On October 25, New Zealand’s financial regulator, the New Zealand Financial Markets Authority (“FMA”) released a statement to provide guidance on the ways initial coin offerings and cryptocurrencies would be regulated under the nation’s laws (https://fma.govt.nz/news-and-resources/media-releases/fma-commentary-on-icos-and-cryptocurrencies/).
Establishing A Regulatory Framework for ICOs
In its section on ICOs (https://fma.govt.nz/news-and-resources/media-releases/fma-commentary-on-icos-and-cryptocurrencies/), the FMA established that all tokens offered in ICOs are considered securities under the Financial Markets Conduct Act 2013.
Tokens may be further categorized as one of four types of financial products “based on [their] economic substance.” The four categories of financial products – debt securities, equity securities, managed investment products, and derivatives – each entail a specific set of regulations for issuers or managers.
The FMA’s statement provided the factors that would designate a token as one of these financial products. In brief, a token will be considered a debt security “if investors have the right to be repaid money or interest lent to, deposited with, or owed by a person, company, or unincorporated entity making a token offer,” an equity security “if investors buy, or have the option to buy, a share in a company,” a managed investment product “if investors contribute money or cryptocurrency to receive interests (tokens) in a scheme (a structure or project that allows investors to pool their money), returns, income and rewards to investors from the scheme – such as money, cryptocurrency, additional tokens, or changes in the tokens’ value – are principally produced by someone else, and investors do not have any day-to-day control over the project or business,” or a derivative “if, under the terms of the token, the issuer or holder may be required to pay an amount or provide something else in the future, and the amount to be paid or the value of the token is derived from the value or amount of something else, such as a commodity or asset.”
As an example of the way a token may be categorized as a financial product, the FMA said that “a project token giving investors voting rights and a share in the company and its profits could be designated an equity security.”
The FMA emphasized that even tokens that do not fall into one of these four categories will still be considered securities.
In addition to the specific regulations applying to each financial product, all New Zealand-based token or cryptocurrency issuers must “be a member of a dispute resolution scheme if the financial services are provided to retail clients,” “be registered on the Financial Service Providers Register (FSPR) for each category of financial service you provide,” “pay the applicable fees and levies for the relevant categories of financial service you provide,” “comply with the fair dealing provisions in Part 2 of the FMC Act,” and “comply with anti-money laundering obligations.”
Promoting Innovation and Flexibility
In addition to providing clarity on the regulation of ICOs in New Zealand, the FMA indicated its support for the industry and the efforts it will take to help it grow and develop.
Striking a collaborative and optimistic tone, the regulator stated that one of its objectives is to “promote innovation and flexibility in our financial markets.”
Elaborating on this, the FMA stated, “We want to play our part in making markets work, and greater regulatory scrutiny of token offers may be necessary to ensure this innovation can become a sustainable method of fundraising. Our focus is to enhance New Zealand’s reputation by promoting fair, efficient and transparent financial markets.”
In this vein, the FMA said that it can, in certain cases, grant exemptions to provisions of the Financial Markets Conduct Act 2013 or “if appropriate, grant exemptions to ensure FMC Act requirements are fit for purpose for ICOs.”
In addition, the regulator solicited input from stakeholders as to how ICOs could be regulated more effectively.
Some Words on Cryptocurrencies
In addition to its statement on ICOs, the FMA clarified its stance on “financial services” related to cryptocurrencies, including exchanges, deposits, wallets, and broking (https://fma.govt.nz/compliance/cryptocurrencies/cryptocurrency-services/). Any New Zealand-based business providing such services related to cryptocurrencies must comply with the Financial Service Providers (Registration and Dispute Resolution) Act 2008. Additionally, businesses running exchanges or wallets may need to follow further regulatory requirements under the Financial Markets Conduct Act 2013. In its statement, the regulator provided the specific regulations required for businesses in each of these categories.
Additionally, businesses providing financial services related to cryptocurrencies must follow the same general regulations for ICOs listed above, including registering with the Financial Service Providers Register for each category of financial service provided.