Cryptocurrency is an “unstable financial asset that can bring social risks and costs”, the UN Conference on Trade and Development (UNCTAD) warned in three policy briefs on Wednesday.
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.
Rise of crypto
The use of cryptocurrency rose globally at an unprecedented rate during the COVID-19 pandemic, reinforcing a trend that was already in motion in the Pacific such as Papua New Guinea becoming the first country in the region to create a Special Economic Zone (SEZ) for blockchain development in 2018.
The Republic of Marshall Islands (RMI) enacted the world’s first government backed digital sovereign (SOV) in 2019, and Palau’s ambitious digital residency programme launched in April to become the world’s first borderless financial hub, to name a few.
In 2021, UNCTAD revealed 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.
Not so golden
The first brief: The high cost of leaving cryptocurrencies unregulated – examines 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.
The agency highlighted if cryptocurrencies continue to grow as a means of payment, and even replace domestic currencies unofficially, the “monetary sovereignty” of countries could be jeopardised.
UNCTAD also indicated the particular risk that stablecoins pose in developing countries with unmet demand for reserve currencies. As their name implies, stablecoins 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 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 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.
Tax evasion fears
The final policy brief discusses how cryptocurrencies 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 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.
“In this way, cryptocurrencies 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.
The agency urged authorities to regulate crypto exchanges, digital wallets and decentralized finance to ensure the comprehensive financial regulation of cryptocurrencies.
It says regulated financial institutions should be banned from holding cryptocurrencies, including stablecoins, or offering related products to their clients.
Additionally, advertising related to cryptocurrencies also should be regulated, as is the case with other high-risk financial assets. And, Governments are advised to provide a safe, reliable and affordable public payment system adapted to the digital era.