The UN’s courageous declaration against cryptocurrencies in developing countries
Decisions must be taken to curb the rise of cryptocurrencies in developing countries, the United Nations said, calling them “an unstable financial asset that can lead to social risks and costs.
“Although private digital currencies have enriched some individuals and institutions, they are an unstable financial asset that can entail social risks and costs,” warned the UN’s the trade and development body, UNCTAD, in three policy briefs released on Wednesday, August 10.
According to UNCTAD, the benefits of cryptocurrencies are, for some, overshadowed by the threats they pose to financial stability, domestic resource mobilization and the security of monetary systems.
In recent years, cryptocurrencies have become an alternative form of payment. Transactions are done digitally through an encrypted technology known as the blockchain. The use of cryptocurrencies has increased globally at an unprecedented rate during the COVID-19 pandemic, reinforcing a trend already underway. There are currently some 19,000 of them.
In 2021, among the top 20 countries with the highest share of the population owning cryptocurrencies, 15 were developing countries.
The UN agency’s first note, entitled “All that glitters is not gold. Not Regulating Crypto-Currencies Is Very Expensive,” examines the rapid adoption of cryptocurrencies in developing countries, including making it easier to transfer money and protecting against fiat currency inflation.
Yet “recent market shocks to digital currencies suggest that holding cryptocurrencies is risky. If a central bank steps in to protect their financial stability, then the problem becomes public,” UNCTAD said.
Moreover, suppose cryptocurrencies continue to grow as a payment or even unofficially replace national currencies. In that case, it is the “monetary sovereignty” of countries that could be at risk, the UN agency warned.
UNCTAD’s second note focuses on the impact of cryptocurrencies on the stability and security of monetary systems and the strength of the financial architecture in general. “A national public service digital payment system should address at least some reasons for using cryptocurrencies and limit the expansion of cryptocurrencies in developing countries,” UNCTAD noted.
The latest policy brief examines 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.”
Indeed, while cryptocurrencies can facilitate remittances, UNCTAD warned that they “could also enable fraud and encourage tax evasion through illicit financial flows – much like a tax haven, where it is difficult to identify who owns what.”
“Thus, cryptocurrencies can also curb the effectiveness of capital controls, a key tool for developing countries to preserve their policy space and macroeconomic stability,” the UN agency further noted.