Okay, so Kia ora, everybody. My name is Kevin Whitmore. I'm part of Callaghan Innovation's web 3 team. So today we're fortunate to have Jeremy Muir and Bryan Ventura from Minter Ellison Rudd Watts. They're going to be taking us through the things that Web 3 businesses need to know about Web 3 related regulation in New Zealand.

And just a heads up that this is the first one of these in a series of learning events that we're going to be running. And the idea is to help plug some of the gaps in the Web 3 ecosystem and provide you with a business toolkit that can help. So we're going to be running more of these on taxation, smart contract audits and the trenches stories from people that have built Web3 businesses, capital raising and other topics. So if you have anything that you are challenged

with or you want additional help or knowledge about, you can send it through to us on email at hello@web3nz.xyz.

So we'll post our email address, or you can enter it into the chat, or you can enter it into the survey at the end of this as well. The idea is that we're going to store this webinar content for future use and put it into a repository so that Web Three builders can access it. So just be aware of that. At the end, we'll just ask you to complete a short survey and that will help us orient future sessions, but it will also provide us with information so that we can run more of these sessions as well.

And the format for the day is going to be a 60 minutes session and presentation format from Bryan and Jeremy. Then after that, you can drop off if you want to, or you can stay on for an optional Q and A session at the end as well.

Without further ado, I will hand over to Jeremy and Bryan.

Jeremy: Hello, everyone. We'll start with some introductions, both of ourselves. There we go. Nice for you, all of us in Minter Ellison Rudd Watts, and sort of a little bit about our experience in this space, what we're seeing. So I'm Jeremy Muir, I'm a partner in the financial services team here at Minter, Ellison rudd Watts. I also colead, the firm's banking and finance division generally across New Zealand.

My practice has evolved over a number of years through setting up investment funds and financial services regulation, through an involvement in the sort of startup community

and venture space, which led to sort of a combining of the streams and abroad sort of fintech heading over a number of years. And that started out as things like equity crowdfunding, peer to peer lending, various online platforms. I've acted for people like Sharesies from the first couple of days in the incubator.

Then about five years ago, or about 250 years in crypto terms, I decided that we should have a look at cryptocurrencies. So we wrote in our team a white paper, as we called it at the time, probably co opting the term wrongly, but we didn't know any better. Called ‘tokens of our affection’, where we looked at how various forms of crypto blockchain tokens would be treated under New Zealand law, particularly the Financial Markets Conduct Act, which regulates financial products and services generally in New Zealand. And we put that out into the universe without having any clients in this space. At that time, we held a seminar which was widely attended by our general clients.

We co-opted after a coffee meeting a day or so before Francis from Techemy Capital to come along and blow a few people's minds by saying a few words at the end of that. And then after that, we rapidly became very busy acting for a lot of the players in the New Zealand ecosystem.

So some people who are obviously on this call, we've worked with and continue to enjoy working with, and that led us to develop our thinking and around the regulatory treatment for a lot of these things. And we'll hopefully share some of that with you today and have you answer questions, but I'll hand it over to Bryan to introduce himself and his role in the ecosystem as well.

Bryan: Thanks, Jeremy, and apologies if you can't hear me. I'm Bryan, a senior associate in Jeremy Muir's team, also working with the other partner, Lloyd Kavanagh. I've been working with Jeremy and Lloyd on quite a number of exciting Web3 projects, both what you call centralized web three projects as well as those who are attempting to be purely decentralized. And it's been a really exciting time applying New Zealand's various regulations to these projects.What we've learned, has actually been quite beneficial for the ecosystem, is that our Financial Markets Conduct Act, which is our securities legislation, is clearer than other jurisdictions and is as much as possible technology neutral.

We'll be happy to talk about the different types of financial products that are under the act and also the licensing and other regulations under both the Financial Markets Conduct Act

as well as the New Zealand anti money laundering legislation and financial service provider registration requirements. But in terms Web3 projects tend to use tokenization in order to unlock commercial efficiencies or unlock some of the benefits of blockchain technology. And therefore the first question is always whether the Web3 project is issuing or dealing in a token, which is what they call a financial product under our Financial Markets Conduct Act.

Jeremy: Firstly, there is an ‘equity security’ which is generally a share in a company or body corporate. There's a ‘debt security’, which is a right to be repaid principal or interest. There is what they call a ‘derivative’, which is a contract which is valued based on the value of an underlying asset and probably more relevantly a managed investment product which is in general a scheme of pooling of people's funds where the pool is used to generate a financial benefit and the financial

benefit is generated by a third party. That's a good sort of kick off of one of the sort of major issues. But let's maybe take a step backwards and think more generally about what we're talking about today because I'm not sure obviously I can see faces who I know know more about the stuff than we do in certain areas here, but let's assume that there may be some people on the call who are less expert.

So let's take a step back to what we mean.

For example, when we talk about Web3, there are various explanations of this and you will hear web Three, web Two, web 3.0 as a different thing from web Three. Web 2.5, where we currently are. One basic explanation that I often fall back on is that Web1 was the version of the internet which was read only so you could create websites, people could navigate to websites and look at the content. Web 2, which is what we currently mostly sit in, although as I've said, people sometimes say that we're in Web 2.5 - where actually people can create content and put it on the Internet. And that has led, of course, to things like social media but also monetization of those concepts and the rise of big tech through companies who control a lot of those aspects.

