Cryptoassets: a statement from the Council of Financial Regulators – September 2022

Cryptoassets are cryptographically secured digital representations of value that you can transfer, store, or trade electronically. Cryptoassets and their underlying technologies such as distributed ledger technology (i.e. blockchain technology) and cryptography are being used to develop new and innovative financial products and services. The popularity is evident in the prolific growth of various coins, initial coin offerings (ICOs), decentralised finance (DeFi) and non-fungible tokens (‘NFTs’) over the last decade.

The Council of Financial Regulators (CoFR) recognises that the deployment and use-cases for these technologies are still evolving. The underlying technology is no longer new or emerging however questions remain about how some of these use-cases benefit the wider economy and society. It is still uncertain how consumers or the financial markets will derive benefits from the current applications either in cryptoassets or ‘cryptocurrencies’, and beyond.

CoFR welcomes the continued exploration of how these technologies can support greater competition and more innovation in financial services.

These innovations have potentially significant implications for the financial sector and the wider economy, for example, in enabling secure transactions without the need for conventional trusted financial intermediaries.

While there are many opportunities presented, it is clear the rise of cryptoassets pose additional risks. We are concerned about potential harm to individual consumers and investors, and wider systemic risks. These range from risks to monetary stewardship and financial stability, to consumer protection, competition, money laundering/terrorism financing and other policy concerns such as tax evasion and cyber-crime.

Additionally, the current cryptoassets marketplace remains highly speculative and volatile. Cryptoassets are not subject to the same set of consumer protections as regulated financial products. There are protections only if a cryptoasset features as part of a regulated product. Direct exposure to cryptoassets offers limited legal protection to investors against significant financial risks, and investors can be exposed to hacking, scams or fraud. Only some parts of the ecosystem, such as New Zealand-based trading platforms, are regulated in limited ways. We reiterate FMA’s advice that New Zealanders should only spend what they can afford to lose on cryptoassets and use New Zealand-based trading platforms.

In particular, we stress that so-called ‘cryptocurrencies’, including stablecoins, have the potential to expose users to high levels of risk. Unlike money in the bank, they are often not backed by any assets or subject to prudential or consumer protection regulation. This creates high risks that they could lose significant value due to fraudulent or irresponsible actions of the issuers or because of a sudden collapsed of confidence that could be driven by sentiments alone. Other key risks include high price volatility, the lack of transparent, robust, stabilising mechanisms, and potential impact on monetary sovereignty.

CoFR is monitoring any international developments in the regulation of these assets, as many jurisdictions are asking the same questions as New Zealand.

There is ongoing work within CoFR agencies to closely follow the developments in cryptoassets and their underlying technologies. For example, the Ministry of Business, Innovation & Employment is examining broader uses of blockchain as part of their work on the future of business. The Reserve Bank is also looking at what cryptoassets could mean for our money and payment system and how best to provide a level playing field and flexibility to support responsible, beneficial innovations. CoFR will continue to monitor the local and international crypto and fintech sector actively and assess our collective responses to the risks and opportunities.