The global reach of private digital currencies makes national regulatory responses difficult, but developing countries are not without choices.
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The global use of cryptocurrencies has increased exponentially during the COVID-19 pandemic, including in developing countries.
While these private digital currencies have rewarded some and facilitated remittances, they are an unstable financial asset that can also carry social risks and costs.
UNCTAD has released three policy briefs that look at these risks and costs, including the threats that cryptocurrencies pose to financial stability, domestic resource mobilization and the security of monetary systems.
All that glitters is not gold
The policy brief titled “All that glitters is not gold: the high cost of unregulated cryptocurrencies” examines the reasons for the rapid adoption of cryptocurrencies in developing countries , including facilitating remittances and as a hedge against currency and inflation risks.
Recent digital currency market shocks suggest that there are private risks associated with holding crypto, but if the central bank steps in to protect financial stability, then the issue becomes public.
If cryptocurrencies become a widespread means of payment and even unofficially replace national currencies (a process called cryptography), it could jeopardize the monetary sovereignty of countries.
In developing countries where the demand for reserve currencies is not met, stablecoins present 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 the digital age
The policy brief titled “Public Payments Systems in the Digital Age: Responding to Financial Stability and Security Risks of Cryptocurrencies” focuses on the implications of cryptocurrencies for stability and security monetary systems, and for financial stability.
It is argued that a national digital payment system that serves as a public good could address at least some of the reasons for crypto usage and limit the expansion of cryptocurrencies in developing countries.
Depending on national capacities and needs, monetary authorities could provide a central bank digital currency or, more easily, a rapid retail payment system. Given the risk of increasing the digital divide in developing countries, UNCTAD urges the authorities to maintain the issuance and distribution of cash.
The cost of doing too little too late
The policy brief titled “The Cost of Doing Too Little Too Late: How Cryptocurrencies Can Undermine Domestic Resource Mobilization in Developing Countries” explains how cryptocurrencies have become a new channel undermining domestic resource mobilization in developing countries.
While cryptocurrencies can facilitate remittances, they can also enable tax evasion and evasion through illicit flows, as if heading for a tax haven where ownership is not easily identifiable.
In this way, cryptocurrencies can also limit the effectiveness of capital controls, a key instrument for developing countries to preserve policy space and macroeconomic stability.
Policy actions required
UNCTAD urges authorities to take the following steps to curb the expansion of cryptocurrencies in developing countries:
- Ensure comprehensive financial regulation of cryptocurrencies by regulating crypto exchanges, digital wallets and decentralized finance, and prohibiting regulated financial institutions from holding cryptocurrencies (including stablecoins) or offering related products to clients.
- Restrict advertising related to cryptocurrencies, as with other high-risk financial assets.
- To provide a safe, reliable and affordable public payment system suitable for the digital age.
- Agree and implement global tax coordination regarding cryptocurrency tax treatments, regulation and information sharing.
- Rethink capital controls to accommodate the decentralized, borderless, and pseudonymous characteristics of cryptocurrencies.