And Web 3 is sometimes described as read, write, and own. So this is the version of the Internet which is not only something that you sit and passively consume or even actively consume by adding content to, but it is actually the version of the digital world which we interact on a daily basis, floating around us.

You may not be passively consuming it on a screen. You may be interacting with your devices. You may be going into shops using augmented reality either now or in the near future. Ultimately the biggest expression of that would be the full sort of full immersion virtual reality.

Sometimes the word metaverse or metaverses is used to describe that. And there are obviously plenty of people who will die in the ditch to say whether it's singular or plural. That’s the sort of a collection of online worlds and how they might be the digital world that you can exist within, whether in virtual reality or augmented reality or extended reality or some version thereof.

The concept of these blockchain / crypto based tools is that they provide one of the types of technology that will allow commerce and human interaction, whether for business or for pleasure, to take part in that digital environment. There's a really good quote that I'll throw out there that I've used a lot in this context recently, came from an interview with Marc Andreessen, one of the co authors of Mosaic, the first widely used web browser.

Also one of the founders of Andreessen Horowitz, a venture capital firm in the US that has invested deeply in this space. And he describes, basically blockchain crypto as the other half of the Internet that we didn't know how to build when we built the first half.

He expands on that by saying that it's still in the early stages of a long progress and that blockchain is a foundational technology change, a new architecture for building an entirely new generation of computing systems.

So, AndreessenTerra and Horowitz and their crypto fund have become convinced that Web 3 blockchain crypto is foundational. It's a big hill. It's a foundational and architecture shift as the ones from mainframes to PCs, from PCs to Web, from web to mobile or from traditional software to AI. It's a fundamental shift.

And building this out is a 25 to 35 year process, and I like to think about that when the crypto world collapses around me every two or three days, whether it's terra luna, stable coins for collapsing earlier in the year, or the current shenanigans around the FTX exchange and Sam Bankman-Fried, there is so much going on in this space, but there is a core piece of technology and growth and innovation which is driving onwards.

So that's the big picture that I like to sort of fall back on to give me hope that I'm focused on the right things. So hopefully that's a good sort of scene setting. And obviously, if anyone needs an explanation around what is bitcoin (magical internet money), how it factors into the next iterations of programmable crypto tokens, we could spend a long time talking about that, but we're going to assume a very base, a fair amount of knowledge, particularly on some of the faces that I can see. So let's dive into or back into the regulatory aspects in relation to if you are setting up a Web Three business in New Zealand, or I would say any business that is going to interact with people digitally in the new economy, what are some of the legal issues and things that you're going to have to grapple with?

And I'll hand back to you to Bryan in a second, but he's already started talking about this fundamental concept of what is a financial product under our legislation. This is key, because if you think about what's happened globally in this space, we exist in a sort of climate of uncertainty as to how a lot of our laws interact with these new ideas and concepts.

And that's where lawyers like us have sort of worked in the space, are really useful to you, hopefully, to try and actually figure out what the way forward is.

New Zealand in some respects is a really good place to be having these conversations and building these businesses because some aspects of our legislation are actually quite modern and our securities laws, so under the Financial Markets Conduct Act is one of those areas. The four classes of financial product that Bryan already alluded to, for example, are quite clearly defined. So, we can often look at a crypto token or a coin or a unit or a concept in this space and reach a reasonably clear view as to how New Zealand law would treat it.

And partly just to give a little bit of background, that's because when we adopted our new Financial Markets Conduct legislation, we decided quite intentionally for MBIE and the people drafting the legislation wanted to have a very clear set of rules at the start.

And that's in contradiction to, say, the US law position under the US Securities act 1933, which regulates securities, which is very broadly defined and could potentially capture half of the universe that we're talking about here depending on how you apply it.

Some case law in relation to orange orchards in Florida, which is the Howie test that you'll hear referred to as to whether you should be having those conversations in relation to your 21st century digital business is, quite frankly, hilarious.

But in New Zealand we have these quite clear definitions. But then to take a step back, we have a broader concept called a security rather unhelpfully, which probably does capture most of this universe, but we don't regulate, but it exists. So that the FMA (Financial Markets Authority) can call in certain things and regulate them if it chooses to do so.

But to date we haven't seen any great appetite for them to do so. So we're quite comfortable existing in that space where we can actually define how our rules apply to certain tokens and things in New Zealand. At that point, you probably heard enough for me. I'll hand back to Brian for a bit to drill into some of those definitions and then some of the other legislative regimes that apply.

Bryan: Thanks Jeremy, that's a great summary of how web three can be interpreted. And to add to that, when we're talking about web three tokens, where it's quite agnostic as to whether it's fungible token or a non fungible token, our Financial Markets Conduct Act and also the rest of New Zealand legislation could potentially apply to either or both. And it's really dependent. Whether a token is a financial product really depends on the characteristics of the token, the features and benefits and how it is actually offered to people.

So, I'll ask if anyone has any questions at this stage before I drill into the mechanics a bit more.

Q: Where are we at in terms of a ‘regulatory sandbox’ in New Zealand and what is on the horizon?

Jeremy: Yeah, cool. Let me try a couple of answers to that and then I'll let Bryan talk about the legislation again. So one thing that is going on is there was a government or a Parliamentary Select Committee on Cryptocurrencies, which many of you will know about because you submitted at the end of last year and at the start of this year.

