In spite of the COVID-19 pandemic, global use of cryptocurrencies has increased rapidly and developing countries are also integrating its use.
These private cryptocurrencies might reward some by providing quicker remittances, but they also have social risks and can cost you money.
UNCTAD suggests ways to regulate digital assets in developing countries
UNCTAD has published three policy briefs which explore the risks and costs of cryptocurrencies. These include threats to financial stability, resource mobilization and safety of monetary systems.
All that glitters is not gold
The policy brief “all that glitters is not gold” discusses the reasons for the proliferation of cryptocurrencies in developing countries, including allowing for remittances and as a hedge against inflation.
The recent market shocks in digital currencies suggest that there are privacy risks to holding it. However, if the central pool steps in to protect stability, then the problem becomes a public one.
If currencies such as Bitcoin or Ethereum would replace other forms of money, this risk might be too high for the central bank.
Developing countries need reserve currencies. Stablecoins, like tokens, are less reliable for some struggling countries. It’s better for their currency to be cryptocurrency, such as Bitcoin. The International Monetary Fund does not support cryptocurrency because of its use in illegal businesses.
Public payment systems are evolving in the digital age
This policy brief discusses the implications of cryptocurrencies for the stability and security of financial systems, considering the stability of monetary systems as well.
The argument is that a domestic digital payment system will help limit the expansion of cryptocurrencies in developing countries because it can be a public good that serves at least some of the reasons why you might want to use cryptocurrencies.
UNCTAD suggests that, in countries where technology adoption is high, the central bank should provide a digital currency backed by their monetary policies. However, in developing countries, UNCTAD urges authorities not to publish new currencies to avoid increasing their digital divide.
The policy explains “The Cost of Doing Too Little Too Late: How Cryptocurrencies Can Undermine Domestic Resource Mobilization in Developing Countries” discusses how the spread of cryptocurrencies can undermine domestic resource mobilization in developing countries.
Although cryptocurrencies can help facilitate remittances, they can also increase tax evasion through illicit flows by making it easier to hide ownership for some investors.
Cryptocurrencies can also stop the effectiveness of the capital controls key tool for developing countries.
Essential policy actions
UNCTAD has advised that following regulation and legislation should be enacted to curb the growth of cryptocurrency in developing countries:
- We should regulate cryptocurrency exchanges, digital wallets and decentralized finance as well as ban regulated financial institutions from holding cryptocurrencies and offering related products to clients.
- The government should restrict ads and misinformation related to cryptocurrencies
- Provide a safe, reliable and affordable public payment system adapted to the digital era.
- Agree and implement global tax coordination regarding cryptocurrency
- The redesign of capital controls should account for the decentralized, borderless and pseudonymous features of cryptocurrencies.
