Understanding NZDD: A Comprehensive Review of New Zealand's Stablecoin
Our review explores NZDD, New Zealand's stablecoin, and explains how it works, its uses, backing, and transparency. We also compare NZDD to USDC and USDT, highlight potential risks, and learn about its future scaling prospects.
Updated 5 October 2024
Summary
In our review, we explore NZDD's core features, potential benefits, and the risks of adopting a stablecoin. Our guide covers:
- Cryptocurrencies, such as Bitcoin and Ethereum, have often been associated with high volatility, making them more suitable for speculative trading than everyday transactions. However, stablecoins are different.
- Stablecoins are designed to maintain a steady value by being pegged to traditional currencies (such as the NZD, USD, or EUR). They aim to offer the best of both worlds: the benefits of digital finance with the stability of fiat currency. Our guide to stablecoins has more information.
- In 2023, New Zealand once again entered the stablecoin space by launching NZDD, a cryptocurrency pegged 1-to-1 to the New Zealand Dollar (NZD). Issued by Easy Crypto, New Zealand's largest retail crypto platform, NZDD is marketed to bring New Zealanders into the digital finance world while keeping their holdings tied to the New Zealand Dollar.
In our review, we explore NZDD's core features, potential benefits, and the risks of adopting a stablecoin. Our guide covers:
- What Is NZDD, and How Does It Work?
- What Can NZDD Be Used For?
- Understanding NZDD's Backing and Transparency and How Is Its Value Secured
- NZDD vs Other Stablecoins such as USDC and USDT
- Potential Risks and Challenges of NZDD
- The Future of NZDD: Our View on Potential Scaling and Expanded Uses
- Our Conclusion - Is NZDD Useful and Should You Consider Investing?
- Challenges and Risks of Stablecoins: Lessons from Overseas Failures
- Frequently Asked Questions
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A Note of Caution from MoneyHub Founder Christopher Walsh:
"When considering NZDD, weighing the potential benefits against the inherent risks is essential, particularly concerning the time value of money. Unlike traditional savings options like term deposits, call accounts, or cash funds, which currently earn around 5% p.a., NZDD does not pay any interest. This means that, while NZDD offers stability by pegging to the NZ Dollar, holding it comes with an opportunity cost—namely, the lost returns that could be gained from interest-bearing financial products. Additionally, it's important to know that stablecoins are still relatively untested in New Zealand, and NZDD is no exception. The general risks of stablecoins, such as liquidity issues and regulatory uncertainties, remain. While NZDD is backed 1-to-1 by New Zealand Dollars held in a trust, the stability of this backing relies heavily on the trust in the issuer, Easy Crypto, and their management of reserves. Stablecoins like NZDD may provide an attractive gateway into digital finance, but they do not come without significant risks, especially in an unproven market. If you are interested in buying NZDD, knowing the potential for market volatility, the regulatory landscape, and the risk of operational or liquidity issues affecting the stablecoin's value is critical. While NZDD offers an innovative way to explore digital finance, those seeking investment returns might find more reliable and tested opportunities in traditional financial products. I'm encouraged by Easy Crypto's launch of a stablecoin, but it's important to note that this should not be viewed as a replacement for an interest-earning cash deposit". |
Christopher Walsh
MoneyHub Founder |
What Is NZDD, and How Does It Work?
NZDD is a New Zealand Dollar-pegged stablecoin, meaning that one New Zealand Dollar backs each unit of NZDD. This stability allows users to hold digital assets without being exposed to the extreme fluctuations characterising other cryptocurrencies like Bitcoin or Ethereum.
The main purpose of NZDD is to function as a bridge between traditional fiat currency and digital finance. It allows users to make transactions, hold wealth, and engage in the global cryptocurrency market, all while maintaining the stability of the New Zealand Dollar. The digital nature of NZDD also facilitates instantaneous transactions globally, 24/7, providing a degree of flexibility that New Zealand banks lack, although services such as Wise and Revolut provide near-instant money transfers from sender to recipient.
Important: Every unit of NZDD is fully backed by a New Zealand Dollar held in a trust account. These funds are managed by ECDD Limited, the issuer of NZDD, which ensures that the stablecoin's value remains stable and fully redeemable. Easy Crypto owns ECDD Limited, a dedicated entity operating NZDD.
NZDD is built on the Ethereum and Polygon blockchain, taking advantage of their well-established network of decentralised finance (DeFi) applications. This makes NZDD a store of value and a digital asset that can be easily integrated into DeFi ecosystems. Furthermore, the NZDD smart contract is open source, providing transparency and allowing anyone to verify the currency's underlying mechanisms. Our guide to stablecoins explains this in more detail. You can also view the smart contract details here.
You can see the latest Proof of Reserves document under 'transparency' which ensures that each NZDD token is indeed backed by real New Zealand Dollars.