And myself or I together with Alex Sims, who many of you will know at Auckland University, academic expert on DAO, DAOs and Blockchains. DAOs, for anyone who hasn't been playing along already, is a decentralized autonomous organization which is a crypto native structure or way for people to interact based on code rather than, say, company incorporation or partnership rules or something like that, of which there are many that exist. And the legal issues around them are particularly interesting (we will come back to those). So Alex and I were the two independent advisers appointed to the committee. As part of that, our role was to review the submissions and provide feedback and answer questions for the politicians on the committee and to write a report which we submitted a few weeks ago. It took a while because we're all busy and also these things change so rapidly that every time we wrote something down it basically needed to be updated.

But it's a pretty lengthy report which talks a lot about both explaining the basics for the benefit of the politicians and the public ultimately talking about the current regulation. And we do make a number of recommendations now that are not yet public because the members of the committee have to consider that and they will write their own report which will then be published together with the advisors report at some future point.

I wish I could tell you when that would be but I don't know. They have got a number of other things on their books on that committee but it is underway in terms of sneak spoiler alerts, sneak peaks without telling you anything that I think would be surprising. We certainly do talk in there about the need for sensible regulation going forward, although I think I can say that we don't propose that the government does anything hastily or that there is a great need in New Zealand, at least for significant new legislation or the writing up of new regimes.

Our general thrust is that we believe, and I think Alex and I are pretty closely aligned on this, that there is much more benefit from the government working closely with industry and players in the market by way of working groups to develop sensible guidance and ultimately, rules. But that anything that is done in haste is likely to be wrong, given how fast things are moving.

So happy to take questions on that, but that's that part of it. In terms of other things that are happening, certainly a number of the ministry so MBIE and others are looking at things like DAOs and other organizations and other issues in the blockchain space but I would say I'm not aware that anything is particularly imminent. There has been a recent report published by MBIE which identifies two key things to progress the New Zealand economy which are impact or purpose driven investment and blockchain and that pulls together some of the key themes of the market.

So by all means read that report. There has been a big report published in the last few weeks in relation to the development of our AML laws and that includes a number of recommendations which apply to the crypto space or virtual asset service providers as the lingo goes in that respect. And it's fair to say though that those recommendations are not particularly precise and likely to take a while to be implemented and are largely driven towards the perspective of tightening systems rather than making it easier for businesses in this space.

Although there is a general recognition that laws should be or the AML rule should be fit for purpose. So we'll continue to work on that. In terms of sandboxes, that's certainly an idea that Alex and I have a lot of sympathy for, not necessarily because our rules in New Zealand are so hard to deal with that we need a sandbox to allow people to do anything.

If you understand the laws you can do a lot within them in New Zealand because we don't have significant licensing regimes, for example, that kick into a lot of products and usages in this space so it's not necessarily needed for that purpose. For example, the Financial Markets Authority is always given when asked whether they should have a sandbox. We just don't need one. But we think that there are real branding advantages for New Zealand. If we were to declare that we were open for this kind of business and that you could have a sandbox where not only do businesses find it easier to get started, but where regulators, government officials and others can work, play and learn alongside businesses in this space to help develop rules that are fit for purpose going forward.

So those are probably the main things that are happening at a policy level. IRD also continues to develop its thinking around crypto issues both in terms of its publications and there are a number of people talking to them, including ourselves in relation to various products, sometimes seeking product rulings, sometimes just seeking general guidance.

So those things are definitely happening in terms of DAOs specifically. There certainly isn't a proposal that's live on the table in New Zealand for, say, legislation to allow DAOs to be incorporated or have legal liability protection for members. There are some things which have been done internationally, particularly in places like Wyoming that have legislation that allow incorporation as a sort of limited liability entity.

As a DAO, it's fair to say that that issue is coming under more direct scrutiny now.

And the issue is that with one of these decentralized organizations there is a risk that if it does not fit clearly into one of the legally recognized categories such as a company that under most common law jurisdictions like ours, like the US, that they will simply be treated as a partnership. i.e. A group of people who have aligned themselves together for a common goal. And that's actually not a great outcome, because under a partnership, as any partner in a law firm like myself will tell you, there is joint and federal liability for the acts of any partner under the partnership. It’s a pretty scary outcome for people just wanting to join a group or a DAO.

We've seen that in the US. In recent weeks to months with Ooki DAO where the CFTC has brought the commodities regulator has brought an action against a DAO where they allege that there is some fraudulent activity going on and they've actually brought that against all of the members of the DAO who have voted on recent proposals. It is quite frankly crazy and has come under a lot of criticism. But it is the legal result that many lawyers were worried about and had warned about. As to where that goes, we don't know. But it's clearly a case of regulators flexing their muscles to try and sort of push people towards really thinking about these issues and not just assuming that no one will take these legal points.

We've looked at DAOs in New Zealand. We've designed some structures that involve limited liability companies. For example, you can do certain things with trusts. So the original dash DAO which is out there has a New Zealand Law trust because New Zealand is a good common law trust jurisdiction at its heart which holds shares or rights to appoint directors in a company which is then used to enter into contracts and things on behalf of the DAO. We can structure around that if we're given a bit of leeway to think creatively. So that's kind of an update on the overall regulatory position. Lots of interesting things are going on.

