The future of money is digital – but NZ needs a careful framework to prevent the pitfalls of cryptocurrency

4:29 pm on 24 July 2023

By Abhishek Mukherjee, Paresha Sinha and Paul David Richard Griffiths* of The Conversation

The Conversation
Huge stack of cryptocurrencies in a circle with a golden bitcoin in the middle. Cryptocurrencies in blockchain concept. 3D illustration

The banking system is slowly moving cryptocurrencies into the mainstream. Photo: 123RF

Analysis - New Zealand's central bank is preparing for a future that includes the mainstream use of cryptocurrency.

At the end of last year, the Reserve Bank of New Zealand (RBNZ) published an issues paper, Private Innovation: Te Auahatanga, on digital currencies. The paper sparked a wide-ranging discussion on the development of the cryptoasset market and how to respond to the challenges it presents.

The RBNZ received 50 submissions on its paper, with consultation ending in April. A summary of the submissions was recently published.

We took a look at the key concerns held by those who participated in the consultation and what these concerns could mean for the uptake of cryptocurrencies in New Zealand.

The future of money in NZ

The RBNZ has mapped out a near future where businesses could accept digital currencies for payments, reducing currency conversion issues for international customers.

Cryptocurrencies could also be used to streamline payments to suppliers or employees, particularly those based overseas.

And by leveraging the transparency of blockchain, businesses could improve trust by efficiently tracking transactions and supply chains.

But businesses will need to improve their security measures to protect against online threats as well as manage the potential market volatility associated with cryptocurrencies.

While outlining a path for cryptocurrencies, the RBNZ noted the challenges of regulating organisations that are entirely digital and decentralised. The bank also raised the question of how New Zealand's existing rules on money laundering and the financing of terrorism would apply to cryptocurrencies.

The key hurdles for cryptocurrency

Five key themes emerged out of the submissions received by the RBNZ. These core themes highlighted the concerns held by regulators, businesses and everyday New Zealanders.

A clear but flexible regulatory framework

Research on other markets has shown that regulations cannot be static. The rules need to evolve with the technology. That said, regulations need to initially be quite prescriptive.

The New Zealand Financial Markets Authority (NZFMA) could establish a regulatory "sandbox" for cryptoassets, allowing businesses to test their crypto-related technologies in a controlled environment under close supervision. This would encourage innovation as well as help shape effective regulations, balancing the growth of the sector with risk management and consumer protection.

The NZFMA could also demand that New Zealand residents transact their cryptoassets through exchanges that are based in New Zealand and thus under the country's regulations in order to develop trust. These can be relaxed once the market matures.

Information and accessibility

The submissions also highlighted the need for clear, accurate and accessible information on cryptocurrencies. Some respondents expressed concern about the general lack of knowledge about cryptocurrencies and how they work.

The lesson from the collapse of the digital trading platform FTX is that New Zealand investors have to be protected, or at least made aware of, the risks of transactions through exchanges in more lenient jurisdictions.

Risks and opportunities

Risk and opportunities were also points of discussion. Respondents to the RBNZ paper acknowledged the risks associated with cryptocurrencies, such as financial crime and the risk to the wider financial system.

At the same time, they saw a significant opportunity to enhance competition and further innovation in New Zealand.

A monitoring approach

Respondents supported the RBNZ's proposed monitoring approach which underscored a "same-risk, same-regulation" principle. This holds that if a cryptoasset presents similar risks to an existing financial product, it should be regulated in a similar manner.

This implies a flexible regulatory stance that evolves based on the risk profile of the asset, thereby creating a fair and balanced regulatory environment for all financial instruments, traditional or digital.

The RBNZ has proposed working closely with international regulators and private sector information providers - companies or organisations that provide data, analysis and insights about the crypto market. This could include blockchain analytics firms, crypto exchange platforms, research institutions and financial technology companies.

Our own earlier research supports the belief that external regulations are not enough. It is essential that financial intermediaries dealing in cryptoassets develop a corporate culture of "performance with integrity", one in which each member of the organisation is centred on the best interest of the client.

We need to monitor cryptoasset businesses and ensure they have robust corporate governance. Another lesson from the FTX failure is that exchanges themselves can not be custodians of customers' assets - this must be done by regulated third party institutions.


Stablecoins, a type of cryptocurrency with value pegged to fiat currencies (a government-issued currency that is not backed by a commodity such as gold) or gold, drew interest during consultations. Participants saw their stability as beneficial. Stablecoins were seen as combining the benefits of cryptocurrencies with the stability of traditional currencies.

However, it must be noted that stablecoins differ in risk exposure according to the collateral they use; the crash of the Terra stablecoin in May 2022 versus the resilience of Tether is testament to this. Regulations must be very clear on the reserve assets demanded, and market supervisors must monitor these reserves very closely.

The future is digital

Although promising, the future of cryptocurrency in New Zealand is not without its challenges. The RBNZ will need to keep a close eye on things. The central bank will need to walk a fine line between encouraging new ideas and managing the risks.

For the moment, the RBNZ is taking a cautious approach. While there won't be any immediate policy changes, the RBNZ will be enhancing its monitoring of the financial ecosystem, tracking global regulatory trends and collaborating with financial organisations to address data gaps.

The goal should be to make sure people understand cryptocurrencies, manage the risks and promote innovation. As one respondent put it: "The future is digital. Let's embrace it, understand it, and make it work for us."

* This article first appeared on The Conversation. Abhishek Mukherjee is a lecturer in Accounting and Finance, University of Waikato; Paresha Sinha, Associate Professor, University of Waikato; Paul David Richard Griffiths is professor of finance; (Banking, Fintech, Corporate Governance, Intangible Assets), EM Normandie.

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