Bold and Innovative move by the Government of NZ. But, the real question arises How many employees will want to get paid in cryptos. Banks will still ask for Fiat and not cryptocurrency for Mortgage payments, Credit card payments, and Loan payments. I am also not sure whether local retailers are ready to accept cryptocurrency as a form of payment.
The success of this policy depends completely on the financial ecosystem. I am sure it is still based on Fiat. Until it gets updated, I do not foresee a success.
At least they are starting from somewhere, it may not be easy right now or have any major effect as you re right that people would still convert their cryptocurrency into fiat because of the lack of places to spend the crypto since we still have very low and few merchants accepting it, and until major merchants are accepting crypto, before they can really enjoy the benefit of it.
For now, I think they will just enjoy the benefit of their salary increasing when the price of bitcoin increases, but what I still do not understand from their clause is that of the particular chosen currency is pegged to their own personal currency and I dont know how possible that may be, well, let them implement it first and we will see how everything goes, maybe other countries will take turn after them also.