The UN calls for stopping the growth of cryptocurrencies in developing countries
While private digital currencies have enriched some individuals and institutions, they are a volatile financial vehicle that can carry “societal risks and costs,” the agency warned.
According to UNCTAD, the United Nations Conference on Trade and Development, the benefits of cryptocurrencies are for some overshadowed by the threats they pose to financial stability, domestic resource mobilization and the security of monetary systems.
The Rise of Cryptocurrencies
Cryptocurrencies are an alternative form of payment. Transactions are done digitally through an encrypted technology known as blockchain.
The use of cryptocurrencies has grown at an unprecedented rate globally during the COVID-19 pandemic, amplifying a trend already underway. Currently there are about 19,000 of them.
In 2021, among the top 20 countries with the largest share of the population owning cryptocurrencies, 15 were developing countries.
Ukraine tops the list with 12.7%, followed by Russia and Venezuela – 11.9% and 10.3% respectively.
All that glitters is not gold
The first note entitled “All that glitters is not gold.” Not Regulating Cryptocurrencies Is Very Costly” – explores the reasons behind the rapid adoption of cryptocurrencies in developing countries, including facilitating remittances and protecting against fiat currency inflation.
But “the recent shocks of digital currencies in the markets suggest that it is risky to hold cryptocurrencies. If the central bank intervenes to protect their financial stability, then the problem becomes public,” UNCTAD said.
In addition, if cryptocurrencies continue to develop as a means of payment, or even to unofficially replace national currencies, the “monetary sovereignty” of countries could be threatened.
As for developing countries that lack reserve currencies, UNCTAD also highlighted the particular risk posed by “stable cryptocurrencies”, or stable cryptocurrencies in French.
A stablecoin is a cryptocurrency whose price is tied to another cryptocurrency, fiat currency, or exchange-traded product (such as precious metals or industrial metals). As their name suggests, stablecoins are designed to maintain a stable value.
“For some of these reasons, the International Monetary Fund (IMF) has expressed the view that cryptocurrencies pose a risk as legal tender,” the agency said.
The second UNCTAD note focuses on the impact of cryptocurrencies on the stability and security of monetary systems, as well as on the stability of the financial architecture in general.
“A national public digital payment system should address at least some of the reasons for using cryptocurrencies and limit the expansion of cryptocurrencies in developing countries,” UNCTAD said.
For example, monetary authorities could launch a digital currency through a central bank or a quick payment system for small purchases, although the measures depend on national capacity and needs.
UNCTAD, however, called on governments to “sustain the issuance and distribution of cash”, given the risk of worsening the digital divide in developed countries.
Fears of tax evasion
The latest policy brief examines how cryptocurrencies have become a new channel for undermining domestic resource mobilization in developing countries and warns of the dangers of doing “too little, too late”.
Indeed, while cryptocurrencies can facilitate remittances, UNCTAD has warned that they can also enable fraud and encourage tax evasion through illicit financial flows – similar to tax havens, where it is difficult to identify who owns what.
“Thus, cryptocurrencies can also hinder the effectiveness of capital controls, a key instrument for developing countries to preserve their political space and macroeconomic stability,” the agency added.
UNCTAD presented several actions to stop the expansion of cryptocurrencies in developing countries.
The agency called on authorities to regulate cryptocurrency exchanges, digital wallets and decentralized finance.
Regulated financial institutions should be prohibited from holding cryptocurrencies, including stablecoins, or offering related products to their customers.
Cryptocurrency advertising should also be regulated, as is the case with other high-risk financial assets, according to UNCTAD, which advises governments to establish a public payment system that is “secure, reliable, accessible and adapted to the digital age”.
UNCTAD also advocates global tax coordination on cryptocurrency tax treatment, regulation and information exchange.
In addition, capital controls should be redesigned to take into account what the agency describes as the “decentralized nature of borderless cryptocurrencies” and the reliance on pseudonyms by its users.