The Current State of Cryptocurrency Banking in New Zealand
Victoria and I recently attended the Blockworks event in Auckland, which featured numerous, international cryptocurrency and blockchain experts speaking on the technology, its advantages, and in some cases, its flaws.
Joshua Vile was one of the guest speakers. He covered various opportunities cryptocurrencies, distributed ledger technology (DLT) and blockchain has in New Zealand right now and looking into the foreseeable future. During his presentation, he stated he had asked a number of businesses operating the cryptocurrency industry 'What is the biggest pain you have?' to which, the majority responded 'banking.'
He agreed that finding a banking provider in New Zealand takes hard work and depends on who you know, but it is possible.
So, what is the Deal with Cryptocurrency Banking in New Zealand? Why do Companies Operating in the Cryptocurrency Industry Find it so Tricky to Maintain Banking Services?
Cryptopia, one of the largest altcoin exchanges in the world, found themselves suddenly de-banked on February 9th 2018. For a company trading over NZD$5million per day, this was a huge hit.
Working at BitPrime, I know how difficult it is to maintain banking services. I've seen a few bank accounts come and go since starting here in August 2017. For the longest time, it was our 'Achilles heel.' We were constantly looking for new bank accounts and having backups 'just in case.' For a long while, maintaining banking services was one of our most significant expenses. It doesn’t seem quite right does it?
We are so fortunate and pleased to announce we have established merchant banking services with a New Zealand banking provider. It indeed is a relief. With banking services came added security and protection, and with that, the entire BitPrime culture changed for the better. It really did affect us in all aspects of the business.
Are Banks 'Loosening the Leash' in Regards to Cryptocurrency Banking?
In short, I don't know. I do believe banks pictured cryptocurrency as a FAD, and perhaps overlooked the technology in the early days, and I don’t blame them. The unknown and mysterious ‘Satoshi Nakamoto,’ created a digital currency that was worth USD$0.003 in March 2010, which rocketed up to USD$18,000.00 in December 2017. It really does sound like something out of a movie.
But, as Bitcoin and cryptocurrency begun to build interest and appear in mainstream media, I can only assume banks started to see the technology as a threat. Perhaps the idea was to work against the industry and hope that one day it would dissolve. A strategy that didn’t prove to be effective. It's obvious the technology is not going away. It's here to stay.
Building on that point, Victoria recently released a blog where she compresses a report by Associate Professor Alexandra Sims from the University of Auckland (also spoke at the Blockworks conference), Dr Kanchana Kariyawasam from Griffith University, and Professor David Mayes from the University of Auckland.
The authors recommend the Reserve Bank of New Zealand trial the creation and issuance of a New Zealand Central Bank-issued Digital Currency (CBDC). If the leash isn’t loosening, reports like this are definitely putting a strain on it.
Things are Starting to Change as we Head into 2019
Kiwibank state they are supporting cryptocurrencies in a number of ways. They are 'generally' happy for customers to transact in Bitcoin or other cryptocurrencies for personal use but are unable to offer banking services to businesses working in the cryptocurrency industry due to the third party risks involved.
I understand where they are coming from here. Essentially, banks are responsible for understanding the source of all funds that they hold or transmit. If your businesses AML policies and procedures aren't up to scratch, how can a bank provide their services?
Businesses operating in the cryptocurrency industry need stringent and thorough AML/KYC processes. To satisfy the banks you have to be better at AML/CFT than they are. This is in addition to the NZD having already undergone the bank's scrutiny before reaching the crypto business.
This is why BitPrime employs a strict AML/CFT-specific policy. Blockchain is an emerging industry, with fraudulent connotations, operating in uncharted waters while the world watches with a microscope. But this is not where my issue lies.
The story with ANZ is very similar to Kiwibank. They do not prohibit customers from buying cryptocurrencies or accepting it as a form of payment. However, they are not able to provide banking services to 'businesses that operate as issuers, dealers or exchanges of digital or cryptocurrency,' stating 'these businesses are currently unregulated and therefore not within ANZ policy.'
