Op-Ed – Response To ASB Bank’s Article On Disruptive Technology

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Executive Brief

One of the main sources of frustration for those of us who are blockchain and cryptocurrency enthusiasts is the degree to which big companies and large financial institutions still don’t understand our industry. Earlier this week, one of New Zealand’s largest banks ASB released a blog post by their General Manager of Global Markets, Nigel Annett. We believe that post offers tremendous insight into how financial institutions and other major organizations are thinking about cryptocurrency and blockchain adoption.

Read the full story below


The views expressed in that post continue to be common around the world. While the blog post demonstrated an improved understanding of many aspects of the technology, we were concerned about ASB’s lacklustre attitude to the imminent impact blockchain and cryptocurrencies will have on global businesses and major financial institutions.


The main flaw in ASB’s understanding, endemic to the entire traditional financial system culture, is that they don’t understand the full value proposition that cryptocurrencies will offer to business in the very near future. These companies will view the traditional banking system as a limiting force upon them once these value propositions are realized (particularly those with international customers). Unfortunately, in New Zealand, the Reserve Bank, the Inland Revenue Department (NZ’s state tax authority), and even the central government may be overestimating the influence they will have on cryptocurrencies and blockchain solutions as they understand their use in other contexts to date.

This article will explain the institutional cognitive dissonance between the way these organizations think cryptocurrencies will affect them and the real impact they are likely to have. It will discuss the decisions these institutions will need to make, particularly in New Zealand markets.




The development of blockchain technology will also have a significant impact on finance.  While there are few use-cases currently at scale (other than Bitcoin), the potential exists for substantial growth in areas with significant customer friction.

While it is true that blockchain technology will have a “significant impact”, there are many other currencies, aside from Bitcoin that are at scale, designed, and ready for consumer, institutional, and other uses. The institutional misunderstanding of these estimable cryptocurrencies has resulted in a failure to recognize that smaller cryptocurrencies do not need to be at scale in order to be consumer-effective. This will be realized exponentially as corporations wake up to just how efficient cryptocurrencies can be at mitigating the many daily problems that businesses have previously accepted as risks that CEO’s and other executives simply need to manage. Examples of these risks include foreign exchange and commodity price swings, and other input costs. Take, for example, the omnipresent issue of bad debts and invoice non-payment that plague businesses of all sizes. These can easily be solved using something like the completely currency-integrated automated invoicing system that DNotes has developed, eliminating them entirely.

International payments and cross-border trade of goods and services are two examples where transaction flows can be slow, expensive and require a trusted third party (i.e. a bank) to intermediate parties to the transaction.  Blockchain potentially eliminates this friction, requiring banks to pivot their operating models in order to retain the customer.

Traditional banking currently enjoys a grace period in which modern businesses tend to be unaware of just how efficient cryptocurrencies will be in mitigating these issues. We are of the opinion that the world is approaching the singularity of a totally new landscape of international finance where reserve currencies may not even be a desirable requirement for the first time in hundreds of years. This could emerge with thousands of cryptocurrencies or product-backed tokens being released by companies, denominated in the national currency used for taxes and salaries, in order to take payments for foreign goods and services.

For example, Fonterra Co-operative Group Limited is New Zealand’s largest company, responsible for approximately 30% of the world's dairy exports. Most of Fonterra’s product is sold in overseas markets, leading to the company operating massive financial instruments to mitigate the foreign exchange risk and conduct business operations internationally. The following links [1] [2] [3] [4] from Fonterra’s Annual Financial report show how large their Foreign Exchange positions are required to be in order to facilitate their international operations, owning hundreds of millions in foreign exchange derivatives simply to hedge these risks. This massive financial burden could be all but eliminated by issuing their own milk-product-backed cryptocurrency token. There are many ways that Fonterra could embed value in this hypothetical currency (let’s call it “Milkbucks”), but the most obvious would be to peg Milkbucks to either the global milk price, at a one-to-one trade value for Fonterra milk product (per Litre / Kilo), by placing Fonterra equity or claim to profits in the currency, or any of the other various options used by the new generation of cryptocurrencies.

Foreign buyers of Fonterra products could then purchase Milkbucks on open exchanges, or directly from Fonterra. If Milkbucks were priced in New Zealand Dollars, all Fonterra would have to do would be to convert them back into New Zealand dollars for salaries, taxes, dividends etc. If Fonterra utilized a blockchain-based invoicing system similar to the one that DNotes is developing, they would also completely eliminate non-payment of goods. Until now these constraints have simply been accepted by executives as a reality of doing business, but now they can be relegated to the trashcan of history, allowing executives and companies to focus on their core competencies instead of running pseudo FX hedge funds. This alternative will become increasingly attractive to previously burned executives seeking practical and easy to implement solutions. Cryptocurrencies became ‘legitimate’ in the eyes of many people and investors in 2017; this year will be the beginning of adoption by big businesses.

“The clear lesson for me is that work life for my children will be vastly different to what it has been for me, and that ‘Moore's Law’ is expanding to the wider economy.  In many cases, we are at the ‘knee’ of the exponential curve where adoption of new technology is on the verge of explosive growth rates.  The implications are far-reaching, from structural changes in the job market to where we live and how we work.”