Bryan, sorry, there's lots to say on this stuff, but hopefully it's all interesting. And to add to Jeremy's point about DAOs, we have looked at it in quite a lot of detail as well. And when DAOs which aren't properly structured with the help of creative lawyers like ourselves, there are issues with being able to enter contracts, receive revenue, incur liabilities, employee people, etc. and essentially, there are a lot of issues with DAOs which aren't properly structured when interacting with the real world.

To pick up one other point that was raised about the ‘cross border’ nature of jurisdiction. The great thing about this technology is it's really easy to do anything on a ‘global from day one’ basis. The technology is there. There's no reason that we can't offer products and services to people around the world.

We cannot open ourselves to membership around the world, except that the law doesn't really work that way. So law is inherently jurisdictional. Every country has its own laws, every country has its own securities laws and in some cases they are markedly different. Some laws apply, such as securities laws generally apply on the basis of where you receive an offer of securities.

That law will apply which is therefore kind of everywhere that you are open to people joining up. Other laws, such as AML might be more based on where your actual place of business is or where you are carrying on that business. So you might in that case only have one regime to think about.

But even then it's quite easy to sort of cross the border. It’s really hard to design things that work seamlessly across borders.

If you can stay out of securities law because your token or your system is clearly not to be treated as a security under most of those jurisdictions, you'll have a lot more freedom to operate, if you want to call it that. If you're offering something which is or even is intended to be treated as some kind of security or financial product, there are still some things that you can do on the grounds that most countries have eligible or qualifying wholesale accredited investor regimes. And some of the difficulties of making those match across borders can be solved by making tokens programmable and therefore only capable of being held by people who have certain certificates or otherwise. We spent quite a bit of time designing some of those systems before, but it is hard. There is no immediate savior on the horizon. Some things like qualifying or complying with various AML law will, I hope, get easier as things like digital identity become or get solved over time. So actually you can comply with all regimes by just holding the right sort of accreditation or token in your wallet.

And to be clear, in New Zealand there's no specific securities law that applies just to crypto assets, mutual assets, and therefore the question is whether your token, whether it's fungible or non fungible, is one of the four aforementioned financial products. And I'm happy to dive into those definitions again or in a bit more detail. But assuming your token is not a financial product, then that's optimal. Because if it is and you offer those tokens to retail investors in New Zealand, then you will need to prepare a Product Disclosure Statement. There may be licensing requirements depending on the type of financial product your token is, and then there will be downstream requirements under New Zealand AML legislation and financial service provider registration requirements. And I'll get to those in a bit more detail and that's why in the virtual asset world that we live in, the optimal outcome is that the tokens that you're offering or dealing with are not financial products or securities and overseas jurisdictions.

Keep in mind as well that broking or custodying financial products have specific regulations.

Under the New Zealand Financial Markets Conduct Act. There's no licensing requirement for broking or custody. However, these are still quite onerous and burdensome compliance requirements for providing those services. And that's why you've got virtual asset service providers who want to make sure that they are not dealing in financial products or technically financial advice products under our Financial Markets Conduct Act.

In terms of AML, it's not necessarily a question of whether your token is a financial product, it is a question of whether you are dealing or offering virtual assets. And the guidance given by our New Zealand AML supervisors. Which is taken from the guidance by the Global Financial Action Task Force, is that a virtual asset is a digital representation of value that can be used for investment or payment purposes, which is quite a broad definition. And therefore, if your project were to fall outside of licensing requirements or product disclosure statement requirements under the Financial Markets Conduct Act, you may nevertheless still need to comply with New

Zealand anti money laundering legislation. And if you are required to comply with New Zealand anti money laundering legislation (AML) for short, you would very likely need to comply with financial serious provider registration requirements as well. So if you look in either the AML legislation or the financial service Provider legislation, you won't find any reference to virtual assets, you won't find any references to crypto or tokens.

There are just a number of discrete financial services that are potentially triggered by

things that you may want to do. For example, the financial services that most often apply are issuing or managing a means of payment. So therefore, if you create even, say, a circulating utility token within your digital ecosystem, which can be used to purchase goods or service or services or unlock software within that platform or system, then that may be a means of payment.

So the act of issuing the tokens can be captured as a financial service or if you provide a marketplace for token for tokenized value or some sort of secondary transactions that can potentially be caught as what's called a money or value transfer service, which traditionally meant things like money remittance providers but has certainly been viewed by the relevant supervisor.

So there are three AML supervisors in New Zealand, depending on which activity you're carrying out.

So the two I've talked about issuing, managing means of payment, and money or value transfer service fall within the Dia sphere and they have certainly indicated that they would view almost anything to do with virtual assets as potentially falling in one of those categories and come in and talk to them. Although if you go and talk to them you may get of course the most conservative answer. So you may want to come in and talk to a lawyer first.

There are also various exemptions that are relevant. For example, there is an exemption for internet options if you're providing a secondary market, and that definition is very broadly worded to cover almost any kind of electronic secondary marketplace for goods. And goods are defined in some legislation to include software. So there are arguments that you can make that things like NFTs or other tokens might have the benefit of that exemption.

Having said that, the large report that has just been published in relation to our AML system has recommendations that both that internet auctions exemption is repeated and possibly replaced with something more targeted and that there is a potential defini2tion of a virtual asset service provider incorporated into virtual assets incorporated into the legislation. So it's very much a case of ‘watch this space’.