While Kiwibank state the support blockchain technology, ANZ is expending resources researching and testing the technology to create more efficient processes.
In April 2018, ANZ demonstrated how distributed ledger technology (DLT) could solve inefficiencies found in insurance policies that brokers manage and the corresponding payments to insurance companies. It's terrific to see ANZ open to implementing blockchain technology within the banking structure.
Westpac is in the same boat as ANZ in regards to research and implementation. The two banks worked together, alongside IBM to digitise the bank guarantee process used for commercial property leasing, using DLT. You can view the whitepaper for this project here.
Not only that but in September, Westpac revealed they are developing one the world's first proofs-of-concept, that digitises inventory management, procurement and trade. This will allow smart contracts to administer stock orders automatically, while artificial intelligence will recognise the ideal time to place the order.
The development of this project does not mean it will be commercialised and brought to market, but the fact that Westpac is dedicating time and resources to researching it shows unparalleled innovation.
'I want Westpac to be seen as a thought leader in this space.' - Didier Van Not, Westpac Corporate and Institutional Banking General Manager.
ASB has made it clear that they see potential in blockchain technology. They recognise the current banking system has flaws: it's 'clunky and expensive, and can take days to settle a transaction,' their words not mine!
ASB recognises that the adoption of blockchain may require them to pivot their operating models to retain customers. They will embrace technological advancements and are prepared for change, so long as they better fulfil customers needs.
'Our overarching goal is to meet our customers' needs by being today's bank, with tomorrow's capability.' - Barbara Chapman, ASB CEO
Be aware, in some cases, ASB will shut down personal accounts that are associated with buying or selling cryptocurrency.
BNZ have kept their cards relatively close to their chest so to speak. I scoured the internet for anything BNZ and cryptocurrency related and came up blank. Evan Veza, BNZ’s Head of International Business Develop has touched on a whitepaper published by the EHF Working Group, which explores some opportunities blockchain offers New Zealand from an economic, social and environmental point of view. But, he simply states the whitepaper has been published and doesn't expand on his personal thoughts and feelings.
Tony Alexander, Chief Economist at BNZ mentioned blockchain in his weekly overview from 21st June 2018, though he is rather vague as well. Tony explains blockchain has the potential to wipe out whole industries that specialise in fake art, fake pharmaceuticals and mislabeled food products. He goes on to say he would be working in the blockchain field is he were 30 years younger and was ‘technologically bent.’ Still, no indication of BNZ’s stance when it comes to cryptocurrency.
On October 3rd 2018, BNZ did announce they are working in conjunction with IBM to integrate “a modern transaction monitoring system that allows banks to intercept fraudulent activity before it happens while ensuring customers’ genuine transactions are not stopped in error.”
As we know, IBM is spending a copious amount of time and resources looking into blockchain technology. Here are three articles I found on Coindesk by simply searching ‘IBM,’ the oldest of which was published on the 27th of September!
- IBM's Food Blockchain Is Going Live With a Supermarket Giant on Board
- IBM Wins Patent for Blockchain-Based Network Security System
- IBM Expands Blockchain Partnership With Insurance Broker Marsh
Who knows, perhaps BNZ and IBM are working on something that is yet to be released, or maybe BNZ is simply exploring other technologies such as AI, and avoiding blockchain entirely.
Banks Love Blockchain but Hate Cryptocurrency?
It is clear most banks are open to blockchain, and willing to invest time and money into the technology provided they see direct benefits. Banks, after all, are profit-maximising businesses. This is where an issue lies: cryptocurrency and blockchain are separate concepts and use distributed ledger technology differently.
The blockchain is a digital, distributed ledger that composed of a chain of blocks. Each block carries information and data that is stored in a secure, verifiable and permanent way. New blocks are validated and attached to the blockchain.
