Cryptocurrency conundrum: Reserve Bank & IR fumble in the dark

What is a payment? With digital currencies making headway, the traditional cash economy is no longer alone.

New Zealand is grappling with digital currencies and their applications in the real world. This is an important part of New Zealand's future economy and business, particularly for employers and banks that may want to normalise cryptocurrencies in everything from salaries to share trading.

We take a look at key players: Inland Revenue, the Reserve Bank, the Financial Markets Authority and the New Zealand Law Foundation to see their perspectives. Meanwhile, Facebook and private organisations charge ahead with their own currencies that could become the next harbinger of economic balance.

Inland Revenue v. cryptocurrencies: To PAYE or not to PAYE? 

Inland Revenue is one of the latest New Zealand organisations trying to get its head around digital payments. It recently outlined tax implications if New Zealand businesses were to pay salaries in crypto-assets. While Inland Revenue isn't taking an official position about whether such forms of payment are a good idea, it is reminding people that tax responsibilities still apply.

The Inland Revenue (IR) August 2019 Tax Information Bulletin states that some employers pay employees in crypto-assets, including cryptocurrencies.

IR says salary and wage payments have shifted with the times: physical cash made way for the cheque, which in turn made way for direct credit into bank accounts. Crypto-assets have also existed since at least 2009.

But how would IR tax cryptocurrency-based salary and wages? In theory, tax is applicable if:

• the crypo-asset can be converted into a fiat currency at an exchange;
• if the value of the asset is tied to a fiat currency; 
• or if 'a significant portion' of the asset functions like a currency.

Taxation could be implemented on a broader scale in two ways: The first includes an agreed cryptocurrency deduction from the employee's gross salary or wages, so that the employee is paid part of their salary in traditional dollars, and other part in cryptocurrency. The most common income tax system PAYE (Pay As You Earn) would be applied to both. So, whether payments are in dollars or in cryptocurrencies, both are liable for taxation.

The alternative is to recalculate gross salary or wages, also termed a salary sacrifice – although there are still questions about whether such a method would be subject to PAYE.

Payments of crypto-assets not subject to PAYE will also be classified fringe benefits and subject to Fringe Benefit Tax (FBT).

In a statement to TechDay, Inland Revenue says:

"The essential message is that cryptocurrencies are treated like property for tax purposes so if you acquire it for the purpose of selling or exchanging it, the proceeds you make from selling it are taxable."

"Our recent guidance on the tax implications of using crypto-assets to pay salary or wages has seen considerable interest. We're unaware if there's any real demand from people to be paid in cryptocurrency but there has been interest in understanding the tax implications so that's what we've provided."

"It's not for Inland Revenue to sanction the use of cryptocurrencies to pay salary or wages. We don't have the authority to do that. This is about making sure the tax implications are clear.

The Reserve Bank 'not ready' for a central digital currency

As the country shudders under the shadow of a cripplingly low official cash rate, The Reserve Bank is quietly analysing digital currencies.

The Reserve Bank's June 2018 bulletin outlined the pros and cons of a central bank currency, with Deputy Governor Geoff Bascand stating that it's just too early to decide whether New Zealand needs such a currency.

"The payments industry is dynamic, and the Reserve Bank is searching for ways to harness new technologies and do things better. Maintaining trust and confidence in our currency, and in the payments and banking system means that in a gold rush we must be a very considered prospector; we have New Zealand's financial system at stake," he says.

Despite a shifting digital payments landscape, the Reserve Banks looks unlikely to change its position anytime soon. In a statement provided to TechDay, the Reserve Bank wrote:

"The bank's position is still as stated previously.  Along with other central banks and financial sector regulators we are watching developments and proposals closely – but nothing has come across the bank's desk requiring evaluation or decision under our mandates."

Citing the November 2017 Financial Stability Reportarticle FinTech developments and implications for RBNZ regulatory responsibilities, the following conclusion remains current:

"Looking ahead, the Reserve Bank will need to monitor how FinTech may change the dynamics in the financial sector, in order to identify how the risks faced by regulated firms are evolving. Over time, such developments may require a change in the Reserve Bank's supervisory approach and a change in the types of entities or activities that are captured within the perimeter of prudential regulation."