There are also other pieces of legislation which could apply, like the Consumer Guarantees Act and the Fair Trading Act. If, for example, your token is not any kind of instrument that's caught by the Financial Markets Conduct Act, you could still very well be caught by the fair dealing provisions of the Fair Trading Act.

And there's other legislation as well. And fair dealing usually just means not being misleading or deceptive or making unsubstantiated representations about your product.

But it's often the big stick that a regulator such as FMA or Commerce Commission will use to keep you in line if they don't have one of the more precise regimes, such as an offer of financial products. So they would still regard themselves as having authority to step in if you were doing something in one of those spaces, even if we or your lawyers would say that it falls outside of, say, the financial product regime.

One good example of how that financial product regime applies would be the case of crypto exchanges was one of the first use cases that we looked at a number of years ago, when we acted briefly for cryptopia before they got hacked and went out of business.

Many stories there, but one of the first issues that they were asked by the Financial Markets Authority is, are you operating a market for financial products?

Because if you are, then that's something which needs a license, the kind of license that NZX has, for example. So as part of keeping them out of trouble or in line with the Financial Markets Authority, we had to do an exercise where we reviewed several hundred discrete tokens that they listed on their exchange at that time, and they listed just about anything to determine whether each one might fall within those definitions of a financial product.

So that's where we actually got a lot of our expertise around assessing tokens. And the answer was that most tokens, most basic coins, bitcoin clones, or other types of utility token were not caught by that legislation, therefore a license was not needed.

So that's an example of the kind of regime you might have.

Or you can look at another business like easy crypto or something in New Zealand, which helps people buy crypto or tokens. As part of looking at that kind of business, you would say, well, are any of the tokens that you deal with financial products?

If not generally fine.

It's just those broad sort of providing some sort of market service of holding money on behalf of people or something like that, or a value transfer service, but not a client money or property service. Broking because that only applies if there are financial products that are involved and not financial advice because our financial advice regime only applies to what are called financial advice products.

Another definition, which is financial products. So the four classes that Bryan mentioned, plus consumer credit contracts, mortgages and certain types of insurance. So basic risk insurance.

So any advice given or recommendation or opinion in relation to acquiring or disposing of a token will only be regulated financial advice if the token itself is in all likelihood a financial product.

So those are the kind of legal tests that you have to be aware of in designing your product. Also it's also important to think about if you are caught by New Zealand AML and FSP registration requirements, especially New Zealand AML.

It can be incredibly onerous for a new project, both in terms of costs and also execution. And to summarize some of the obligations, if you are an AML reporting entity, you are caught by AML, you would need to do what they call customer due diligence or overseas, they call it KYC on your customers.

And then the question is, who would be your customers? And that can be potentially quite broad as well. And then apart from that, as a reporting entity, you would need to prepare what they call a risk assessment document and also a compliance program which is quite lengthy.

And apart from that, there are also certain reporting requirements, such as suspicious activity reporting if you form a suspicion that one of your customers or someone is using your service for money laundering or terrorism financing purposes as well as prescribed transaction reporting.

Essentially, if you're a court by New Zealand AML, you are essentially complying with the same sets of AML regulations that traditional financial institutions and banks have to comply with. And that's where we come in and we can try to help you to structure your business, structure your token, so that ideally you're not caught by the Financial Markets Conduct Act or New Zealand AML or FSP registration requirements.

Jeremy: Yeah, so it depends what you mean by token purchase, but yeah, it would depend on the nature of your business and how you've designed your AML program because that's not that may be a way of ensuring that you are getting the information you need. I would probably defer to one of my colleagues, Lloyd Kavanagh, our partner here, is the AML guru on those matters. So I'd be happy to take that one offline.

Do you have a view, Brian?

I know it's something which is under consideration under the report as to whether those specific rules should be encoded in the legislation, rather than just being sort of desirable under a plan.

We can talk about when an AML reporting entity needs to determine the source of funds or source of wealth in general. Usually if you're dealing with a customer that is a trust, then it is a legitimate requirement that you determine the source of funds or wealth and whether you consider your customer to be high risk.

It’s worth noting that the New Zealand, AML supervisor guidance on determining source of funds as a source of wealth, specifically in the virtual asset serious provider space, there is guidance that says that there should be a presumption. If you are dealing with technology which could conceal a person's identity, then the presumption may be that the person you're dealing with is high risk. So that's worth considering as well.

That goes back to the test of whether the NFT could be a financial product under the Financial Markets Conduct Act. Essentially with NFTs they can be used for many different things.

They can be used as proof of ownership of a unique piece of property, whether it's digital or a piece of property in the real world or currently, they're being used as proof of ownership of digital art, mostly art which presents apes or different punks.

And how the NFT is sold will be relevant to the analysis on whether the NFT could be a financial product. For example, if you're a general business that is selling digital assets and you happen to use NFTs to record proof of ownership, then the risk of those NFTs being financial products would be lower. However, if the entities are specifically used for fundraising purposes, then the risk could potentially be higher.

We'd recommend that you get some legal advice on that.

So the small offers regime applies only to offers of equity securities and securities. If you take a step back, if your tokens are not financial products at all, then you don't need to rely on the small offers regime. You can offer them within New Zealand, at least on an unrestricted basis, other than complying with fair dealing rules, to not be misleading, deceptive, not making unsubstantiated representations.