The main purpose of NZDD is to function as a bridge between traditional fiat currency and digital finance. It allows users to make transactions, hold wealth, and engage in the global cryptocurrency market, all while maintaining the stability of the New Zealand Dollar. The digital nature of NZDD also facilitates instantaneous transactions globally, 24/7, providing a degree of flexibility that New Zealand banks lack, although services such as Wise and Revolut provide near-instant money transfers from sender to recipient.
Important: Every unit of NZDD is fully backed by a New Zealand Dollar held in a trust account. These funds are managed by ECDD Limited, the issuer of NZDD, which ensures that the stablecoin's value remains stable and fully redeemable. Easy Crypto owns ECDD Limited, a dedicated entity operating NZDD.
NZDD is built on the Ethereum and Polygon blockchain, taking advantage of their well-established network of decentralised finance (DeFi) applications. This makes NZDD a store of value and a digital asset that can be easily integrated into DeFi ecosystems. Furthermore, the NZDD smart contract is open source, providing transparency and allowing anyone to verify the currency's underlying mechanisms. Our guide to stablecoins explains this in more detail. You can also view the smart contract details here.
You can see the latest Proof of Reserves document under 'transparency' which ensures that each NZDD token is indeed backed by real New Zealand Dollars.
What Can NZDD Be Used For?
Stablecoins like NZDD are designed to be used in everyday financial transactions and are different from cryptocurrency because they are not seen as speculative assets. To explain this in detail, we shortlist some applications where NZDD can be used:
1.Bill Payments via NZDD
NZDD can be used to pay bills directly through a service called BillPay (as explained on NZDD's website). This system lets you settle accounts with service providers such as mobile companies and utilities. The process is as simple as using a traditional bank account, but it offers the added flexibility and speed of cryptocurrency transactions. Since NZDD is pegged 1:1 to the NZD, users don't need to worry about fluctuations in value when making payments – one NZDD equates to one New Zealand Dollar.
For a step-by-step guide on using NZDD for bill payments, we suggest visiting NZDD's website, which provides a straightforward walkthrough of the process.
2. An Alternative to Holding Cash
Even if you're not actively using NZDD to make purchases, it is an alternative way to hold cash in a digital wallet. For anyone familiar with cryptocurrency wallets, NZDD offers the opportunity to hold value in NZD while participating in the broader blockchain ecosystem. This approach combines the stability of cash with the technological benefits of cryptocurrencies, making it an attractive option for users looking to explore digital finance without leaving the safety of traditional fiat.
Our View: NZDD is unique in that it allows users to pay for power and phone bills, whereas this isn't an option for cryptocurrencies such as Bitcoin and Ethereum. Whether it's paying for electricity, internet, or other daily essentials, NZDD arguably helps strengthen the digital infrastructure in New Zealand. This is particularly important as the world transitions toward Web3 technologies, where decentralised applications (dApps) will play an increasingly significant role.
For some time, NZDD and its parent company, Easy Crypto, have expressed a clear vision of helping New Zealand transition into the Web3 era. By launching NZDD, they are innovating in a way that can support local developers and businesses, enabling them to integrate blockchain solutions into their offerings. It's likely that if more businesses begin to adopt blockchain and Web3 technologies, NZDD can play a central role in enabling seamless digital transactions. However, it is early days, and as of August 2024, around $800,000 of NZDD was on deposit.
3. Crypto Investing and Trading
NZDD has important implications for crypto investors and traders, particularly those concerned about forex risks. Before NZDD, many local traders relied on USD-based stablecoins like USDC or USDT. However, these stablecoins introduced a degree of foreign exchange risk, making them less attractive for long-term holding.
For example, if a trader holds USDC and the USD/NZD exchange rate fluctuates, they may incur a loss or gain unrelated to their trading activities. By contrast, NZDD eliminates this risk, as it is pegged directly to the New Zealand Dollar. This lets traders focus on their crypto investments without worrying about forex volatility.
Additionally, NZDD simplifies the trading process in New Zealand, enabling seamless exchanges between cryptocurrencies and NZD. Traders can convert their crypto profits into NZDD, avoiding forex risks and the potential for double taxation on earnings, which can occur when using foreign stablecoins.
1.Bill Payments via NZDD
NZDD can be used to pay bills directly through a service called BillPay (as explained on NZDD's website). This system lets you settle accounts with service providers such as mobile companies and utilities. The process is as simple as using a traditional bank account, but it offers the added flexibility and speed of cryptocurrency transactions. Since NZDD is pegged 1:1 to the NZD, users don't need to worry about fluctuations in value when making payments – one NZDD equates to one New Zealand Dollar.
For a step-by-step guide on using NZDD for bill payments, we suggest visiting NZDD's website, which provides a straightforward walkthrough of the process.