"At the same time, the Reserve Bank is coordinating with other agencies to ensure that New Zealand provides an environment that does not hinder digital innovation, provided that the innovators operate safely and observe relevant regulations."

With the Reserve Bank unable to commit to a digital currency, the government and Financial Markets Authority don't seem to have too much cause to act.

Govt - FMA still not regulating cryptocurrencies

The Financial Markets Authority (FMA) does not regulate forms of alternative capital raising such as cryptocurrency exchanges, leaving anyone who decides to trade cryptocurrencies open to risk.

The FMA suggests that traders use due diligence and make sure than any New Zealand-based exchange is registered on the Financial Service Providers Register (FSPR); is a member of a dispute resolution scheme; and holds traders' New Zealand dollars in a trust account. In other words, caveat emptor – buyer beware.

Study lobbies for blockchain benefits

In September 2018, a report by academics at the University of Auckland and Griffith University declared that there needs three ingredients to benefit from blockchain: a central bank-issued cryptocurrency, thriving cryptocurrency exchanges, and the ability for businesses to trade in GST-free cryptocurrency.

These comments come from the New Zealand Law Foundation-funded Regulating Cryptocurrencies in New Zealand report, which encourages the government to support New Zealand as a fintech and blockchain hub.

According to the report, businesses that accept payments in cryptocurrencies and New Zealand exchanges are potentially subject double GST taxation – once on the currency and once the goods and services. This, the report's authors say, cannot be justified.

The report suggests nine recommendations. They include Inland Revenue accepting cryptocurrencies for tax payments; better support from the FMA and Department of Internal Affairs for consumers; and the removal of GST from cryptocurrencies used to pay for goods and services.

Facebook - private firms take cryptocurrencies into their own hands

Facebook announced plans to launch its own cryptocurrency called Libra back in June 2019. Regulators involved in Facebook's US Congressional Hearing became increasingly worried about what would happen if they allowed a global social media giant those kinds of powers.

"If products and services like these are left improperly regulated and without sufficient oversight, they could pose systemic risks that endanger US and global financial stability," says a statement from US House of Representatives Committee on Financial Services chairperson Maxine Waters.

Regulators ask if Facebook can be trusted to manage what could possibly become the world's largest privately-owned cryptocurrency.

But Facebook is just a high-profile example of many organisations that have invented their own cryptocurrencies. JP Morgan Chase issued its own coin called the JPM Coin in 2019. Asian giant Tencent also has its own coin called QQ Coin. Google, Amazon, and Air Asia are also interested in creating their own cryptocurrencies.

Cryptocurrencies – scarred by bad luck, market volatility, scams, and abuse

Cryptocurrencies have also been marred by volatile markets, and cyber attacks.

Much of the publicity centres around the most well-known cryptocurrency, Bitcoin. As of August 26, one bitcoin is equal to NZ$15,853.78. On August 20, it was worth NZ$16,929. Other currencies include Ether (trading at NZ$292.70, down from NZ$312 on August 20), and Litecoin (trading at NZ$113.68, down from NZ$119 on August 20). Currently there are more than 1600 different cryptocurrencies, many of which fluctuate wildly in value from day to day.

New Zealand's own cryptocurrency exchange Cryptopia lost $23.5 million in cryptocurrency firsthand. It ended in company liquidation, with rumours that the founders conducted an 'exit scam'. Nothing has been proven but it does underscore that cryptocurrencies are widely used for cybercrime – but that shouldn't be the defining use case.

A long road left to travel

Governments are keeping a better pace with technology than they used to, but it seems that digital currencies are an issue that nobody knows how to deal with. Meanwhile, private organisations are testing the waters in every way possible.

For now, governments may see private enterprises' experiments as examples of how to (or how not to) include digital currencies in future regulation. In the meantime, it seems that there are murky waters ahead with plenty of circling sharks.