The small offers regime could be relevant if you were, say, tokenizing equity securities, so shares. So if the tokens that you offered had the characteristics of shares and we could argue that they were equity securities, then yes, you could use the small offers regime to raise up to $2 million from any 20 non-associated persons within a twelve month period. There are some rules around how you rely on that regime compared to there's a similar the same test for equity crowdfunding in peer to peer lending.

You can raise up to $2 million from all of those sources within that twelve month period. But let's say you were trying to tokenize a share in order to do that and why might you do that?

One of the reasons you might want your token to have that treatment would be for tax. And again, not a tax lawyer, not a tax lawyer, but we know some tax lawyers and we generally try not to travel with them too far away from us in this context. But one of the issues with doing a token issue to raise capital is if you are a New Zealand company and you sell a whole lot of tokens and you earn a million dollars, is that immediately taxable proceeds? Because you basically just sold widgets and you've made a profit.

Therefore, the IRD wants their 28% if it's a company with those profits. On the other hand, if you raise capital by selling shares or issuing shares to an investor, the money that comes in from that is not taxable because it's equity capital raised by the company.

One of the things we have sometimes looked at for sort of ICO token raises is it might be a better outcome if you offer these things and you give them rights which are akin to shares in a company. Therefore we can treat them as equity for tax purposes, although that means that they are then clearly financial products.

So you need to just follow the Financial Markets Conduct Act either by unless you wish to do a full retail offer with a product disclosure statement which you could if you wanted to avoid that, then you could either rely on the small offers regime or you could do rely on only accepting qualifying wholesale investors ie.

People who are significant $5 million net assets or qualify and self certify as eligible investors because of their experience in investing or one of the other categories. And you can mix and match and combine across those categories. So there may be reasons why that would be definitely a good thing to do. The alternative of course, which we often start down the path pretty quickly is well, why not issue the tokens out of a place which has no income tax.

So that's why a lot of people use jurisdictions like BVI, Panama, and other places because they do not have income tax.

Therefore if you raise money then therefore you get feed your money and don't pay any tax. But of course, it's never that simple.  If you are fully based in New Zealand, and you simply create a subsidiary company and you control it and manage it out of New Zealand then there's a definite risk that it would be treated as being onshore or resident effectively in New Zealand for tax purposes.

So you haven't gained anything, and there's an art of the science to making that sort of structure work and often it's easier when you genuinely have people around the world who are contributing or part of a venture.

So that it's a reasonable assumption, it's reasonable to say that actually this business is being run out of BDI because it isn't clearly being run out of anywhere other than that jurisdiction, but that's a whole thing in itself to think about.

Kevin:  I'm currently in Japan at the moment and attended an event where one of the standing politicians was saying they want to see DAOs legalized within the next five years and be treated like limited liability companies.

Jeremy:  I'll start and then, Bryan, you can chip in. As we mentioned, there are already some jurisdictions, Wyoming and Delaware, which do allow DAOs to be created with a legal structure.

I'm sure there are a couple of others not in my head just at the moment. The UK is particularly interesting space because there is a lot of thought going into the legal structures and tools that are needed to be in their minds, that they want to be a real hub for crypto activity.

So the English Law Commission, for example, who published a wonderful 500 page study on how the law of property applies to crypto digital assets, which is a great stocking filler for Christmas for all of your family, and they've done a lot of thinking around things like DAOs and smart contracts. They haven't quite got to the stage that I'm aware of for proposing any DAO legislation. Or maybe you may be wrong if you don't want to leave them.

It's really interesting. For those of you who know, Binu Paul, who was the fintech lead at the Financial Markets Authority in New Zealand, is now in a position of responsibility for digital assets at the Financial Conduct Authority, if that's the right definite FCA in the UK. So we hope to talk to him about his learnings and what he's seeing in that space at some point.

But great to have a New Zealand contact over there, Australia through there, about two years ago, or a year and a half ago, they published a select committee report effectively laying out a roadmap for things that they wanted to do in the digital asset space.

One of them was to certainly advance discussions on legislation for a DAO. Our contacts over there say that its discussions are progressing, but have certainly slowed down following the change of government. Not strictly because the new government is ‘anti’, just that obviously when you've been out of power for a decade or however long it is, you've got a few other priorities to get through. So it's my understanding of where Australia is at. They are engaged in things like a token mapping exercise.

Bryan:  I think just anecdotally there's a lot of government policy interests coming out of the offshore jurisdictions and I think a lot of that is driven by their desire to remain as financial hubs from a global perspective and continue to be a jurisdiction of choice for people to structure their entities. And we would recommend following developments out of offshore jurisdictions.

Yeah, and I was just looking so the report that I referred to earlier out of MBIE is The Future of Business for Aotearoa New Zealand, an exploration of two trends influencing productivity and wellbeing purpose led business and use of blockchain technology.

So you can get that from the MBIE website that has talks about the use of DAOs to enable more networked approaches to governance and talks about how it is growing, including the involvement of New Zealanders and things like MetaCartel and other existing DAOs and as something that we can definitely look to sort of develop and evolve into. So they're definitely thinking about it, but we haven't kind of got there yet.

Maybe one comment to make about DAO’s the general use of governance tokens and we've worked with a lot of projects who have governance tokens as part of their ecosystem. And one thing to consider is again going back to the financial product risk under the New Zealand Financial Markets Conduct Act, whether that token, that governance token could be a managed investment product in particular, which would then obviously create a lot of other issues.

