The global reach of private digital currencies makes national regulatory responses challenging but developing countries are not without choices.
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 facilitate remittances, they are an unstable financial asset that can also bring social risks and costs.
UNCTAD has released three policy briefs that delve into these risks and costs, including the threats cryptocurrencies bring to financial stability, domestic resource mobilization and the security of monetary systems.
All that glitters is not gold
The policy brief entitled “All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated” examines the reasons for the rapid uptake of cryptocurrencies in developing countries, including facilitation of remittances and as a hedge against currency and inflation risks.
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 (a process called cryptoization), this could jeopardize the monetary sovereignty of countries.
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.
Public payment systems in the digital era
The policy brief entitled “Public payment systems in the digital era: Responding to the financial stability and security-related risks of cryptocurrencies” focuses on the implications of cryptocurrencies for the stability and security of monetary systems, and to financial stability.
It is argued that a domestic digital payment system that serves as a public good could fulfil at least some of the reasons for crypto use and limit the expansion of cryptocurrencies in developing countries.
Depending on national capabilities and needs, monetary authorities could provide a central bank digital currency or, more readily, a fast retail payment system. Given the risk of accentuating the digital divide in developing countries, UNCTAD urges authorities to maintain the issuance and distribution of cash.
The cost of doing too little too late
The policy brief entitled “The cost of doing too little too late: How cryptocurrencies can undermine domestic resource mobilization in developing countries” discusses how cryptocurrencies have become a new channel undermining domestic resource mobilization in developing countries.
While cryptocurrencies can facilitate remittances, they may also enable tax evasion and avoidance through illicit flows, just as if 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.
Required policy actions
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 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.