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As citizens in developing countries increasingly turn to crypto for remittances, trade, savings and other use cases, the United Nations has warned that crypto can do more harm than good.
A UN agency has called on developing countries to limit the use of cryptocurrencies, citing financial stability risks and threats to domestic monetary systems.
In a statement on August 10, the UN Conference for Trade and Development (UNCTAD) referred to cryptocurrencies as “unstable” financial assets whose use can lead to social, fiscal and other types of harm.
While recognising that cryptocurrencies have benefitted some users, particularly in the form of cheaper and faster remittances, UNCTAD warned that developing countries must not overlook the threat they pose to national currencies and domestic resources.
In response to the growing use of cryptocurrencies in developing countries, UNCTAD has issued a list of “required policy actions” aimed at limiting their expansion.
These include comprehensive regulation of crypto exchanges, digital wallets and decentralised finance platforms, and a blanket ban on regulated financial institutions holding cryptocurrency (including stablecoins) and offering related products to clients.
Similarly, capital controls are encouraged to weaken the “decentralised, borderless and pseudonymous” features of cryptocurrency.
UNCTAD also suggests that use of cryptocurrency could be limited by advertising restrictions, as is already the case for other high-risk financial products.
With regard to tax, all countries are encouraged to agree and implement global tax coordination for cryptocurrency, alongside harmonised regulation and information sharing.
Finally, to dissuade citizens from using cryptocurrency, countries are encouraged to provide “safe, reliable and affordable” public payment systems that are adapted to the digital era.
UNCTAD suggests that instant payment networks or central bank digital currency (CBDC) would be the strongest options.
Crypto's double-edged sword
UNCTAD’s recommendations are based on a series of three policy briefings each focused on the increased use, and increased risk, of cryptocurrencies worldwide.
The first briefing, “All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated”, examines the reasons for the rapid uptake of cryptocurrencies in developing countries.
According to UNCTAD, use and ownership of cryptocurrency is said to have increased “exponentially” during the COVID-19 pandemic.
For remittances, this was due to traditional payment methods facing service disruptions, while for personal savings and investments, this was due to widespread inflation and the perceived protection against it offered by crypto. These effects were also most pronounced in developing countries.
Among the top 20 countries where cryptocurrency ownership is the highest, UNCTAD found that 15 are classed as emerging economies.
In 2021, Ukraine, Russia and Venezuela ranked numbers one, two and three respectively, coming in as the only countries in the world where more than 10 percent of the population own cryptocurrency.
The top three are followed by Singapore, Kenya, the US, India, South Africa, Nigeria and Colombia respectively, completing the top ten.
As noted by UNCTAD, however, the risk of currency substitution and other monetary threats are greater in emerging economies, where inflation tends to be higher and trust in government lower.
“If cryptocurrencies become a widespread means of payment and even replace domestic currencies unofficially (a process they call cryptoisation), this could jeopardise the monetary sovereignty of countries,” said UNCTAD.
“In developing countries with unmet demand for reserve currencies, stablecoins pose particular risks. For some of these reasons, the International Monetary Fund has expressed the view that cryptocurrencies pose risks as legal tender.”
Public payment systems in digital era
In its second policy brief, UNCTAD argues that a domestic digital payment system that serves as a public good could fulfil at least some of the needs that are currently met by cryptocurrency, and could help to limit the expansion of cryptocurrencies in developing countries.
“In cases where digital payment streams are not readily available to households, monetary authorities should carefully consider the implementation of a central bank digital currency or fast retail payment system, depending on national capabilities and needs,” said UNCTAD.
However, to avoid the risk of “accentuating the digital divide” in developing countries, UNCTAD urged monetary authorities to maintain issuance and distribution of cash.
As such, financial inclusion should be prioritised before more advanced digital payments are made available.
“In poorer countries, a lack of personal identification documentation excludes people, particularly women, rural populations and migrants, from owning a bank account,” said UNCTAD.
“For this reason, public authorities should coordinate efforts to make identification documents universally accessible.
“Second, low-income households, compared with other income groups, have lower levels of access to mobile telephones and the internet.”
The cost of doing too little too late
Although cryptocurrencies' usefulness for remittances is understood, UNCTAD also recognises that cryptocurrencies can enable tax evasion and avoidance through illicit flows. This is the topic of its third policy briefing.
UNCTAD likens this process to the use of shell companies and tax havens, making it difficult for authorities to know who is the beneficial owner of a particular asset, and how to identify them.
As such, UNCTAD argues that cryptocurrencies directly undermine the effectiveness of capital controls, which UNCTAD sees as a “key instrument” for developing countries to implement monetary policy and ensure macroeconomic stability.
“Countries should redesign their capital controls to include flows channelled through cryptocurrencies,” said UNCTAD.
“Alternatives include imposing financial tax on cryptocurrency trading and limiting the amount of individual transactions on crypto exchanges.
“Moreover, central bank digital currencies could be designed to allow for the functioning of capital controls. Without adapting to new digital alternatives, the effectiveness of these controls may be undermined.”