2. An Alternative to Holding Cash
Even if you're not actively using NZDD to make purchases, it is an alternative way to hold cash in a digital wallet. For anyone familiar with cryptocurrency wallets, NZDD offers the opportunity to hold value in NZD while participating in the broader blockchain ecosystem. This approach combines the stability of cash with the technological benefits of cryptocurrencies, making it an attractive option for users looking to explore digital finance without leaving the safety of traditional fiat.
Our View: NZDD is unique in that it allows users to pay for power and phone bills, whereas this isn't an option for cryptocurrencies such as Bitcoin and Ethereum. Whether it's paying for electricity, internet, or other daily essentials, NZDD arguably helps strengthen the digital infrastructure in New Zealand. This is particularly important as the world transitions toward Web3 technologies, where decentralised applications (dApps) will play an increasingly significant role.
For some time, NZDD and its parent company, Easy Crypto, have expressed a clear vision of helping New Zealand transition into the Web3 era. By launching NZDD, they are innovating in a way that can support local developers and businesses, enabling them to integrate blockchain solutions into their offerings. It's likely that if more businesses begin to adopt blockchain and Web3 technologies, NZDD can play a central role in enabling seamless digital transactions. However, it is early days, and as of August 2024, around $800,000 of NZDD was on deposit.
3. Crypto Investing and Trading
NZDD has important implications for crypto investors and traders, particularly those concerned about forex risks. Before NZDD, many local traders relied on USD-based stablecoins like USDC or USDT. However, these stablecoins introduced a degree of foreign exchange risk, making them less attractive for long-term holding.
For example, if a trader holds USDC and the USD/NZD exchange rate fluctuates, they may incur a loss or gain unrelated to their trading activities. By contrast, NZDD eliminates this risk, as it is pegged directly to the New Zealand Dollar. This lets traders focus on their crypto investments without worrying about forex volatility.
Additionally, NZDD simplifies the trading process in New Zealand, enabling seamless exchanges between cryptocurrencies and NZD. Traders can convert their crypto profits into NZDD, avoiding forex risks and the potential for double taxation on earnings, which can occur when using foreign stablecoins.
Understanding NZDD's Backing and Transparency and How Is Its Value Secured
A key aspect of stablecoins is the mechanism by which their value is guaranteed. In the case of NZDD, each token unit is backed 1-to-1 by New Zealand Dollars held in a trust account managed by ECDD Limited. However, this means very little if no controls or underlying funds exist. We explain what's important below.
1. Proof of Reserves
NZDD is fully collateralised, meaning that for every NZDD in circulation, an equivalent amount of NZD is held in reserve. This ensures that users can redeem their NZDD for cash anytime, maintaining the coin's stability. NZDD's transparency page, updated regularly, provides detailed insights into how the reserves are managed and audited.
For example, according to the August 2024 Proof of Reserves report, the total amount of NZDD in circulation was 820,202 tokens, all backed by an equivalent amount of New Zealand Dollars. The transparency of these reports is crucial for maintaining trust among users and the broader crypto community.
Who is the auditor of NZDD and ECDD? How is the monthly statement audited/proven?
Per our discussions with Easy Crypto, NZDD was extensively audited prior to launch by a Big 4 audit firm. This covered all aspects of the business and operating model. NZDD currently provides monthly snapshots of the onchain assets, and soon will couple that with snapshots of the cash in the bank.
2. Open-Source Smart Contract
The NZDD smart contract is open-source, meaning anyone can review the code behind the stablecoin. This ensures transparency and reduces the risk of hidden mechanisms destabilising the token. It also allows developers to build on the NZDD framework, potentially leading to new innovations within New Zealand's crypto ecosystem. However, as outlined above, it is early days for us to see such developments.
1. Proof of Reserves
NZDD is fully collateralised, meaning that for every NZDD in circulation, an equivalent amount of NZD is held in reserve. This ensures that users can redeem their NZDD for cash anytime, maintaining the coin's stability. NZDD's transparency page, updated regularly, provides detailed insights into how the reserves are managed and audited.
For example, according to the August 2024 Proof of Reserves report, the total amount of NZDD in circulation was 820,202 tokens, all backed by an equivalent amount of New Zealand Dollars. The transparency of these reports is crucial for maintaining trust among users and the broader crypto community.
Who is the auditor of NZDD and ECDD? How is the monthly statement audited/proven?
Per our discussions with Easy Crypto, NZDD was extensively audited prior to launch by a Big 4 audit firm. This covered all aspects of the business and operating model. NZDD currently provides monthly snapshots of the onchain assets, and soon will couple that with snapshots of the cash in the bank.
2. Open-Source Smart Contract
The NZDD smart contract is open-source, meaning anyone can review the code behind the stablecoin. This ensures transparency and reduces the risk of hidden mechanisms destabilising the token. It also allows developers to build on the NZDD framework, potentially leading to new innovations within New Zealand's crypto ecosystem. However, as outlined above, it is early days for us to see such developments.
