The United Nations trade and development body, UNCTAD, called for action to tackle cryptocurrencies in developing countries, in three policy briefs released on Wednesday.

Although private digital currencies have rewarded some people and institutions, they are an unstable financial asset that can carry social risks and costs, the agency warned.

UNCTAD said their benefits to some are overshadowed by the threats they pose to financial stability, domestic resource mobilization and the security of monetary systems.

Rise of Cryptography

Cryptocurrencies are an alternative form of payment. Transactions are carried out digitally using an encrypted technology known as blockchain.

The use of cryptocurrency has increased globally to an unprecedented pace during the COVID-19 pandemic, reinforcing a trend that was already in motion. Some 19,000 currently exist.

In 2021, developing countries accounted for 15 of the top 20 economies when it comes to the share of the population that owns cryptocurrencies.

Ukraine tops the list with 12.7%, followed by Russia and Venezuela with 11.9% and 10.3%, respectively.

Not so golden

The first brief – All That Glitters Isn’t Gold: The High Cost of Unregulated Cryptocurrencies – examines the reasons for the rapid adoption of cryptocurrencies in developing countries, including facilitation of remittances and as 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 problem becomes publicsaid UNCTAD.

Additionally, if cryptocurrencies continue to grow as a means of payment, and even unofficially replace national currencies, the “monetary sovereignty” of countries could be compromised.

UNCTAD has also highlighted the particular risk posed by stablecoins in developing countries with unmet demand for reserve currencies. As the name suggests, stablecoins are designed to maintain stability because 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,“, said the agency.

The second guidance note focuses on the implications of cryptocurrencies for the stability and security of monetary systems, and for financial stability in general.

“It is argued that a national digital payment system that serves a public good could address at least some of the reasons for crypto usage and limit the expansion of cryptocurrencies in developing countries,” said UNCTAD.

For example, monetary authorities could provide a central bank digital currency or a fast retail payment system, although the measures depend on national capacities and needs.

However, UNCTAD urged governments “to maintain the issuance and distribution of cash», given the risk of widening the digital divide in developed countries.

Tax evasion fears

The final guidance note explains how cryptocurrencies have become a new channel for undermine domestic resource mobilization in developing countries, and warns against the dangers of doing too little, too late.

While cryptocurrencies can facilitate remittances, UNCTAD has warned that they can also enable tax evasion and evasion through illicit financial flows – similar to 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 their policy space and macroeconomic stability,” the agency added.

Curbing Crypto

UNCTAD outlined several actions aimed at stopping 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.

Additionally, regulated financial institutions should be prohibited from holding cryptocurrencies, including stablecoins, or offering related products to their customers.

Advertising related to cryptocurrencies should also be regulated, as is the case with other high-risk financial assets.

Governments are advised to provide a safe, reliable and affordable public payment system fit for the digital age.

UNCTAD also advocates for global tax coordination regarding tax treatments, regulation and information sharing on cryptocurrencies.

Additionally, capital controls should be redesigned to account for what the agency described as “the decentralized, borderless, and pseudonymous characteristics of cryptocurrencies.”