‘Wild West’ world of crypto: Kiwi investors need protection

OPINION

It seems everyone is talking about investing in cryptocurrencies. This is not surprising when around 220 million people are actively trading cryptocurrencies, generating more than US$2 trillion in combined value.

In 2021 Elon Musk
even tweeted people could buy one of his Tesla electric cars with Bitcoin.

But crypto is a high-risk virtual investment that inhabits an unregulated environment that is akin to the old Wild West. Anyone can create a crypto asset, with or without the backing of physical assets.

Crypto is also volatile, often fluctuating by huge amounts within a short time frame. In the first half of 2022 Bitcoin and Ethereum were down by more than 50 per cent from their all-time highs in late 2021.

Crypto offers the prospect of making big profits quickly which inevitably attracts scammers and fraudsters. Unfortunately, this has led to the proliferation of “pump-and-dump” crypto schemes that can lure investors into buying tokens at inflated prices under the pretext of creating the next batch of crypto millionaires.

The people who own most of the tokens sell out, which causes an immediate fall in the token’s prices. This can drain an unsuspecting investor’s assets overnight.

Globally, there have been many examples of pump-and-dump schemes, such as SafeMoon, that were promoted by A-list celebrities on social media sites like Reddit, Twitter and TikTok which have become virtual gathering places for crypto investors.

New Zealand has not been immune from questionable crypto schemes. In 2021 the Commerce Commission shut down a multi-level cryptocurrency marketing pyramid scheme called Lion’s Share which encouraged Kiwis to pay hundreds of dollars to join in the hope of being rewarded in cryptocurrencies from each person they signed up.

One of the scheme’s promoters was an Auckland based YouTuber who claimed she made $154,000 from Lion’s Share in less than two weeks.

Cryptocurrencies are here to stay, but they are not currently regulated in New Zealand. This presents a rare opportunity for our law makers to enact sensible policy settings.

However, the problem with cryptocurrency regulation is that too many policymakers seem to be focused on what crypto might be in the future rather than regulating it for now, and updating the rules as required.

As a starting point, the key focus of any future crypto regulations in New Zealand must be on protecting Kiwi investors.

For example, South Korea, introduced cryptocurrency regulation that brought the number of available cryptocurrencies down from around 60 to five. This regulation benefited investors by banning less-established, less serious cryptocurrency vendors.

Anti-regulation crypto enthusiasts argue the big attraction of digital currencies like Bitcoin is that it is decentralised, and new regulations would threaten innovation. I disagree. Crypto investors currently have little to no protection in the market, as there is no regulatory framework in place to ensure protection of assets.

Sensible regulation has the potential to protect long-term investors, prevent fraudulent activity like pump-and-dump schemes within the crypto ecosystem, and provide clear guidance to allow companies to innovate in the crypto economy.

Well targeted guidance could also help reduce speculation among crypto assets. Less speculation can lead to higher investor confidence, which could attract more long-term investors wary of a highly speculative, volatile crypto market.

Regulation is overdue to protect investors from crypto crime which has grown exponentially over the last two years. According to a report by blockchain data firm Chainalysis scammers took $14 billion worth of crypto last year, up from $7.8 billion in 2020.

New Zealand regulators should examine the regulatory approach of Australia which legalised crypto transactions in 2017. Australia has flagged creating a licencing framework for crypto exchanges to promote greater transparency and accountability.

It would be safer for Kiwis to purchase cryptocurrencies from New Zealand exchanges, rather than ones based overseas, which may not be regulated.

The New Zealand Reserve Bank also needs to get moving on developing our own central bank digital currency (CBDCs). As well as being a quick and efficient way for central banks worldwide to regulate the crypto space, CBDCs can protect investors from scams like pump and dump schemes.

Many central banks in western economies are currently planning CBDCs. The latest Financial Services Council ‘Money and You’ research report, finds 17 per cent of Kiwis are either already invested in crypto or considering investing.

It’s time for New Zealand’s lawmakers to embrace sensible regulation in the crypto space to protect these, and future investors. Afterall, sensible regulation of a booming unregulated market is a win for everyone.

Ryan Bessemer is CEO of Trustees Executors, a Licensed Financial Markets Supervisor and a leading provider of specialist corporate trustee, private wealth and back-office investment administration services