Crypto offers the prospect of making big profits quickly, which inevitably attracts scammers and fraudsters – and a potentially tough race for investors. Photo / Michael Cunningham
It seems everyone is talking about investing in cryptocurrencies. It’s no surprise when around 220 million people are actively trading cryptocurrencies, generating over 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 akin to the old Wild West. Anyone can create a crypto asset, with or without the backing of physical assets.
The crypto is also volatile, often fluctuating huge amounts in a short period of time. In the first half of 2022, Bitcoin and Ethereum are down more than 50% from their all-time highs at the end of 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 entice investors to buy tokens at inflated prices under the guise of creating the next batch of crypto millionaires.
The people who own the most tokens sell out, which causes the token’s prices to plummet immediately. This can drain an unsuspecting investor’s assets overnight.
Globally, there are many examples of pump and dump programs, such as SafeMoon, which have been promoted by A-list celebrities on social media sites such as Reddit, Twitter and TikTok, which are become virtual gathering places for crypto investors.
New Zealand has not been immune to dodgy cryptosystems. In 2021, the Commerce Commission shut down a tiered cryptocurrency marketing pyramid scheme called Lion’s Share that encouraged Kiwis to pay hundreds of dollars to join in hopes of being rewarded with cryptocurrency from each person they registered.
One of the promoters of the scheme was an Auckland-based YouTuber who claimed to have earned $154,000 from Lion’s Share in less than two weeks.
Cryptocurrencies are here to stay, but they are currently unregulated in New Zealand. This is a rare opportunity for our legislators to enact sensible policies.
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 needed.
As a starting point, the main objective of any future crypto regulation in New Zealand must be to protect Kiwi investors.
For example, South Korea introduced cryptocurrency regulations that reduced the number of available cryptocurrencies from around 60 to five. This regulation has benefited investors by banning less established and serious cryptocurrency sellers.
Anti-regulation crypto enthusiasts say the big appeal of digital currencies like Bitcoin is that they are decentralized and new regulations would threaten innovation. I do not agree. Crypto investors currently have little to no protection in the market, as there is no regulatory framework in place to ensure asset protection.
Sensible regulation has the potential to protect long-term investors, prevent fraudulent activities such as pump-and-dump schemes within the crypto ecosystem, and provide clear guidance to enable companies to innovate in the crypto economy.
Well-targeted advice could also help reduce speculation among crypto assets. Less speculation can lead to greater investor confidence, which could attract longer-term investors who are wary of a highly speculative and volatile crypto market.
Regulation is lagging behind to protect investors from crypto crime which has grown exponentially over the past couple of 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 review Australia’s regulatory approach which legalized crypto transactions in 2017. Australia reported the creation of a licensing framework for crypto exchanges to promote greater transparency and accountability.
It would be safer for Kiwis to buy cryptocurrency from New Zealand exchanges, rather than those based overseas, which may not be regulated.
The Reserve Bank of New Zealand must also work to develop its own central bank digital currency (CBDC). Besides being a quick and efficient way for central banks around the world to regulate the crypto space, CBDCs can protect investors from scams such as pump and dump schemes.
Many central banks in Western economies are currently planning CBDCs. The Financial Services Council’s latest research report “Money and You” reveals that 17% of Kiwis are already invested in crypto or considering investing.
It is time for New Zealand lawmakers to enact sensible regulation in the crypto space to protect them and future investors. After all, 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.
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