Regulators tighten their grip on cryptocurrencies

This article was current at the time of publication.

Volatility in the value of crypto assets may be a current issue but recent surveys predict they will rapidly become a major part of the business financial landscape.

Credit card giant Visa revealed in January that 24 per cent of 2250 small businesses surveyed across nine countries plan to accept cryptocurrencies such as Bitcoin as a form of payment in 2022, with 82 per cent aiming for some form of digital option.

A Deloitte survey of 2000 US-based retail organisations, conducted late last year, found that 85 per cent expected cryptocurrency payments to become common in their industry within five years.

“Peer pressure” aside, Deloitte says the business benefits of using cryptocurrencies include access to new demographic groups, new capital, and new liquidity pools.

It can also open a way to enhance traditional activities such as simple, real-time, and secure money transfers.

Crypto assets are digital assets that use blockchain technology to secure transactions and verify the ownership and transfer of coins or tokens. 

Stablecoins, a type of crypto assets, essentially are asset-backed cryptocurrency, the value of which is typically pegged to the value of an underlying asset like the US dollar.

The value of crypto assets (at the time of writing) is around US$906 billion, with at least 10,000 currencies listed on data site CoinMarketCap.

Notably, the array of cryptocurrencies and other crypto assets, such as Stablecoin and non-fungible tokens (NFTs), continues to expand. Even central banks such as the Reserve Bank of New Zealand are considering issuing digital currencies.

Taxing crypto

Reflecting their use – mainly as a speculative investment asset – the New Zealand Inland Revenue Department (IRD) has so far treated gains and losses from cryptocurrency activities as taxable income.

To ensure a similar treatment to other investment assets such as fiat currency (money), shares and bonds, taxation amendments in 2022 removed cryptocurrencies from GST, with retrospective effect to 1 January 2009, and allowed businesses raising capital by issuing cryptocurrencies to claim input tax deductions on capital-raising costs.

The IRD has noted that the changes “could help facilitate investment, business growth and technology development in crypto assets and provide certainty for crypto asset users in New Zealand”.

However, there has been considerable debate via submissions on the status of fungible and semi-fungible assets. Parliament’s Finance and Expenditure Select Committee specifically excluded NFTs from the definition of crypto assets, but IRD officials noted the fungibility issue was an “edge case” that would be monitored in the future.

The IRD has also issued a string of notices regarding the tax treatment of crypto assets as part of remuneration.

Accounting for crypto

Charis Halliday, External Reporting Board (XRB) Technical Director Accounting Standards, says issues surrounding crypto assets attract global attention.

“As crypto assets continue to evolve, so too will the associated accounting issues,” Halliday says.

“Because cryptocurrencies can be held for different purposes and will have diverse terms and conditions, the accounting treatment will depend on the particular facts and circumstances and the relevant analysis could be complex.”

In June 2019, the IFRS Interpretations Committee issued an agenda decision on accounting for cryptocurrencies (as a subset of crypto assets), indicating they are not financial assets but intangible assets in the scope of IAS 2 Inventories or IAS 38 Intangible Assets. 

The agenda decision also provided guidance on relevant disclosure requirements. 

Crypto as an investment

The Financial Markets Authority (FMA) has issued information on advising on investing in cryptocurrencies.

An FMA spokesperson says cryptocurrencies are generally not a financial product such as managed funds, shares, derivatives or debt securities, or a financial advice product like mortgages and insurance.

However, financial services or products can be designed around cryptocurrencies and these will be captured by financial advice regulation, the spokesperson says.

For example, regulated financial advice can be given about managed funds or derivatives with cryptocurrencies as the underlying asset, or an investment plan featuring crypto would likely be considered advice.

The FMA warns that anyone giving advice on buying or selling cryptocurrencies as investments, “and certainly anyone who accepts payment for this”, could be taken to be holding themselves as a financial adviser or designing an investment plan, which could breach the Financial Markets Conduct Act.

Security and crypto crime

Government cyber security agency CERT NZ reports an increasing number of scams and thefts involving cryptocurrency – some resulting in large financial loss – and has a range of advice on keeping it secure.

The FMA advises anyone in New Zealand wanting to buy cryptocurrencies to use a locally based trading platform. These must be registered on the Financial Service Providers Register, belong to a disputes resolution scheme and hold investors’ money in New Zealand dollars in a trust account.

Want the lowdown on all things crypto? Listen to this With Interest podcast.