United Nations Conference on Trade and Development (UNCTAD) has taken a strong stance against cryptocurrency, specifically in emerging markets, arguing that they threaten financial stability, domestic resource mobilization, and the security of monetary systems.
The agency warned, “although private digital currencies have rewarded some individuals and institutions, they are an unstable financial asset that can bring social risks and costs.”
State of cryptocurrency
According to UNCTAD, cryptocurrency usage has increased at an unprecedented rate during the COVID-19 pandemic, reinforcing a trend already in motion. Regarding the share of the population that owned cryptocurrencies in 2021, 15 of the top 20 economies were emerging markets.
Ukraine topped the list with 12.7%, followed by Russia and Venezuela, with 11.9%and 10.3%, respectively.
The cryptocurrency ecosystem expanded by 2,300% between September 2019 and June 2021, particularly in emerging markets.
‘All that glitters is not gold’
The first brief – All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated – examines the reasons behind the rapid uptake of cryptocurrencies in emerging markets, including the facilitation of remittances and as a hedge against currency and inflation risks.
According to them, private digital currencies’ global reach makes policy responses challenging, but emerging markets do not lack choices; the brief offers policy options for limiting such risks and costs.
“If unchecked, cryptocurrencies may become a widespread means of payment and even replace domestic currencies unofficially (a process called cryptoization), which could jeopardize the monetary sovereignty of countries. The use of stablecoins poses the greatest risks in developing countries with unmet demand for reserve currencies,” UNCTAD said.
UNCTAD also highlighted how crypto undermines the effectiveness of capital controls, which they state is instrumental in emerging markets with which to curb the build-up of macroeconomic and financial vulnerabilities.
Public payment systems in the digital era
The second policy brief generally explores cryptocurrencies’ implications for monetary stability, cybersecurity, and financial stability.
“It is argued that a domestic digital payment system that serves as a public good could fulfill at least some of the reasons for crypto use and limit the expansion of cryptocurrencies in developing countries,” said UNCTAD.
Rather than hamper cryptocurrency’s financial stability and security, they argue that monetary authorities should provide digital payment options, ensuring that national payment systems continue functioning as public goods. For households without access to digital payment streams, monetary authorities should consider implementing a central bank digital currency or fast retail payment system based on national capabilities and requirements.
They use Nigeria as a case study. The design of a central bank digital currency in Nigeria involves trade-offs between inclusiveness and the restriction of illicit transactions.
“Such a currency should be universally accessible, yet mechanisms are necessary to prevent its use in illicit financial transactions, such as tax evasion and money laundering. Using a central bank digital currency may be appealing for financial inclusion, yet, as accounts are anonymous, illegal transactions are thereby potentially facilitated.”
They look at implementing an account-based central bank digital currency, with each wallet linked to a person, which would better help control illicit transactions but might risk excluding undocumented populations.
People with bank accounts and, therefore, the ability to obtain identification documents are currently the only ones who can use electronic naira currency. The Central Bank of Nigeria plans that anyone with a mobile telephone, including undocumented workers, will be able to access this currency. To minimize the risk of illicit transactions, accounts linked to identification documents are permitted to hold higher values of up to 5 million (around $12,000), and anonymous accounts are limited to lower values of up to 120,000 (around $300).
The cost of doing too little too late
The final policy brief discusses how cryptocurrencies have become a new channel for undermining domestic resource mobilization in emerging markets and warns of the dangers of doing too little, too late.
Despite cryptocurrencies’ potential for facilitating remittances, UNCTAD warned they might also facilitate illicit financial flows, which could reduce tax evasion and avoidance.
“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,” the agency added.
- Tax authorities should clearly define cryptocurrencies’ legal status. All business and personal accounts should be required to report gross inflows and outflows of crypto exchanges, e-wallet providers, and decentralized finance platforms.
- Agree and implement a global tax cryptocurrency regulation that considers the needs and challenges of emerging markets and gives them adequate representation.
- Information sharing on cryptocurrency holdings and trading must be comprehensive, such as through a common reporting standard. Such measures would support countries in detecting evasion of capital controls and enforcing taxes.
Criticisms of the reports
Omar Syed, co-founder of Shardeum and a seasoned crypto expert mentions, “The UNCTAD has concerns about crypto assets replacing fiat currencies, but they are an emerging alternative asset class. The global financial watchdog, Financial Action Task Force (FATF), has said that crypto is NOT a threat to the global monetary system. While major developed nations are taking strides in regulating crypto, developing countries banning it will push them behind, cause talent exodus, discourage capital flow in those countries.”
In addition, Jordan Walker, Co-Founder, and CEO at The Bitcoin Collective, an educational platform, looked at these reports concerning bitcoin., ‘There is so much to say about this report by UNCTAD, but I can’t help but feel they stumbled at the first hurdle. They have grouped all 20,000 cryptocurrencies. This is fundamentally wrong as bitcoin is an outlier amongst the crowd. It is the only truly decentralized cryptocurrency and should not be grouped with this centralized crowd. I would like to see this same report done again, but for solely bitcoin now, that would be very interesting. One final thing to point out is that the required policy action quoted in the paper is: ‘Provide a safe, reliable and affordable public payment system adapted to the digital era’ this describes bitcoin perfectly, but why don’t they want to adopt it… because they can’t control it which is why they call for Central Bank Digital Currencies which they have full control over.”
To halt cryptocurrency expansion in emerging markets, UNCTAD has outlined several measures. To ensure the comprehensive regulation of cryptocurrencies, the agency called for regulating crypto exchanges, digital wallets, and decentralized finance. Additionally, regulated financial institutions should not hold cryptocurrencies or offer their customers stablecoins.
Also on the agenda, the advertising of cryptocurrencies, like advertising for other high-risk financial instruments, should be regulated.
They urge governments to create a safe, reliable, affordable public payment system suited to the digital age.
As well as advocating for global tax coordination, UNCTAD supports cryptocurrency taxation, regulation, and information sharing.