Banks are happy to utilise centralised, private blockchains for their own benefit: they are for-profit businesses after all. Time and time again, blockchain proves it can increase their user experience through efficiency and immutability. A blockchain network can be controlled by a central entity. Therefore, using blockchain, at least from the banks perspective, is not a threat.
That is not the Case with Cryptocurrency
Cryptocurrency, on the other hand, are a token-based distributed ledger. Cryptocurrencies are digital currencies built on top of blockchains and allow people to invest in the value of the underlying blockchain.
The technology has the ability to remove the need for intermediaries by offering a decentralised trust model that is not reliant on a single entity. With cryptocurrency, you and I are the bank, and transactions are peer-to-peer with no third party involvement.
What’s more, cryptocurrencies allow anyone to have access to trade and finance, something that was considered a luxury ten years ago. Back then, banks were the only ones to create value: they were the givers of loans, the creators of money, and the primary source of storing value.
With cryptocurrency, anyone can create, exchange and trade value. Initial coin offerings (ICO’s) grant everyone the ability to create value, and the market decides its worth. Once created, anyone can trade or exchange the value, in the form of cryptocurrencies. This is the first time in history trading value with input from a bank has occurred since their inception.
Cryptocurrencies, as a result, have the ability to lift a lot of people out of poverty. It's not just transactions that cryptocurrency facilitates: loans and mortgages fall to the wayside as well, take a look at Salt (SALT) for example. Eventually, this technology may make banks obsolete, or at least for everything other than a wholesale balance sheet provider.
Are you Starting to see why Banks aren't Overly Supportive of Cryptocurrency?
An excellent example this type of behaviour is seen with Australian cryptocurrency exchange Independent Reserve, and their relationship with ANZ, Kiwibank and Westpac. Independent Reserve allows users to deposit AUD, USD and NZD to their account and then trade the deposited fiat for cryptocurrency.
Unfortunately, any New Zealanders banked by ANZ, Kiwibank or Westpac do not have this luxury. Any deposits that come from these banks are rejected and refunded within 1-2 weeks.
Independent Reserve states:
‘We do our best to support all banks, but unfortunately some banks do not support us. We have a particularly hard time with NZ banks for various reasons, ranging from them auto-converting funds to different currencies, to them flat out calling us a scam. [Independent Reserve] would love to work with all banks, but it's often not possible. We'll try and keep you updated on which banks are workable.’
This demonstrates the unsupportive nature of New Zealand banks towards cryptocurrency and demonstrates their current stance towards the industry. Is it ethical for banks to do this? We ‘own’ the money in our bank account, yet we don’t have control over it? Independent Reserve operates within Australian Government law and regulations. Do banks think that their judgement is better or more important than the Australian Government?
New Zealand as a Global Blockchain Hub
New Zealand has a chance to become a hub for blockchain and cryptocurrency based activity. As Joshua Vile explained at Blockworks, our current regulations need minimal adjustment to combat this technology. With the technology comes high tech jobs at an ever-increasing rate: jobs that are well paid, interesting and make a real difference in society.
Take a look at EPIC Westport for example: a business hub, founded by husband and wife, Ben Dellaca and Tash Barnes-Dellaca, which offers an open plan co-working space, private offices, and meeting rooms for individuals or small businesses available for however long you need, whether that is for one day, one month, or permanently.
Ben has a passion for blockchain tech, and many of the businesses operating at EPIC are blockchain-based. NEM, TravelbyBit and CerebalFix are a few that come to mind. Blockchain or not, EPIC stimulates the Westport economy by providing support to all businesses, big or small.
I give a tremendous amount of credit to Ben, Tash and the rest team at EPIC for their accomplishments. They have inspired, encouraged and stimulated the entire West Coast region with their efforts. I couldn't think of a better way to reinvigorate an economy that saw 1200 (of the 4000) residents lose jobs just a few years ago.
