Most so-called ‘crypto-currency’ products and services offered to retail consumers in NZ would likely fall under the aegis of the regulator, according to Garth Stanish, Financial Markets Authority (FMA) director capital markets.
Stanish said the rise of crypto-currencies and related offers such as so-called initial coin offerings (ICOs) had both regulators and consumers scratching their heads on where they fit in the investment picture.
“But at the end of the day these are financial products… and investors need to understand the risks,” he said.
Last week the FMA added its two bitcoins worth (on current values equating to $16,724) to the crypto-debate with a new guide for retail investors on ICOs et al.
The FMA guide-cum-warning coincided with a scandal brewing offshore around latest ICO darling, Tezos. Reuters reported the US$232 million Tezos ICO – “one of the largest” to date – had investors spooked following a stand-off between company founders and the Swiss-based foundation that controls the funds.
“The dispute has highlighted the risks in the current frenzy over initial coin offerings (ICOs) which have raised more than $2 billion this year,” the Reuters report says. “ICOs are an unregulated means of crowdfunding in which a new cryptocurrency is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin to raise funds for startup companies.”
Stanish said while trend had yet to impact NZ directly in a big way, ICOs would inevitably be offered here as well. However, given the trans-border nature of most crypto-currency based offers, a few (or more) New Zealanders would undoubtedly have invested in some of these speculative ventures with no regulatory protection.
The FMA was collaborating closely with other regulators and the global financial cop industry body, the International Organisation of Securities Commissions (IOSCO), on the growing crypto-currency challenge, he said.
In February this year IOSCO published a report that concluded the new global financial technology could “create challenges in terms of regulatory consistency, as well as cross-border supervision and enforcement”.
“It also creates a potential risk of regulatory arbitrage,” the IOSCO report says, that could only be countered by global cooperation between regulators.
The IOSCO report also says most crowd-funding type offers – which ICOs resemble – probably “cross the line into the realm of ‘regulated activities’”.
IOSCO has slated ICOs for further investigation.
For the time-being the FMA will assess crypto-currency offers and associated digi-derivatives like ICOs on a case-by-case basis – Stanish said budding providers should approach the regulator early.
“As this sector develops, we will continue to monitor and consider what additional regulatory support and requirements may be appropriate for the offer of these products and services,” the FMA guide says.
The regulator notes it had wide exemption powers – highlighted in the recent robo-advice ruling – that could be granted in the crypto-space where appropriate.
“Other ideas mentioned to us regarding the possible regulation of ICO and token offers include creating a new category of prescribed intermediary service similar to the equity crowdfunding model,” the FMA says – although the required law change was not a favoured option for the regulator.
However, Stanish said innovations like ICOs and blockchain were “likely to be extremely influential” in the future.
“We’re at the dawn of the internet age [for finance] that could bring in fundamental changes,” he said. “No one can be sure how it’s going to develop but it’s not in anyone’s interests that it happens in a regulatory vacuum.”