NZDD vs Other Stablecoins such as USDC and USDT
While USD-backed stablecoins like USDC and USDT dominate globally, NZDD brings a localised advantage to New Zealand users. To explain the pros and cons, we look at popular alternatives that have been established for longer.
NZDD vs USDC/USDT
NZDD vs DAI
NZDD vs USDC/USDT
- Forex risks: NZDD eliminates the forex risk associated with USD-backed Stablecoins, given that they are pegged to the NZD. This means greater financial stability and predictability for New Zealander users.
- Local focus: Unlike USDC and USDT, NZDD is focused specifically on supporting New Zealand-based payments and is designed with local regulations and market conditions in mind.
- Trust and transparency: NZDD's transparency measures, including Proof of Reserves, offer users peace of mind. USDT, in particular, has faced criticism in the past for its lack of transparency regarding its reserves.
NZDD vs DAI
- Collateralisation: While DAI is a crypto-collateralised stablecoin backed by other cryptocurrencies, NZDD is fiat-backed, which offers a more stable foundation. This arguably makes NZDD more reliable for users who prefer the stability of traditional currency.
- Regulatory environment: NZDD operates within the New Zealand regulatory framework, while DAI's operations are decentralised and largely outside traditional financial oversight. This could make NZDD more appealing to users prioritising working within established financial systems and regulations.
- Stability and scrutiny: The regulatory clarity around NZDD ensures that it's backed by NZD, with audit reports available for public scrutiny, providing users with a higher level of confidence in the asset's stability. In contrast, DAI's reliance on cryptocurrency collateral introduces greater risks, especially during periods of significant market volatility, which is common with cryptocurrencies, where the value of the underlying crypto assets might fluctuate more drastically than fiat-backed assets.
- Use Cases: DAI's use cases often focus on the decentralised finance (DeFi) space, where its programmability and integration with smart contracts are highly valued. NZDD, while also usable in DeFi, has a more practical focus on local transactions, bill payments, and being a stable store of value for New Zealanders. This difference highlights how NZDD is geared toward local users seeking everyday uses (such as paying power and phone bills via BillPay, as outlined by NZDD). In contrast, DAI is more suitable for advanced DeFi operations and has little to offer a typical consumer.
Potential Risks and Challenges of NZDD
NZDD, like any financial innovation, carries certain risks. While stablecoins are designed to maintain a consistent value, they are not without their complexities and challenges.
1.Market and Liquidity Risks
Even though NZDD is backed 1-to-1 by NZD, it could still be exposed to liquidity risks, particularly during periods of market stress. Our research team continues to observe unpredictable market volatility, and there is little way to hedge against the risks. This means that liquidity could become a concern if there was a sudden surge in demand for withdrawals or a loss of confidence in NZDD. Stablecoins generally rely heavily on maintaining public trust, and any disruptions in liquidity could erode confidence in their stability.
Additionally, because NZDD is still relatively new, its market remains small and developing. As the adoption of NZDD increases, liquidity is likely to grow. Still, users need to be mindful of the potential for thin liquidity in certain market conditions.
2. Regulatory Risks
While NZDD operates within New Zealand's regulatory framework (currently under review by the Reserve Bank of NZ per this 2023 press release), the global regulatory environment surrounding cryptocurrencies and stablecoins is still evolving. This means that any changes in New Zealand's regulations or global regulatory pressure could impact the operation of NZDD and similar stablecoins.
The Reserve Bank of New Zealand (RBNZ) has reported to the media their interest in monitoring stablecoins but has yet to issue concrete regulations. Should the RBNZ decide to implement more stringent oversight or new regulatory measures, this could influence how NZDD is used or traded.
Lastly, it's not just local regulation. International activity and regulations could also play a role, particularly as New Zealand interacts with global markets. Potentially, compliance requirements for NZDD in overseas transactions could be introduced. Given the new NZDD, our research team anticipates that regulatory activity will evolve.
3. Counterparty Risks
The issuer of NZDD, ECDD Limited, is responsible for maintaining the reserves and ensuring that real NZD backs each NZDD. Users might face challenges redeeming their NZDD for NZD if the company faces operational or financial difficulties. Transparency measures like Proof of Reserves mitigate this risk, but the possibility of mismanagement, fraud, or insolvency always exists in financial operations.
We asked ECDD's parent, Easy Crypto, to provide assurances about such concerns. The response is as follows:
"Every month, we will provide snapshot reports of onchain and in Bank assets. We do this to provide our users with the certainty they want that assets match the liabilities (you can see the transparency report here).
