Cryptocurrencies have recently become an alternative form of payment. Transactions are now being done digitally through encrypted technology known as blockchain. Additionally, the use of cryptocurrency globally at an unprecedented rate during the COVID-19 pandemic reinforced a trend that was already in motion. 

The UN trade and development body, UNCTAD, has now called for action to curb cryptocurrencies in developing nations through its three policy briefs that were published this Wednesday. 

The three policy briefs explore the risks and costs of cryptocurrencies, including the dangers they pose to financial stability, the mobilization of domestic resources, and the security of monetary systems.

Although private digital currencies have rewarded some individuals and institutions, the UN trade body states that they are an unstable financial asset that can bring social risks and costs, the agency warned.

UNCTAD also adds that their benefits to some are overshadowed by the threats they pose to financial stability, domestic resource mobilization, and the security of monetary systems.

The first brief titled, “All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated” examines the reasons behind the rapid uptake of cryptocurrencies in developing countries, including the facilitation of remittances and as a hedge against currency and inflation risks. 

Under this brief, UNCTAD stated, “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. If cryptocurrencies become a widespread means of payment and even replace domestic currencies unofficially (by a process called cryptoization), this could jeopardize the monetary sovereignty of countries.

UNCTAD also highlighted 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. 

“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,” the trade body added.

The second policy brief is titled, “Public payment systems in the digital era: Responding to the financial stability and security-related risks of cryptocurrencies.” It focuses on the implications of cryptocurrencies for the stability and security of monetary systems, and financial stability.

UNCTAD said, “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.”

UNCTAD suggests that monetary authorities could provide a central bank digital currency or a fast retail payment system, though measures will depend on national capacities and needs. The trade body also urges 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. 

“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. 

In conclusion, UNCTAD urges authorities to take the following actions to curb the expansion of cryptocurrencies in developing countries:

• Ensure comprehensive financial regulation of cryptocurrencies through regulating crypto exchanges, digital wallets, and decentralized finance, and banning regulated financial institutions from holding cryptocurrencies (including stablecoins) or offering related products to clients.
• Restrict advertisements related to cryptocurrencies, as similarly done for other high-risk financial assets.
• Provide a safe, reliable and affordable public payment system adapted to the digital era.
• Agree and implement global tax coordination regarding cryptocurrency tax treatments, regulation, and information sharing.
• Redesign capital controls to take account of the decentralized, borderless, and pseudonymous features of cryptocurrencies.