The other thing that we have looked at in that space is kind of the use of DAOs to own particular assets. And some of you will be familiar with there was a DAO that was put together, or being put together or put together in the US. A while ago when a copy, original copy of the US. Constitution came up for sale and a DAO was put together to fundraise to acquire it with the idea that then the members of the DAO could vote as to how that might be put to use, displayed monetized or otherwise.

So I think there's a lot to be said for the use of these sort of structures as a modern digital native way to hold assets and possibly to monetize them. Certainly if there is a share of revenue coming back to people, that's when you would look very carefully to see whether you were creating a security or a financial product because anything that you might equally do by setting up a company obviously is going to look more like our financial product.

But the advantages of the technology are definitely such that we see things evolving down that path. And we had looked at and continued to look at one project which would involve an artist effectively putting certain rights into a dow and then giving some control over how that was used, or at least that the revenue stream from that creation would then be used to perhaps fund grants or other people voted on or other things voted on by the members of the DAO. Almost like a sort of a fan-led consortium.

So I think there's a lot of potential for those type of structures but you certainly want to create them in a way where every day mum and dad or even young people can get involved without the risk of liability if there is an issue in terms of the asset or litigation or regulatory action.

Jeremy: Yeah, I might talk about how we deal with those sort of issues. And then, Bryan, you might like to talk about blockchain NZ, your role and the role of an organization in terms of actually allowing people to just talk among themselves and learn as they go.

But, I mean, we act for a lot of startups in the fintech space and in the crypto space, and it is definitely always a challenge to charge people fees at our full rates, which are reassuringly expensive, you might say, when you're in start up mode. So we deal with that in a number of different ways.

One is that we're kind of always happy to just talk to people off the clock, give you half an hour, an hour of our time, because we like to learn about what people are doing in this space, and we get as much out of those conversations as we give back.

And I think anyone who's dealt with me and with Bryan would know that we're pretty generous with our time at that point.

Bryan: Thanks, Jeremy. Because we definitely see it as part of our contribution to the ecosystem, how we learn stuff that, as mere lawyers, we wouldn't otherwise know. So a lot of it can work that way and at least get started where we start to want to turn on the clock and recover something.

Certainly when we're being asked to give opinions that people are going to rely on and that affect potentially our insurance, we definitely want to be paid otherwise.And one way around that is just factoring in the timing of, well, we're an expense like all the other expenses, paying the people that write the code, doing all those things. And we're important too, as those other things are. So at some points, it's about just helping people budget for that expense and maybe delaying charging it until you've actually done a capital round, raised the money, sold some widgets or otherwise. So that's generally how it works.

We also do things like we ran the or participated in the Golden Ticket program for Fintechs where we gave, along with some other digital providers, free sort of advice and things and working with Callaghan and others to just educate people so that when you do come to us, maybe you already know the questions to ask.

And otherwise, Bryan, do you want to talk about add to that or talk about Blockchain NZ?

Bryan: Yeah, sure. Thanks, Jeremy. And really quick addition as well. We were very flexible as well in that we right size the legal service that you want. If you want to really link the beautiful 20 page memo on whether your token could be a financial product and the implications of the AML, and if it's peer registration, then we can do that for you, but also we can right size the advice based on your needs and your budget. And then in terms of the work that we're doing with Blockchain NZ, the current share of Blockchain NZ and as a firm, we've been heavily invested in growing and helping to grow that association. And thanks to Kevin Whitmore and his colleagues from Callaghan, who's on the Blockchain NZ Executive Council with me, we've actually helped grow the association from 50 odd members around mid last year to around 100 members at this time now.

We play we try and play an important role by having an info hub on our website with a lot of free information for people, both in terms of very basic regulatory issues as well as information, free information about some of the technological opportunities with Blockchain and Web3. And we also help connect people.

We have a number of different members on the council, all with different skill sets.

We were very happy to, as a council, very happy to talk to anyone if you're a member or not a member. And then we'll also try and connect you to people who we think may be able to help you and your business and follow us or connect with us on LinkedIn because we push out quite a lot of both firm related updates and things through that.

And it's a great way of sharing what's going on in the world quite often to be found sort of sharing developments in the US or in other jurisdictions as well through that.

So very happy to engage through those channels.

So the way you'd have to look at that in New Zealand under our law is by looking at what the features of the Tokens are and whether it's effectively being managed in a way by a third party or an external party that would bring it within, say, the managed investment product definition. So it's a really interesting area and one that we've looked at similar things even outside of the crypto context for things like copy trading for the derivatives traders where effectively you follow someone else's trades and they get a clip of the ticket through the actual sort of broking house.

And some of those things are quite difficult to fit in a box under our legislation because of the way our legislation works, as I've said, where we have these quite clear boxes.

So a reflection trading token, it's obviously not an equity security because it's not like a share in a company. You can easily not be that. It's not a right to be repaid money. So one feature of that debt security definition is that it actually uses the word ‘Money’. And unlike in some other usages of that word in the legislation, money in the Financial Markets Conduct Act is defined as including money's worth. So other sources of value, except for in the definition of debt security, where it actually says, no, it must just be money, not what the money is worth.