New Zealand’s traditional authorities are going to have to ask themselves what their response will be to the exponential rise and the new reality of the cryptocurrency landscape. The biggest issue facing them is their misunderstanding of the power discrepancy in decisions that must be made surrounding cryptocurrencies and other blockchain implementations as applied to real market uses, and their consistently growing ubiquity.

It is our view that only a handful of potential scenarios exist. None of these will be viewed by the government as a perfect scenario (obviously because some cryptocurrencies can complicate financial monitoring), but the game theory Nash Equilibrium, to us, seems obvious. The best that New Zealand’s government agencies can hope for is containment, allowing cryptocurrencies to flourish in a ‘legitimate’ way, because cryptocurrencies are ‘Anti-Fragile’. This means that by virtue of being a parallel system that is not party to the traditional system—the more pressure that is placed on them by traditional institutions, the less incentive users will have to go back to those traditional systems (i.e. the $NZD).

New Zealand’s tax agency—the Inland Revenue Department—indicated late last year that cryptocurrencies may be treated as personal property similar to holding gold bullion, in lieu of them releasing more specific guidelines. This would mean that cryptocurrency owners would need to pay taxes on any realized gains. The main problem with this is that people would then have no need to go back into traditional currencies if they know they will be taxed for doing so. Unlike gold bullion, people will still be able to trade their crypto for goods, and this ability will accelerate going forward.

Historically, foreign currency brought into the country couldn’t be used as legal tender, thus people accepted the taxes from bringing in large sums of foreign money. They accepted any losses from the exchange, because they understood that foreign currencies like the Yen and Euro could not be used for the purchase of New Zealand goods. The fact that individuals and businesses are now accepting cryptocurrency is proof that it is not foreign currency, but rather an ‘alternative currency’.

This is a major predicament for regulators that they clearly do not foresee, because they, like Nigel Annett, misunderstand the growing power imbalance in this relationship as transactions in cryptocurrencies become more widely accepted. Without full scale acceptance by traditional power structures, the government could not only miss out on income they would believe owed from cryptocurrency gains, but also taxes from income paid in crypto, GST, and other forms of taxation that they will not even be aware they are failing to capture. Absent an integrated model, businesses and individuals will not be able to participate within government-set parameters, and instead be forced to operate unconstrained by regulators as a part of a parallel payment system. Because these transactions are not denominated in the New Zealand dollar and local banks are being regulatorily barred from hosting these accounts, New Zealand tax authorities will have few options other than forensic accounting for literally every company and individual in the country. Solutions to this problem are fairly straight-forward but they will be unconventional to regulators, because this time the nail gets harder and pops out further the more you strike it.

The power imbalance between the crypto-economy and the central government is extremely visible to anybody who properly understands it. Though it might seem counterintuitive, the reality is that the best thing that could happen to cryptocurrency ecosystems and their users would be for central government to clamp down and attempt to ban their use or regulate them. This would force current owners to find additional uses for their cryptocurrency inside the system, and thus further raise the value of those cryptocurrency ecosystems.

Therein lies the crux of the issue for government: if they do nothing, crypto will do just fine. If they clamp down on crypto and tax, regulate, or ban it like they have in China, it will do even better. Governments are going to have to come to terms with the robust persistence of cryptocurrencies, and the fact that centralized authorities no longer hold all of the power in this discussion.  

Combined with the inevitable financial issues mathematically baked into modern money creation covered in depth here, this will be the first time businesses and individuals will be able to protect themselves from the types of economic and financial collapses that have occurred on smaller scales many times already all over the world. Once this process accelerates, the rush into crypto will make the last few years seem like just a minor blip on the radar.

“But on a positive note, challenges such as these bring opportunity. Companies that embrace and understand the impacts of exponential technology are well placed to support and advise their clients on how to respond to the disruptive forces in their own industries, and by doing so, strengthening the customer relationships.”

We think Annett is absolutely correct here. What will also need to happen is a complete re-learning of what money is, particularly by traditional banking. Cryptocurrency is completely reshaping the world’s understanding of currency, mediums of exchange, and transactions. Rather than being subject to government issuance and control, digital currencies may now be easily issued by the companies behind the products customers enjoy consuming. It will be much easier for governments to regulate cryptocurrencies once this is accepted.

It is our view that central government agencies have a choice to make: provide a platform for cryptocurrencies to operate and reap rewards from potentially hundreds of billions of dollars in capital flight, or clamp down and regulate them in an increasingly futile effort to capture ever-dwindling revenue from a decreasing number of people who will still have the desire to swap back into national currency as the medium to acquire the goods and services they desire—which is the entire function of money itself.

