The UN trade and development body, UNCTAD, has called for action to curb cryptocurrencies in developing nations, in three policy briefs published on Wednesday.
Although private digital currencies have rewarded some individuals and institutions, they are unstable financial asset that can bring social risks and costs, the agency warned.
UNCTAD said their benefits to some are overshadowed by the threats they pose to financial stability, domestic resource mobilization, and the security of monetary systems.
Cryptocurrencies are an alternative form of payment. Transactions are done digitally through encrypted technology known as blockchain. The use of cryptocurrency rose globally at an unprecedented rate during the Covid-19 pandemic, reinforcing a trend that was already in motion.
In 2021, developing countries accounted for 15 of the top 20 economies when it comes to the share of the population that owns cryptocurrencies. 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.
The first policy brief examined the reasons behind the rapid uptake of cryptocurrencies in developing countries, including facilitation of remittances and as a hedge against currency and inflation risks. “Recent digital currency shocks in the market suggest that there are private risks to holding crypto, but if the central bank steps in to protect financial stability, then the problem becomes a public one,” UNCTAD said.
UNCTAD also highlighted the particular risk that stable coins pose in developing countries with unmet demand for reserve currencies. their name implies, stable coins are designed to maintain stability as their value is pegged to another currency, commodity or financial instrument. “For some of these reasons, the International Monetary Fund has expressed the view that cryptocurrencies pose risks 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 serves as a public good could fulfill at least some of the reasons for crypto use and limit the expansion of cryptocurrencies in developing countries,” said UNCTAD.
However, UNCTAD has urged governments “to maintain the issuance and distribution of cash”, given the risk of deepening the digital divide in developed countries.
The final policy brief discusses 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. While cryptocurrencies can facilitate remittances, UNCTAD warned that they may also enable tax evasion and avoidance through illicit financial flows – similar to a tax haven, where ownership is not easily identifiable.
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