"The assets, NZDD are held on bare trust. Onboarded entities have beneficial interest in that NZDD and should ECDD cease operations will have the rights to those NZD in the bank account. Further, our Bank is government-backed which should go some way to mitigate concerns around bank issues".
4. Technical and Operational Risks
NZDD operates on the Ethereum blockchain, known for its stability and security, but no system is immune to technical failures. Blockchain networks can experience slowdowns, smart contract bugs, or even hacks, which could lead to delays or losses for users. These technical risks are common to all blockchain-based assets, and while Ethereum has a robust security history, users need to be aware of the risks.
5. Smart Contract Risks
Even though the smart contract that governs NZDD is open-source, meaning it can be audited and reviewed by anyone, there is always the potential for coding errors or vulnerabilities. If a flaw in the smart contract were to be exploited, it could result in the loss or devaluation of NZDD. While the transparency of the code minimises such risks, they are not eliminated.
1.Market and Liquidity Risks
Even though NZDD is backed 1-to-1 by NZD, it could still be exposed to liquidity risks, particularly during periods of market stress. Our research team continues to observe unpredictable market volatility, and there is little way to hedge against the risks. This means that liquidity could become a concern if there was a sudden surge in demand for withdrawals or a loss of confidence in NZDD. Stablecoins generally rely heavily on maintaining public trust, and any disruptions in liquidity could erode confidence in their stability.
Additionally, because NZDD is still relatively new, its market remains small and developing. As the adoption of NZDD increases, liquidity is likely to grow. Still, users need to be mindful of the potential for thin liquidity in certain market conditions.
2. Regulatory Risks
While NZDD operates within New Zealand's regulatory framework (currently under review by the Reserve Bank of NZ per this 2023 press release), the global regulatory environment surrounding cryptocurrencies and stablecoins is still evolving. This means that any changes in New Zealand's regulations or global regulatory pressure could impact the operation of NZDD and similar stablecoins.
The Reserve Bank of New Zealand (RBNZ) has reported to the media their interest in monitoring stablecoins but has yet to issue concrete regulations. Should the RBNZ decide to implement more stringent oversight or new regulatory measures, this could influence how NZDD is used or traded.
Lastly, it's not just local regulation. International activity and regulations could also play a role, particularly as New Zealand interacts with global markets. Potentially, compliance requirements for NZDD in overseas transactions could be introduced. Given the new NZDD, our research team anticipates that regulatory activity will evolve.
3. Counterparty Risks
The issuer of NZDD, ECDD Limited, is responsible for maintaining the reserves and ensuring that real NZD backs each NZDD. Users might face challenges redeeming their NZDD for NZD if the company faces operational or financial difficulties. Transparency measures like Proof of Reserves mitigate this risk, but the possibility of mismanagement, fraud, or insolvency always exists in financial operations.
We asked ECDD's parent, Easy Crypto, to provide assurances about such concerns. The response is as follows:
"Every month, we will provide snapshot reports of onchain and in Bank assets. We do this to provide our users with the certainty they want that assets match the liabilities (you can see the transparency report here).
"The assets, NZDD are held on bare trust. Onboarded entities have beneficial interest in that NZDD and should ECDD cease operations will have the rights to those NZD in the bank account. Further, our Bank is government-backed which should go some way to mitigate concerns around bank issues".
4. Technical and Operational Risks
NZDD operates on the Ethereum blockchain, known for its stability and security, but no system is immune to technical failures. Blockchain networks can experience slowdowns, smart contract bugs, or even hacks, which could lead to delays or losses for users. These technical risks are common to all blockchain-based assets, and while Ethereum has a robust security history, users need to be aware of the risks.
5. Smart Contract Risks
Even though the smart contract that governs NZDD is open-source, meaning it can be audited and reviewed by anyone, there is always the potential for coding errors or vulnerabilities. If a flaw in the smart contract were to be exploited, it could result in the loss or devaluation of NZDD. While the transparency of the code minimises such risks, they are not eliminated.
The Future of NZDD: Our View on Potential Scaling and Expanded Uses
Our view is simple: NZDD is a promising development in New Zealand's evolving financial landscape. Its stability, local focus, and practical use cases make it an attractive option for New Zealanders looking to explore the benefits of cryptocurrency without being exposed to extreme volatility. However, we believe its future success will depend on several key factors, which we have outlined in detail.
1. Wider adoption
One of the biggest challenges for any stablecoin is achieving widespread adoption. While NZDD has started to make inroads with local businesses and services like BillPay, its usefulness depends on how many merchants and institutions have started to accept it as a form of payment. For NZDD to truly thrive, it must be integrated widely without any hassles or friction in payment.
2. Integration with Decentralised Finance (DeFi)
The DeFi space is growing rapidly, and stablecoins play a crucial role. As NZDD becomes more widely adopted, its potential for use in DeFi applications will also increase. NZDD can arguably be a reliable base currency for decentralised exchanges (DEXs), lending platforms, and liquidity pools.