We've done quite a lot for various sort of crypto based, almost savings products and things that have relied on that aspect of the definition. If you're using a stable coin that's not RBNZ will happily tell you that's not money. So maybe that definition doesn't work. It's not a right to be repaid money probably anyway. It's not necessarily a derivative because it doesn't have that sort of bilateral aspect of payment.

The one definition which will often get which could get you - is it a managed investment product, that definitely has aspects of ‘who’ is taking the money you've paid for the token, managing it in order to generate you that return? And you can see that with a reflection token.

You could certainly argue that it falls outside that, and then it would be up to a regulator to say, well, who set up this arrangement? And maybe that person is by creating the ecosystem or putting out the protocol or running the code, is the one who would be in the firing line.

I believe there is one in Australia. Is anyone familiar with that?

I can, but I think I looked at it and couldn't quite get my head around it. Joni Pirovich is on over there. It's an interesting concept, but haven't got anything in the wings or in the plans just yet.

If someone was planning to start one, we'd love to learn more about it. Yeah, and we offer a very loose and non-coded, decentralized organization of people that we talk to about all stuff, so it's not particularly autonomous, though.

It's not a question for me. I know this is obviously not under your direct control, but just in in terms of what the work that you've been doing, we've obviously seen especially back towards sort of 2017-2018, a shift towards a lot of web3 businesses setting up in places like Singapore and other offshore jurisdictions in terms of potentially more clarity around some of the regulation, or at least a little bit more of a roadmap future-proofed assurity to insurers that things aren't going to shift suddenly underneath them.

I guess, bits of ambiguity around how we implement policy, how we implement regulation and that give a little bit more assurity to investors, but also to web three businesses, that New Zealand is a good place to come.  I've given a lot of thought because we've had to write some recommendations, Alex and I, in our report and it's astonishingly hard and I don't think there is I don't have an answer where I would wave a magic wand and say this is what it looks like, partly because it's so easy to get it wrong.

So you look at in the early days, early days as in sort of five years ago, five or six years ago, New York set up its regime. Was it a bit licensed regime where it was thinking that it would encourage crypto businesses to come to New York by offering a licensed, regulated, understood form of regulation and basically no one came or the ones that came did not find it a success.

Singapore equally introduced a licensing regime designed to encourage people to come and set up in Singapore. But my understanding is that the experience also has not worked and that they had a large number of applications but then two years later almost none of them had actually got through the licensing program and being settled. On the other hand, if you make it too easy so I've been reading in the last few days about the experience in the Bahamas for FTX of let's create a regime and encourage a big player like FTX to come and set up.

Problem is though, if you don't regulate them properly then it will blow back in your face. And now there are a lot of people in the Bahamas who are suffering because of what they thought was going to be an enormous windfall opportunity now being sort of an empty space of tied up land and contracts and people now no longer in employment.

So it's very hard to assume that you'll be able to design a regime that gets it right.

So I think if I go back to Marc Andreessen's comments about a 30 year program let's try and develop this in an iterative way where we're all talking and trying not to make too many mistakes along the way. I'm also making mistakes in setting up a business because you can learn and evolve and pivot and do that.

But if we pass a law then it's very hard to move that or change that in any period of time and you're going to be stuck with it. I don't have a magic want when our report comes out and depending on what the politicians say, there are plenty of iterative recommendations of things that will make life slightly easier. There are obviously things around tax and other things.

Jeremy: I don't think we'll see any big sweeping changes. So the things that are in train are obviously the AML changes but I think they're likely to be. Some of them may be by regulation within a year but anything bigger would take longer than that. Bryan, any other thoughts?

Bryan: Yeah, I think as well further to Jeremy's comments, a lot of the legislative inquiries from like Australia and other jurisdictions have all been on the basis that they either are a financial hub or they want to be a financial hub.

And I guess the question is whether there is appetite in New Zealand to be one as well because I think that will probably shape the direction of travel here in New Zealand. Hopefully there's a positive movement because we've seen just the amount of innovation and how exciting it's been for the New Zealand economy and hope that we have settings to support that.

And to be very clear on that point, I've worked offshore in a financial hub before and I've seen how those jurisdictions operate and they are really designed about treating financial services as a weightless export. So basically providing services to people around the world.

And if that's here, the New Zealand financial regulatory system is somewhere over here, which is that it's very inward looking and designed to protect New Zealand consumers, which is of course an important thing. But we do not offer licensing regimes for example that allow people to or even regulate people who offer services outside New Zealand.

If you ask the FMA they will tell you that anyone who's outside New Zealand IS kind of not their problem to a degree. So actually the move towards becoming a hub for the financial services part of this for businesses to operate globally would require an enormous change in our regulatory settings, the funding for regulators and otherwise.

So I think John Key talked about Switzerland of the South Pacific when he came in and took some concrete steps towards it in some of our tax regime and other things, but then quickly reviled when financial crises and things came along.

Yes, the Minister sensed a courageous political decision to go down that path. I think the more realistic view is that we will continue to just try and work towards allowing innovation in Web three, perhaps more at a technical level. Certainly around things like NFTs. There are some amazing businesses growing out of New Zealand using this technology and we'll try not to make it harder for them and positively to make it easier for them to explore international expansion rather than necessarily assuming that we're going to quickly become a financial services de-fi crypto hub for the world.

Very happy to talk about that with anyone over a beer at any point at great length or a cup of tea might require two beers.