While private digital currencies have rewarded some individuals and institutions, they are an unstable financial asset that can carry social risks and costs, the agency warned.
UNCTAD said their benefits are overshadowed for some by the threats they pose to financial stability, the mobilization of domestic resources and the security of monetary systems.
Rise of crypto
Cryptocurrencies are an alternative payment method. Transactions are done digitally through encrypted technology known as blockchain.
Cryptocurrency use rose globally at an unprecedented speed during the COVID-19 pandemic, reinforcing a trend that was already in flux. There are currently about 19,000 of them.
In 2021, developing countries accounted for 15 of the top 20 economies when it comes to the proportion of the population owning cryptocurrencies.
Ukraine led the list with 12.7 percent, followed by Russia and Venezuela with 11.9 percent and 10.3 percent, respectively.
Not so golden
The first short – All That Glitters Isn’t Gold: The High Cost of Leaving Cryptocurrencies Unregulated – examines the reasons behind the rapid adoption of cryptocurrencies in developing countries, including: facilitating transfers and as a hedge against currency and inflation risks.
“Recent digital currency shocks in the market suggest there are private risks to holding crypto, but if the central bank steps in to protect financial stability, then the problem becomes a public problemsaid UNCTAD.
Furthermore, if cryptocurrencies continue to grow as a means of payment, even unofficially replacing domestic currencies, countries’ “monetary sovereignty” could be at risk.
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.
“For some of these reasons, the International Monetary Fund has expressed the view that: cryptocurrencies pose risks as legal tender,the agency said.
The second policy letter focuses on the implications of cryptocurrencies for the stability and security of monetary systems, and for financial stability in general.
“It is claimed that a domestic digital payment system that serves as a public good could fulfill at least some of the reasons for using cryptocurrencies and limit the expansion of cryptocurrencies in developing countries,” UNCTAD said.
For example, monetary authorities could offer a central bank digital currency or a fast retail payment system, although measures will depend on national capabilities and needs.
UNCTAD, however, has urged governments to “do maintain the issuance and distribution of cash;given the risk of widening the digital divide in developed countries.
Fear of tax evasion
The latest policy letter discusses how cryptocurrencies have become a new channel for undermining domestic resource mobilization in developing countries, and warns against the dangers of too little, too late.
While cryptocurrencies can facilitate money transfers, UNCTAD warned that: they can also facilitate tax evasion and avoidance by illicit money flows – similar to a tax haven, where property is not easy to identify.
“In this way, cryptocurrencies can also curb the effectiveness of capital controls, an important tool for developing countries to maintain their policy space and macroeconomic stability,” the agency added.
Keep crypto in check
UNCTAD has outlined several actions to stop the expansion of cryptocurrency in developing countries.
The agency urged authorities to regulate crypto exchanges, digital wallets and decentralized finance to ensure comprehensive financial regulation of cryptocurrencies.
In addition, regulated financial institutions should be prohibited from holding cryptocurrencies, including stablecoins, or offering related products to their customers.
Advertising related to cryptocurrencies must also be regulated, as is the case with other high-risk financial assets.
Governments are advised to ensure a secure, reliable and affordable public payment system adapted to the digital age.
UNCTAD also advocates for global tax coordination regarding tax treatments, regulation and information sharing about cryptocurrency.
Additionally, capital controls must be redesigned to take into account what the agency described as “the decentralized, borderless and pseudonymous characteristics of cryptocurrencies”.
Click here to hear UNCTAD’s latest podcast focusing on the highs and lows of the cryptocurrency world.