3. Innovation in Web3 and Beyond
As the world transitions toward Web3 technologies, which emphasises decentralised, user-controlled platforms, NZDD has the potential to serve as a foundational currency for New Zealand's growing blockchain ecosystem. Developers can build dApps (decentralised applications) that integrate NZDD as a payment or rewards mechanism, fostering gaming, finance, and digital services innovation.
4. Potential Government-Backed Digital Currency
While in the next few years, it's unlikely the Reserve Bank of New Zealand (or another government entity) will have an interest in issuing its own Central Bank Digital Currency (CBDC), if this occurs, it could compete with (or complement NZDD), depending on the framework and design. Arguably, the existence of NZDD (and its limited current use) is paving the way for smoother integration of a national digital currency into the financial system. We believe that NZDD, even in its limited form through BillPay, offers New Zealanders an early taste of what digital currency can provide.
1. Wider adoption
One of the biggest challenges for any stablecoin is achieving widespread adoption. While NZDD has started to make inroads with local businesses and services like BillPay, its usefulness depends on how many merchants and institutions have started to accept it as a form of payment. For NZDD to truly thrive, it must be integrated widely without any hassles or friction in payment.
2. Integration with Decentralised Finance (DeFi)
The DeFi space is growing rapidly, and stablecoins play a crucial role. As NZDD becomes more widely adopted, its potential for use in DeFi applications will also increase. NZDD can arguably be a reliable base currency for decentralised exchanges (DEXs), lending platforms, and liquidity pools.
3. Innovation in Web3 and Beyond
As the world transitions toward Web3 technologies, which emphasises decentralised, user-controlled platforms, NZDD has the potential to serve as a foundational currency for New Zealand's growing blockchain ecosystem. Developers can build dApps (decentralised applications) that integrate NZDD as a payment or rewards mechanism, fostering gaming, finance, and digital services innovation.
4. Potential Government-Backed Digital Currency
While in the next few years, it's unlikely the Reserve Bank of New Zealand (or another government entity) will have an interest in issuing its own Central Bank Digital Currency (CBDC), if this occurs, it could compete with (or complement NZDD), depending on the framework and design. Arguably, the existence of NZDD (and its limited current use) is paving the way for smoother integration of a national digital currency into the financial system. We believe that NZDD, even in its limited form through BillPay, offers New Zealanders an early taste of what digital currency can provide.
Our Conclusion - Is NZDD Useful and Should You Consider Investing?
NZDD offers a unique opportunity for New Zealanders to engage with the world of cryptocurrencies without the volatility associated with more speculative digital assets. Its stability, local focus, and transparent structure make it an appealing option for those looking to experiment with digital finance, whether for day-to-day transactions, crypto trading, or long-term value storage.
However, as with any financial product, it's important to approach NZDD cautiously and fully understand the risks involved. While it offers a preview into the future of finance, it remains a part of a rapidly evolving and often unpredictable landscape.
NZDD is a solid entry point for those interested in participating in the future of blockchain-based finance in New Zealand. But as always, thorough research, an understanding of personal risk tolerance, and a cautious approach are essential to making informed decisions. If you don't understand it, don't go any further—this is the theme underpinning all of MoneyHub's research and resources.
However, as with any financial product, it's important to approach NZDD cautiously and fully understand the risks involved. While it offers a preview into the future of finance, it remains a part of a rapidly evolving and often unpredictable landscape.
NZDD is a solid entry point for those interested in participating in the future of blockchain-based finance in New Zealand. But as always, thorough research, an understanding of personal risk tolerance, and a cautious approach are essential to making informed decisions. If you don't understand it, don't go any further—this is the theme underpinning all of MoneyHub's research and resources.
Challenges and Risks of Stablecoins: Lessons from Overseas Failures
While stablecoins offer a promising solution to cryptocurrency volatility, their development has been marked by several high-profile failures and controversies demonstrating the risks inherent to these digital assets. The collapse of Terra (UST) and concerns surrounding Tether (USDT) provide important lessons for anyone considering stablecoins like NZDD. Understanding these risks is essential to navigating the world of stablecoins with confidence and knowledge.
Understanding the collapse of Terra (UST)
One of the most dramatic failures in the history of stablecoins is the collapse of TerraUSD (UST), an algorithmic stablecoin. Launched by Terraform Labs, UST was designed to maintain a 1-to-1 peg with the US dollar, not through fiat backing, but via a complex system involving its sister cryptocurrency, LUNA.
However, this innovative structure turned out to be deeply flawed. Terra's algorithm relied on the continued trust and value of LUNA to stabilise UST. When market sentiment shifted in May 2022, the price of LUNA crashed, triggering a 'death spiral' that caused UST to lose its peg entirely. Within days, UST's value plummeted, wiping out billions of dollars in investor wealth and sending shockwaves through the entire crypto market.