However, this is not where this type of activity should stop. EPIC has set a precedent for how New Zealand could look in the future. Blockchain hubs, similar to Epic, found all over the country: and when I say all over the country, I don’t mean the major cities, such as Auckland, Wellington and Christchurch. Remember, working remotely is widely accepted in the cryptocurrency industry. Epic demonstrates how hubs can function in cities and towns, big or small, up and down New Zealand.
As the late Sir Paul Callaghan put it 'New Zealand is a place where talent wants to live.' Unfortunately, the major banks in New Zealand are blockading the entire industry as best they can.
Malta Leading by Example?
Maltese Prime Minister Joseph Muscat believes cryptocurrencies are ‘the inevitable future of money,’ and is paving the way for regulation in the industry. Malta has built its own regulatory framework for cryptocurrency, aimed to attract blockchain businesses, and it has been extremely successful.
Binance, the largest exchange by volume, (NZD$1,062,605,573 24hour) made the move from Hong Kong to Malta once legislation was implemented. Another notable exchange based in Malta is BitBay, and it appears OKEx is in partnership with the country and plans to launch an exchange there in the foreseeable future.
Additionally, the country now hosts the Malta Blockchain Summit, serving as a showcase for the ecosystem and justify the efforts made by the Maltese government. The summit is expected to have over 5,000 people in attendance.
I’m not saying New Zealand could replicate the situation in Malta, but it is an excellent example of the economic stimulation that can occur when government and banks work together to properly regulate blockchain technology. Proper regulatory frameworks mean very little if an organisation cannot secure banking services.
How can Cryptocurrency Change our World?
There is so much hype about cryptocurrency, lots of scepticism and people viewing it as a digital currency and nothing more. Originally, cryptocurrency (or Bitcoin) was just a digital currency, but it has been 10 years since Bitcoin was released, and technology has come a long way since. Now, cryptocurrency, or blockchain technology has many use cases and eventually could affect every aspect of our lives.
For this part of the blog, I am going to (mostly) reference Associate Professor Alex Sims’ report ‘Regulating Cryptocurrencies in New Zealand.’ Sims is somewhat of a knight in shining armor for myself and within the office: her report is eye opening. I encourage anyone with 176 pages of time to check it out.
Sims states blockchain will not reach its full potential if cryptocurrencies are unable to be used. Blockchain technology has already proven it can make existing processes more efficient. Banks are utilising the advantages blockchain offers. In her report, Sims explains KlickEx, a New Zealand remittance business is using cryptocurrency Stellar Lumens (XLM) as part of their transaction process in conjunction with IBM. As a result, New Zealanders sending money to the Pacific Islands are unknowingly using cryptocurrency.
It is obvious that the use of blockchain technology can make existing processes more efficient, so the question should be: are we happy with our existing processes?
Example of Current Inefficiency
At the Blockworks conference, Sims’ explained the process of viewing your medical records, which is as follows
- Go onto the Ministry of Health website and print a form
- Fill out the details on the form and explain why you need access to YOUR medical records
- Scan the form and send it to the Ministry of Health
- The Ministry of Health will process your application within 20 working days (that's four weeks)
- If the Ministry of Health decides your reasoning is valid, the will grant you access to your medical records. Conversely, if they decide the reasoning you have given isn’t valid, they will deny access to your records
- If approved, the Ministry of Health will send your medical records via NZ post. And, if it’s an emergency, they will fax them
Do We Truly Own Our Data?
Can you believe that! We need to jump through all of those hoops just to gain access to our own medical records, and we still might not get them. I see banking in a similar light.
We don’t really have control over our funds so long as they are stored in a bank account. Banks have the ability to pick and choose who we send funds to, and when we can access our money. The Independent Reserve example above is a prime example of this.
