australian leadership, which was incredibly encouraging … one in five Australians now own cryptocurrency and it is imperative that regulation protects consumers, provides certainty, and drives investment”.
The conundrum of crypto
With such wide scope, topical things can be found to say on each of the major reference points (yes, even tax!). But the two themes closest to my own areas of work are financial crime or criminal organisation mis-use, and whether regulation is possible (and, if so, how)?
“On the one hand, they democratise finance by essentially crowdfunding money based on its popularity, while on the other they are anonymous. Because transactions are encrypted, the money transferred is untraceable to actual people. That makes cryptocurrencies popular among hackers, criminals and others who operate between the light and dark webs. It seems that attitudes to cryptocurrencies are as volatile as the price of the currencies themselves.”
This article also touches on the financial inclusionary ‘power for good’ that cryptocurrencies possess:
“… the state of banking regulation has left billions of people without access to an account. When Facebook tried to remedy the issue with its stablecoin – a cryptocurrency backed with real money, originally called Libra, and which is now known as Diem – the regulators did not approve. Banks’ ‘know your customer’ rules demand that people provide information about their lives that not everyone is in a position to produce. Having a phone with a Facebook account could have remedied that.”
Although transactions are visible, recorded, and immutable in the blockchain (and experts like Chainalysis can trace them, to a point), the dilemma for law enforcement agencies or private plaintiffs is that when the trail goes into a cold wallet, or a country that does not respect international co-operation and the rule of law, anonymity prevails.
Criminals know this; perhaps explaining why bitcoin is still the currency of choice for ransomware cyber-crime attacks.
The past year has seen cyber-attacks, ransomware, and other forms of misuse of digital assets reach a crescendo. Private and public sector agencies, large and small, are all becoming snared. It gives all of the cryptocurrencies and virtual asset service provider (VASP) sectors an unfairly bad name. The most common result of fraud or hacking, as any lawyer experienced in civil law tracing or asset recovery techniques may know, is that even with speed of tracking blockchain transactions you arrive at a brick wall. Unless good fortune strikes, with the end-wallet destination still warm, and a foreign firm or foreign law enforcement agency who can be bothered to offer mutual legal assistance at pace, legal recoveries are rare.
And it seems Law Enforcement agencies may not be any better than the private sector at handling cyber insecurity. Earlier this year the New Zealand Police rather bashfully admitted they had been outsmarted when NZ$45,000 of bitcoin went missing in a sting operation gone wrong. A covert operation into use of cryptocurrency in money laundering had to be hastily shut down when the coinage was “fraudulently obtained from a Police Bitcoin wallet during an operation” and dissipated to “culprits likely based overseas”. Police auditors were soon on the scene and two further investigations launched, into the botched investigation. Losing your valuable virtual assets is always going painful, and the funds seem irretrievable from abroad – consistent with the result of most private fraud tracing investigations.
Will nervousness about their own cyber-risk become another background factor in the Parliamentary broad-ranging Inquiries?
In Part Two of this article, I will look at five hot topics (or conversation starters) for the two Inquiries, and how earlier Australian Senate reports seem to be grappling with them so far.