Key lessons and the aftermath of Terra's collapse:
However, this innovative structure turned out to be deeply flawed. Terra's algorithm relied on the continued trust and value of LUNA to stabilise UST. When market sentiment shifted in May 2022, the price of LUNA crashed, triggering a 'death spiral' that caused UST to lose its peg entirely. Within days, UST's value plummeted, wiping out billions of dollars in investor wealth and sending shockwaves through the entire crypto market.
Key lessons and the aftermath of Terra's collapse:
- Algorithmic risks: Unlike fiat-backed stablecoins, algorithmic stablecoins depend on market mechanisms to maintain their stability. These mechanisms can fail catastrophically under stress, as seen with Terra.
- Systemic contagion: Terra's collapse had ripple effects across the entire crypto ecosystem, damaging the reputation of stablecoins and contributing to a broader market downturn.
- Loss of investor confidence: Once trust in the stablecoin's mechanism was lost, the system could not recover, highlighting how important investor confidence is to maintaining a stablecoin's value.
Understanding the concerns around the transparency of Tether (USDT) 's reserves
Tether (USDT) is the largest and most widely used stablecoin in the world. It plays a crucial role in cryptocurrency markets as a liquidity provider and store of value. However, Tether has been dogged by controversy for years due to questions about its reserve backing and transparency.
Initially, Tether claimed that every USDT in circulation was backed 1-to-1 by US dollars held in reserve. However, investigations and regulatory scrutiny revealed that only a portion of its reserves were held in cash or cash equivalents per this Financial Times article in May 2021. Instead, Tether had backed its stablecoins with a mix of assets, including commercial paper (short-term corporate debt), which raised concerns about the liquidity and stability of its reserves.
Despite releasing regular attestations of its reserves, Tether has not undergone a full public audit, leaving many critics sceptical about its claims of full collateralisation. This has led to a lack of trust among some users and fears that Tether could face a crisis if large numbers of users attempted to redeem their USDT for fiat simultaneously, leading to a potential run on the reserves.
Key issues surrounding Tether include:
Initially, Tether claimed that every USDT in circulation was backed 1-to-1 by US dollars held in reserve. However, investigations and regulatory scrutiny revealed that only a portion of its reserves were held in cash or cash equivalents per this Financial Times article in May 2021. Instead, Tether had backed its stablecoins with a mix of assets, including commercial paper (short-term corporate debt), which raised concerns about the liquidity and stability of its reserves.
Despite releasing regular attestations of its reserves, Tether has not undergone a full public audit, leaving many critics sceptical about its claims of full collateralisation. This has led to a lack of trust among some users and fears that Tether could face a crisis if large numbers of users attempted to redeem their USDT for fiat simultaneously, leading to a potential run on the reserves.
Key issues surrounding Tether include:
- Lack of transparency: Tether has been criticised for not providing full, audited reports of its reserves, leading to ongoing concerns about whether it truly holds enough assets to back all issued USDT.
- Regulatory scrutiny: Tether has faced multiple regulatory actions, including a settlement with the New York Attorney General (NYAG), which found that Tether misrepresented its reserves. This scrutiny has fueled doubts about its long-term sustainability.
- Market risks: Because Tether is such a key part of global cryptocurrency markets, any issues with its stability could have significant ripple effects. A crisis of confidence in Tether could lead to a broader liquidity crunch across crypto markets.
Stablecoin Peg Risks and the Importance of Reserves
The examples of Terra and Tether above illustrate the risks of stablecoins losing their peg. A stablecoin's ability to maintain its peg depends largely on the strength and transparency of its reserves. Fiat-backed stablecoins like USDC (USD Coin) and NZDDaim reduce these risks by maintaining full, transparent fiat currency reserves.
However, even fiat-backed stablecoins are not entirely immune to risks:
Additionally, Stablecoins are also subject to regulatory risks as governments and financial institutions worldwide scrutinise their potential impact on monetary systems. In particular, regulators are concerned about the systemic risks posed by large stablecoins like Tether and USDC, which operate at a scale that could disrupt global financial stability.
For example, in the US, the Securities and Exchange Commission (SEC) and the Federal Reserve have both expressed concerns about stablecoins, particularly around issues of consumer protection and financial stability. The SEC is considering whether stablecoins should be regulated as securities, which could impose stricter compliance requirements on issuers.
In New Zealand, while the Reserve Bank of New Zealand (RBNZ) is closely monitoring the development of stablecoins like NZDD, no specific regulatory framework is in place. However, this could change as global regulations evolve. NZDD's adherence to strict transparency and reserve requirements helps mitigate some regulatory concerns. However, it's important to recognise that the regulatory environment for stablecoins is still uncertain and could change rapidly.
