UNCTAD spells out actions to curb crypto currencies in developing countries

The UN Conference on Trade and Development (UNCTAD) has called for action to curb crypto currencies in developing nations.

Crypto currencies are an alternative form of payment. Transactions are done digitally through encrypted technology known as block chain.

The UN trade and development agency made the call in three policy briefs entitled “All that glitters is not gold: The high cost of leaving crypto currencies unregulated” published on Wednesday.

The policy brief examines the reasons for the rapid uptake of crypto currencies in developing countries, including facilitation of remittances and as a hedge against currency and inflation risks.

UNCTAD warned that although private digital currencies had rewarded some individuals and institutions, they were an unstable financial asset that could bring social risks and costs.

UNCTAD said their benefits to some are overshadowed by the threats they pose to financial stability, domestic resource mobilisation, and the security of monetary systems.

According to the agency, the use of crypto currency rose globally at an unprecedented rate during the COVID-19 pandemic, reinforcing a trend that was already in motion, noting that some 19,000 are currently in existence.

In 2021, developing countries accounted for 15 of the top 20 economies when it comes to the share of the population that owns crypto currencies.

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.

“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.

Furthermore, if crypto currencies continue to grow as a means of payment, and even replace domestic currencies unofficially, the “monetary sovereignty” of countries could be jeopardised.

UNCTAD also highlighted the particular risk that stable coins pose in developing countries with unmet demand for reserve currencies.

As 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 crypto currencies pose risks as legal tender,” the agency said.

The second policy brief focuses on the implications of crypto currencies for the stability and security of monetary systems, and to 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 crypto currencies in developing countries,” said UNCTAD.

For example, monetary authorities could provide a central bank digital currency or a fast retail payment system, though measures will depend on national capacities and needs.

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 crypto currencies have become a new channel for undermining domestic resource mobilisation in developing countries, and warns of the dangers of doing too little, too late.

While crypto currencies 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.

“In this way, crypto currencies may also curb the effectiveness of capital controls, a key instrument for developing countries to preserve their policy space and macroeconomic stability,” the agency added.

UNCTAD has outlined several actions aimed at halting cryptocurrency expansion in developing countries.

The agency urged authorities to regulate crypto exchanges, digital wallets and decentralised finance to ensure the comprehensive financial regulation of crypto currencies.

Furthermore, regulated financial institutions should be banned from holding crypto currencies, including stable coins, or offering related products to their clients.

Advertising related to crypto currencies also should be regulated, as is the case with other high risk financial assets.

Governments are advised to provide a safe, reliable and affordable public payment system adapted to the digital era.

UNCTAD also advocates for global tax coordination regarding crypto currency tax treatments, regulation and information sharing.

Additionally, capital controls should be redesigned to take account of what the agency described as the decentralised, borderless and pseudonymous features of crypto currencies.