Action to curb the growing popularity of cryptocurrencies in the developing world has been urged by the United Nations’ trade and development agency.
The UN Conference on Trade and Development (UNCTAD) has issued three ‘policy briefs’ warning against cryptocurrencies’ rise and proposing several actions aimed at halting cryptocurrency expansion in developing nations.
The use of cryptocurrencies – digital money stored in a digital wallet or on a smartphone or computer – increased globally at an ‘unprecedented’ pace during the pandemic, reinforcing a trend already under way, UNCTAD points out.
Fifteen of the 20 economies with the highest share of people owning cryptocurrencies – of which popular examples include Bitcoin, Dogecoin, Ethereum, Ripple and Tether – in 2021 were developing countries. Ukraine topped the list with 12.7 per cent, followed by Russia and Venezuela, with 11.9 per cent and 10.3 per cent, respectively. Other nations in the top 10 include Kenya (fifth) and India (seventh).
‘Although private digital currencies have rewarded some individuals and institutions, they are an unstable financial asset that can bring social risks and costs,’ the Switzerland-headquartered agency warns, stating that their benefits to some are overshadowed by threats they pose to financial stability, domestic resource mobilisation and the security of monetary systems.
Concern over ‘cryptoisation’
The first policy brief – titled ‘All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated’ – examines reasons behind the rapid uptake of cryptocurrencies in the developing world: most notably facilitation of remittances and as a hedge against currency and inflation risks.
But the paper notes reasons for caution as including: risks of financial instability; cryptocurrencies providing a channel for illicit financial flows; cryptocurrencies’ use undermining the effectiveness of capital controls (described as ‘an essential instrument in developing countries with which to curb the build up of macroeconomic and financial vulnerabilities, as well as to increase policy space’); and that ‘if left unchecked’ cryptocurrencies may even replace domestic currencies unofficially (‘cryptoisation’), which could jeopardise nations’ monetary sovereignty.
In the second policy brief – ‘Public payment systems in the digital era: Responding to the financial stability and security-related risks of cryptocurrencies’ – UNCTAD states that to harness the opportunities and minimise the risks of digitalisation in developing countries, authorities need to consider creating digital versions of their national payment systems. Central bank digital currencies (CBDCs) and fast retail payment systems are examined.
The third policy brief – ‘The cost of doing too little too late: How cryptocurrencies can undermine domestic resource mobilisation in developing countries’ – points out that cryptocurrencies may enable tax evasion or avoidance through offshore flows whose ownership is not easily identifiable. Illicit financial flows and ‘persistent net financial outflows’ erode tax revenues, shrinking developing countries’ fiscal space and capacity to provide essential public services and infrastructure, the paper states.
‘Cryptocurrencies share all the characteristics of traditional tax havens – the pseudonymity of accounts, and insufficient fiscal oversight or weak enforcement,’ the paper notes. ‘The key difference is that international transfers of cryptocurrencies do not rely on banks or related legal and accounting services. Instead, cryptocurrency transactions are often channelled through unregulated cryptoexchanges. Hence, cryptocurrencies are under-regulated, enabling individuals to bypass tax authorities’ efforts to address offshore tax evasion.’
Developing countries ‘not without choices’
The global reach of private digital currencies makes national regulatory responses challenging but developing countries are ‘not left without choices’, UNCTAD states.
It describes cryptocurrencies as currently in a legal grey area in most developing countries. Nine developing countries – Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar and Tunisia – have actually banned cryptocurrencies, according to the agency.
The trio of policy briefs, which are each four pages long, all include recommendations for policymakers. UNCTAD summarises these in an overarching press release billed as the agency ‘spelling out actions’.
Authorities are urged to regulate crypto exchanges, digital wallets and decentralised finance ‘to ensure the comprehensive financial regulation of cryptocurrencies’, as well as prohibit financial institutions from holding cryptocurrencies, including stablecoins, or offering related products to their clients.
Furthermore, UNCTAD recommends that advertising related to cryptocurrencies also should be ‘restricted’, as is the case with other high-risk financial assets.
Developing nations should also ‘provide a safe, reliable and affordable public payment system adapted to the digital era’; agree and implement global tax coordination regarding cryptocurrency tax treatments, regulation and information-sharing; and ‘redesign’ capital controls to take account of the decentralised, borderless and pseudonymous features of cryptocurrencies.
‘Swiss city looks to enable tax payments by crypto’ – our news story (14 July 2022) on a push by Lugano’s public authority to obtain ‘formal approvals and installing the technological infrastructure’ to enable citizens and companies to pay their taxes in cryptocurrency in the ‘near future’ – part of a broader ambition of implementing crypto acceptance for payment of all goods and services in the affluent lakeside city
‘UK Treasury consults on crypto as FCA flags “very high” risks’ – our news story (11 January 2021) on the UK government launching a long-awaited consultation on regulating crypto-assets and stablecoins
‘ECB calls for “careful monitoring” of crypto-currencies’ – our news story (22 May 2019) on a European Central Bank report noting that crypto assets have raised concerns with regards to money laundering, market integrity and consumer protection, and have possible implications for the financial stability of the eurozone