However, even fiat-backed stablecoins are not entirely immune to risks:
- Reserve management: The entity managing the stablecoin's reserves must be reliable and transparent. Any mismanagement or lack of liquidity in the reserves can cause the stablecoin to lose its peg, even if it is fiat-backed.
- Redemption risk: If there is a sudden surge in redemptions (i.e., users converting stablecoins back into fiat), the stablecoin issuer needs sufficient liquidity to meet these demands. If the issuer cannot fulfil redemptions, confidence in the stablecoin can quickly erode.
Additionally, Stablecoins are also subject to regulatory risks as governments and financial institutions worldwide scrutinise their potential impact on monetary systems. In particular, regulators are concerned about the systemic risks posed by large stablecoins like Tether and USDC, which operate at a scale that could disrupt global financial stability.
For example, in the US, the Securities and Exchange Commission (SEC) and the Federal Reserve have both expressed concerns about stablecoins, particularly around issues of consumer protection and financial stability. The SEC is considering whether stablecoins should be regulated as securities, which could impose stricter compliance requirements on issuers.
In New Zealand, while the Reserve Bank of New Zealand (RBNZ) is closely monitoring the development of stablecoins like NZDD, no specific regulatory framework is in place. However, this could change as global regulations evolve. NZDD's adherence to strict transparency and reserve requirements helps mitigate some regulatory concerns. However, it's important to recognise that the regulatory environment for stablecoins is still uncertain and could change rapidly.
MoneyHub Founder Christopher Walsh explains how NZDD's approach differs:
"I understand that NZDD aims to differentiate itself by adhering to a more transparent and conservative approach than international Stablecoins. With full fiat backing held in a bare trust, regular Proof of Reserves reports, and New Zealand-based oversight, NZDD arguably addresses many concerns plaguing stablecoins like Tether and Terra.
However, the broader risks of stablecoins, particularly those related to regulatory uncertainty and market confidence, should not be ignored. NZDD's success will depend on its operational strength and how well it navigates these challenges in a rapidly changing global crypto landscape. It's an interesting time and landscape, and one that we continue to monitor given the ongoing developments”.
However, the broader risks of stablecoins, particularly those related to regulatory uncertainty and market confidence, should not be ignored. NZDD's success will depend on its operational strength and how well it navigates these challenges in a rapidly changing global crypto landscape. It's an interesting time and landscape, and one that we continue to monitor given the ongoing developments”.
Frequently Asked Questions
Given the niche nature of NZDD, if you have specific questions, we suggest contacting NZDD directly. The FAQs below provide general information.
What are the main risks of holding NZDD instead of cash in a savings account or term deposit?
The primary risk of holding NZDD is the lack of interest earnings compared to traditional savings options like term deposits or cash accounts, which can currently offer around 5% p.a. Additionally, there are risks inherent to stablecoins, including liquidity risks, regulatory uncertainties, and the reliance on the issuer (Easy Crypto) to maintain sufficient reserves. Unlike government-backed bank deposits, NZDD is not covered by a deposit guarantee, making your funds potentially vulnerable if issues arise.
How does NZDD maintain its peg to the New Zealand Dollar, and can it ever lose this peg?
NZDD maintains its peg by being fully backed 1-to-1 with New Zealand Dollars held in a trust account managed by ECDD Limited. However, maintaining this peg relies heavily on liquidity, market confidence, and effective reserve management. If there is a significant demand for redemptions or confidence in the issuer wavers, the peg could be at risk. This scenario, while unlikely given regular audits and transparency measures, is still possible and represents a key risk of investing in stablecoins.
Is NZDD a suitable option for investing in digital assets while avoiding volatility?
NZDD is a stablecoin, designed to offer stability by being pegged to the NZ Dollar, making it less volatile than other cryptocurrencies like Bitcoin or Ethereum. However, it does not generate interest, and its use is more practical for transactions or as a bridge to the digital finance world rather than as a growth investment. If you're looking for investment returns, NZDD (or any stablecoin) will be unlikely to keep up with inflation or provide growth.
What protections are in place for the funds backing NZDD, and how transparent is the backing process?
The funds backing NZDD are held in a trust account managed by ECDD Limited, an Easy Crypto subsidiary. NZDD provides monthly Proof of Reserves reports to ensure that NZD fully backs each token in circulation. The smart contract governing NZDD is also open-source, allowing transparency in its operations.
Despite these measures, there is no government guarantee for these reserves, which means that users are dependent on the operational integrity of Easy Crypto and ECDD Limited. The transparency reports offer some reassurance, but investors must be comfortable with this arrangement before committing funds.
Despite these measures, there is no government guarantee for these reserves, which means that users are dependent on the operational integrity of Easy Crypto and ECDD Limited. The transparency reports offer some reassurance, but investors must be comfortable with this arrangement before committing funds.
