Legal and banking experts are putting their heads together to come up with a framework to regulate the game-changing blockchain technology, driving Bitcoin and other cryptocurrencies.
Bitcoin Photo: AFP
Blockchain has the disruptive power to allow people and businesses to transact directly anywhere in the world, bypassing banks and other traditional third parties, and creating a big challenge for lawmakers and regulators around the world.
A University of Auckland professor is leading the team tasked with developing a Trans-Tasman framework, with the help of a $50,000 grant from the Law Foundation.
Alex Sims, who is head of commercial law at the university's business school, said banks and credit card companies realise their role as gate-keepers in financial transactions is under threat.
"If cryptocurrencies become widespread, it could slash banks' profits," she said.
"Banks are trying to use the new technology between themselves because the benefits are massive, but they are going to try to limit how others use it.
"There is a real danger that if the banks get their way, the benefits of cryptocurrencies may be reduced or even lost."
Alex Sims is the head of commercial law at the University of Business School. Photo: University of Auckland
She said there were no laws regulating cryptocurrencies in New Zealand, although people have had their bank accounts closed because their bank suspected them of dealing in cryptocurrencies.
At the heart of cryptocurrencies is blockchain, which was invented in 2008 with the birth of Bitcoin.
The blockchain technology acts like a digital ledger that records transactions and stores them in secure blocks across thousands of computers, within a network.
Each block is chained to the next with a cryptographic signature, which is unlocked with a private key but without the names of the parties to the transaction.
Professor Sims said there were a number of additional features that made blockchain more secure than a conventional bank account.
However, she said there were also a number of risks, which the working group aimed to address over the next year of research.
"Currently, cryptocurrency transactions cannot be reversed and most new transaction technology relates to small sums. What happens when a consumer's life savings are sent to the wrong person by accident or a person's private key is compromised?" she said.
"Then there are issues of privacy. How are a person's financial details kept private when the information is accessible by those that have access to a particular blockchain?"
The Trans-Tasman group also includes professor of banking and finance, David Mayes, from the Business School, and Dr Kanchana Kariyawasam of Australia's Griffith University Business School.
"The danger is if you regulate too much, you won't get the full benefits, but if you regulate too lightly, you could see problems such as money laundering," Ms Sims said.