While private digital currencies have rewarded a number of individuals and institutions, they are a volatile financial asset that can carry risks and social costs, the agency warned.
The Rise of Cryptocurrency
Cryptocurrencies are an alternative form of payment. Transactions are made digitally through a cryptographic technology known as blockchain.
Cryptocurrency usage has increased globally at an unprecedented rate during that time COVID-19 pandemic, reinforcing a trend that has already begun. About 19,000 currently exist.
In 2021, developing countries account for 15 of the top 20 economies when it comes to the percentage of the population that owns cryptocurrency.
Ukraine topped the list with 12.7%, followed by Russia and Venezuela, with 11.9% and 10.3% respectively.
Not too golden
First summary – All that glitters is not gold: The high cost of leaving crypto unregulated – look at the reasons behind the rapid uptake of cryptocurrencies in developing countries, including facilitate money transfer and like a hedge against currency and inflation risks.
“The recent crypto shocks in the market show that there are unique risks to holding cryptocurrencies, but if the central bank intervenes to protect financial stability, then the the matter becomes a public matter‘ said UNCTAD.
Furthermore, if cryptocurrencies continue to develop as a means of payment, and even replace local currencies informally, the “monetary sovereignty” of countries could be at stake.
UNCTAD also highlights the particular risk that stablecoins pose in developing countries with unmet demand for reserve currencies. As their name suggests, stablecoins are designed to remain stable because their value is pegged to another currency, commodity, or financial instrument.
“For a number of these reasons, the International Monetary Fund has expressed the view that Cryptocurrencies pose risks such as legal tenders,The agency said.
The policy summary second focuses on the effects of cryptocurrencies on the stability and security of the monetary system and financial stability in general.
“It is argued that a domestic digital payment system that serves as a public good could satisfy at least some of the rationale for the use of cryptocurrencies and limit the expansion,” UNCTAD said. of cryptocurrencies in developing countries.
For example, monetary authorities could offer central bank digital currencies or rapid retail payment systems, although measures will depend on national capacity and needs.
However, UNCTAD has called on governments to ” maintain the issuance and distribution of cashat the risk of deepening the digital divide in developed countries.
Fear of tax evasion
Final match policy summary discuss how cryptocurrencies have become a new channel for undermining the mobilization of domestic resources in developing countries, and warn of the dangers of doing too little, too late.
While cryptocurrencies can facilitate remittances, UNCTAD has warned that they can also allow for tax evasion and avoidance through illicit financial flows – similar to a tax haven where ownership is not easily determined.
In this way, cryptocurrencies can also limit the effectiveness of capital controls, an important tool for developing countries to maintain policy space and economic stability. macro.
UNCTAD has outlined a number of actions to prevent the expansion of cryptocurrencies in developing countries.
The agency called on the authorities to regulate cryptocurrency exchanges, digital wallets and decentralized finance to ensure comprehensive financial regulation of cryptocurrencies.
Furthermore, regulated financial institutions should be prohibited from holding cryptocurrencies, including stablecoins, or offering related products to their customers.
Cryptocurrency-related advertising also needs to be regulated, as is the case with other high-risk financial assets.
Governments should provide a secure, reliable and affordable public payment system that adapts to the digital era.
UNCTAD also advocates for global tax coordination regarding crypto tax treatment, regulation and information sharing.
Besides, Capital controls should be redesigned to take into account what the agency describes as the “decentralized, borderless features and moniker of cryptocurrencies”.
To listen to the latest UNCTAD podcast focusing on the crypto world’s highs and lows, click here.