UN trade body calls for halt to rise in cryptocurrency in developing countries |
While private digital currencies have rewarded some individuals and institutions, they are a volatile financial asset that can carry social risks and costs, the agency warned.
UNCTAD said their benefits for some are overshadowed by the threats they pose to financial stability, domestic resource mobilization and the security of monetary systems.
Emergence of crypto
Cryptocurrencies are an alternative payment method. Transactions are done digitally through encrypted technology known as blockchain.
Cryptocurrency use rose globally at an unprecedented rate during the COVID-19 pandemic, reinforced a trend that was already in motion. Around 19,000 currently exist.
In 2021, developing countries accounted for 15 of the top 20 economies in terms of the share of the population owning cryptocurrencies.
Ukraine topped the list with 12.7 percent, followed by Russia and Venezuela, with 11.9 percent and 10.3 percent respectively.
Not so golden
The first short – All that glitters is not gold: The high costs of leaving cryptocurrencies unregulated – examines the reasons behind the rapid uptake of cryptocurrencies in developing countries, including facilitation of transfers and as one hedge against currency and inflation risks.
“Recent digital currency shocks in the market suggest that there are private risks in holding crypto, but if the central bank steps in to protect financial stability, then the problem becomes public“, UNCTAD said.
Furthermore, if cryptocurrencies continue to grow as means of payment, and even unofficially replace domestic currencies, the “monetary sovereignty” of countries may be jeopardized.
UNCTAD also highlighted the particular risk that stablecoins pose in developing countries with unmet demand for reserve currencies. As the name implies, stablecoins are designed to maintain stability as their value is tied to another currency, commodity or financial instrument.
“For some of these reasons, the International Monetary Fund has expressed that view cryptocurrencies pose a risk as legal tender,the agency said.
The second policy brief focuses on the implications of cryptocurrencies for the stability and security of monetary systems, and for financial stability in general.
“It is argued that a domestic digital payment system that functions as a public good can fulfill at least some of the reasons for crypto use and limit the expansion of cryptocurrencies in developing countries,” UNCTAD said.
For example, monetary authorities could offer a central bank digital currency or a fast retail payment system, although measures would depend on national capacities and needs.
However, UNCTAD has urged governments to “to maintain the issuance and distribution of cash”, given the risk of deepening the digital divide in developed countries.
Fear of tax evasion
The final policy brief discusses how cryptocurrencies have become a new channel for undermines domestic resource mobilization in developing countries, and warns against the dangers of doing too little, too late.
While cryptocurrencies can facilitate transfers, UNCTAD warned against it they can also enable tax avoidance and evasion through illicit financial flows – similar to a tax haven, where ownership is not easily identifiable.
“In this way, cryptocurrencies can also dampen the effectiveness of capital controls, a key instrument for developing countries to preserve their political space and macroeconomic stability,” the agency added.
Dampening crypto
UNCTAD has outlined several actions aimed at halting the expansion of cryptocurrency in developing countries.
The agency urged authorities to regulate crypto exchanges, digital wallets and decentralized finance to ensure comprehensive financial regulation of cryptocurrencies.
Furthermore, regulated financial institutions should be prohibited from holding cryptocurrencies, including stablecoins, or offering related products to their customers.
Advertising related to cryptocurrencies should also be regulated, as is the case with other high-risk financial assets.
Authorities are advised to provide a safe, reliable and affordable public payment system adapted to the digital age.
UNCTAD also advocates for global tax coordination regarding the tax treatments, regulation and information sharing of cryptocurrency.
In addition, Capital controls should be redesigned to take into account what the agency described as “the decentralized, borderless and pseudonymous characteristics of cryptocurrencies”.
To listen to UNCTAD’s latest podcast focusing on the ups and downs of the cryptocurrency world, click here.
