Although private digital currencies have enriched some individuals and institutions, they are an unstable financial asset that can carry “social risks and costs”, the agency warned.
According to UNCTAD, the United Nations Conference on Trade and Development, their benefits of cryptocurrencies are for some overshadowed by the threats they pose to financial stability, domestic resource mobilization and the security of monetary systems. .
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 increased globally at an unprecedented rate during the COVID-19 pandemic, reinforcing a trend already underway. There are currently around 19,000.
In 2021, among the top 20 countries with the highest share of population owning cryptocurrencies, 15 were developing countries.
Ukraine topped 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 expensive” – examines the reasons for the rapid adoption of cryptocurrencies in developing countries, including the facilitation of remittances and the inflation protection of fiat currencies.
But “recent shocks to digital currencies in the markets suggest that it is risky to hold cryptocurrencies. If a 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, it is the “monetary sovereignty” of countries that could be jeopardized.
Regarding developing countries lacking reserve currencies, UNCTAD also highlighted the particular risk represented by “stablecoins”, or stable cryptocurrencies in French.
A stablecoin is a cryptocurrency whose price is pegged 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 risks as legal tender,” the agency said.
UNCTAD’s second note focuses on the impact of cryptocurrencies on the stability and security of monetary systems, and for the stability of the financial architecture in general.
“A national public service digital payment system should address at least some of the reasons for the use of 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 capacities and needs.
UNCTAD, however, urged governments to “maintain the issuance and distribution of cash”, given the risk of aggravating the digital divide in developed countries.
Tax evasion fears
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 – much like a tax haven , where it is difficult to identify who owns what.
“Thus, cryptocurrencies can also hamper the effectiveness of capital controls, a key instrument for developing countries to preserve their policy space and macroeconomic stability,” the agency added.
UNCTAD presented several actions to stop the expansion of cryptocurrencies in developing countries.
The agency urged 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.
Advertising related to cryptocurrencies should also be regulated, as is the case for other high-risk financial assets, according to UNCTAD, which advises governments to set up a public payment system “safe, reliable, affordable and adapted to the digital age”.
UNCTAD also advocates global tax coordination regarding the tax treatment of cryptocurrencies, regulation and information sharing.
In addition, capital controls should be redesigned to account for what the agency describes as “the decentralized, borderless nature of cryptocurrencies” and the reliance on pseudonyms by its users.