Cryptocurrency puts the control back into the peoples hands. Currencies like Icon (ICX) and Dentacoin (DCN) are focussing on giving people control of their insurance records, medical records, and dental records. Imagine if we could own our own records, and when we go to the dentist (for example), we give them access to our records, not the other way round.
Cryptocurrencies allow us to update fundamental processes that have not changed in hundreds of years, such as banking and finance. Things that were considered impossible before are now possible. A never before seen level of transparency and openness is available in a world of ever-growing corruption and control. To quote Sims, “if a government funds a project, whether it is building a road or foreign aid, it becomes possible to see in real time exactly where the money was spent and what is was spent on.”
She continues “money could be programmed so that it can be paid only to specified organisations and people. Thus it is not simply a case of having an audit trail if things go wrong; instead, wrongdoing cannot occur because money cannot be transferred to the wrong organisations or people – code can be law.”
How can Smart Contracts Change our World?
Smart contracts have opened the door to a huge number of opportunities to improve and change existing processes. Put simply, smart contracts are a set of rules. Generally, these rules state if A occurs do B.
For example, a smart contract could be used to buy a plane ticket. The contract can be created so that, if the flight is cancelled, I am automatically and instantaneously refunded. The flight was cancelled (A), which triggered the refund (B). For more information on smart contracts, read over our blog ‘What you need to know about smart contracts?’
Additionally, if I needed to get to my destination, I could create a contract so that if the flight was cancelled, I would automatically buy a ticket for the next flight going to my desired destination. If money is an issue (of course!), I can ask that the smart contract contacts me via an app. Which then asks for approval before buying a ticket for the next flight. If the flight is too expensive, I can decline and the funds are transferred back to my account: if I can afford the flight, I accept and the funds and transferred from my account.
It's Still Early Days
Smart contracts are still in early development and are relatively simplistic. Of course, errors in smart contract code is still a risk and can cause major issues, but this technology is progressing quickly and it is not far fetched to imagine one day cities will be built on it.
Take, the false missile alert that occurred in Hawaii earlier this year. State Governor David Ige indicated the alert occurred because an employee accidentally pressed the wrong button. One day, alerts like this may be initiated by smart contracts. If a satellite picks up on a missle (A), the smart contract will automatically and instantly contact people in the affected area (B). An example that may be a little more relatable for New Zealanders is earthquakes. Alerts could be automatically and instantly sent to residents close to the sea, warning of a tsunami.
The same could be said for traffic lights in cities. If a build up in traffic is detected (A), a traffic light will stay green for a longer period of time (B). In everyday living: If the temperature outside goes above 25 degrees (A), the windows in said rooms will open (B).
Technology really has the potential to affect every facet of the world, which is the point I am making. A bird this big can’t fly if the banks have clipped its wings.
Working in the cryptocurrency industry, I realise I have a somewhat biased opinion when it comes to blockchain and banking. My goal for this blog is not to persuade or convince anyone to convert to cryptocurrency. But, simply ask that you think about your past and how you would like the future to look. Ask yourself, are you happy with the world we live in today, if not, what changes need to be made?
The world is changing and an exponential rate due to modern technology. In the recent past, we saw the whole payment system flip on its head as a result of EFTPOS cards. The way we communicate changed entirely with the commercialisation of cell phones. And of course, the internet and how it now affects every aspect of our life.
What is going to be the next great piece of technology to impact the world? For me, I believe it is cryptocurrency.
Over to You
What are your thoughts? Have you had any positive or negative experiences with your bank and cryptocurrency? Let us know in the comments below.
Westpac leader in blockchain
Cryptopia losing bank account
ANZ report on DLT
Kiwibank and crypto
Westpac media release
Westpac whitepaper on blockchain
Another ASB article
ASB closing accounts
BNZ touching on blockchain in whitepaper
Disclaimer: The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The opinions expressed by the author do not represent the opinion of BitPrime.
Images courtesy of Shutterstock or BitPrime unless stated otherwise.
Last updated: 29/11/2018