The cryptocurrency economy is now worth well north of half a Trillion US dollars, and this is a winner-takes-all scenario. If New Zealand became the first country to treat crypto as a parallel legal tender to their national currency, rather than foreign currency or traditional asset class that is liable to tax on gains, then tens or even hundreds of billions of dollars could be brought into the local economy. If this were coupled with the Reserve Bank of New Zealand allowing its member banks to operate their own cryptocurrency exchanges, or granting them permission to a mutual exchange that they all use, New Zealand could be propelled forward as the leader in cryptocurrency acceptance. This winner-takes-all situation is played at speed, because cryptocurrency can be moved in an instant, yet the security and infrastructure around cryptocurrencies can require some time for institutions to set up—so our financial institutions need to move quickly. Once cryptocurrencies truly have an institutionally-supported home to go to, why would their users want to leave?

Regulatory frameworks must be created to facilitate adoption that works for all parties

New Zealand banks are going to seriously struggle with integration of cryptocurrencies in the current regulatory environment, where account security and account control requirements imposed by the Reserve Bank for their users and businesses are impeding the process.

Legitimizing crypto integration for New Zealand and its member banks will allow a degree of financial monitoring that will alleviate a lot of the fraud and tax evasion concerns that must have the IRD and central government squirming in their seats. Doing so will allow companies to seamlessly accept crypto alongside their traditional banking accounts, and simplify the IRD’s job in investigating and auditing the use of cryptocurrencies in an improved manner over any other way forward that we can see.  Cryptocurrency users do not need to use the traditional banking system, and digital currency use will only continue to grow into the future - compounding the problem for a central government that needs to decide whether to embrace or reject this new reality. Regardless of what central government decides, crypto will thrive. The question is, will the central institutions thrive too or pay the costs of being wrong?

Consumers will prefer institutionally supported options

People generally prefer the path of least resistance, opting for easy solutions. Businesses and individuals would almost certainly rather sign up with ASB and hold their crypto portfolio at a well-known bank that can prove their comparative advantage in security and liquidity, than use a small garage operation or exchange on foreign soil. Companies like Apple, Amazon, and Facebook have proven that the vast majority of people choose the most convenient option almost every time. This is why we believe the ‘containment’ strategy to convince cryptocurrency users to forego their ability to circumvent local laws is the best option for governments around the world, including New Zealand.  

The strategy to capture the vast majority of cryptocurrency transactions on institutionally supported platforms would also make discovery of those who wish to break the law much easier. The number of people who would continue to operate outside of the major financial institutions would become a shrinking minority, thus making it increasingly easy to identify bad actors —especially on publicly verifiable blockchains. It’s by no means the perfect solution for central government agencies, but it will make it exponentially easier for them compared to the alternative, where everyone is underground. In our view, the universal power that governments have traditionally held no longer applies to cryptocurrencies. It is thus vital that their decision making and regulation process reflect this power shift and imbalance in order for our central institutions to manage it in the best way possible for everyone involved, including themselves.

How do disruptive technologies impact inflation?

“Unless non-tradeable inflation increases to offset the decline, inflation will be structurally lower than would be expected, implying interest rates would also be lower than would otherwise be the case.  Arguably, this is good deflation as it is the result of productive innovation in the economy driving benefits to the end consumer.

Yet we have central banks who are fighting this trend through quantitative easing to generate inflation to revert to their target bands, which creates an interesting tension between exponential technologies creating an abundant, cheaper economy; and Central Banks attempting to engineer an inflation outcome based on assumed mean-reverting economic conditions.”

The relationship between cryptocurrencies and inflation is a very complex one deserving of its own article, but the short of it is that misunderstanding about what money is has caused institutional confusion over their potential inflationary effects. Cryptocurrencies are not just another ‘good’ or ‘asset’ for sale in the economy, but rather an improved parallel payment system over fiat alternatives. They are inflationary to the economy because they are a pseudo increase to the money supply, and more currency chasing the same number of goods is inflation by definition.

“Ironically, banking’s profitability is both a strength and a weakness in responding to the threat of exponential technology.  Strong profitability signals there is no burning platform to change with urgency.  Strong profitability also means shareholders expect stable future returns.  But disruptive competitors don’t think this way.  They are happy to sacrifice short-term profitability for longer-term growth that drives greater consumer surpluses.  The challenge for banks is striking the right balance to maintain and enhance their position in the customer value chain.”

Nigel’s understanding of the upcoming effect of cryptocurrencies and blockchain on traditional systems is a lot better than most major institutions that we have seen so far, though we do draw attention to some substantial points of disagreement. Traditional banking and central government institutions can benefit greatly and profitably from cryptocurrencies with the methods we have outlined above, and significant negative consequences could be incurred should they be ignored. Cryptocurrencies are presenting the world with the same choice offered by the internet two decades ago—get on board or get run over. Cryptocurrencies are getting bigger by the day and they are not going to go away, no matter what anyone or any institution says.


About the authors:

Daniel Gross - Co-Founder of CryptoSolutions NZ, Entrepreneur in database and software solutions, Business and financial analyst.

Timothy Goggin - Blockchain expert, DNotes executive, Business and economic analyst, Co-Founder of CryptoSolutions NZ.

Author: Timothy Goggin

Timothy Goggin is an economic analyst with an interest in the application of moral philosophy and decentralized systems. He studied economics at the Business School at Victoria University of Wellington, New Zealand. His area of research is the consequential and moral dimensions of implementing digital currencies and the resulting synergies for consumers in the trading environment.

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