Cryptos could destroy Nigeria and other developing countries’ monetary sovereignty: UNCTAD
The United Nations Conference on Trade and Development (UNCTAD) has called for action to tackle cryptocurrencies in Nigeria and other developing countries.
The United Nations Trade and Development Agency made this call in three policy briefs titled “All That Glitters Is Not Gold: The High Cost of Unregulated Cryptocurrencies” , published on Wednesday.
The policy brief examines the reasons for the rapid adoption of cryptocurrencies in developing countries, including facilitating remittances and as a hedge against currency and inflation risks. UNCTAD warned that although private digital currencies have rewarded some people and institutions, they are an unstable financial asset that can carry social risks and costs.
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.
According to the agency, the use of cryptocurrency has grown around the world at an unprecedented rate during the COVID-19 pandemic, reinforcing a trend that was already in motion, noting that 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.
“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 issue becomes public,” UNCTAD said.
Moreover, 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 also highlighted the risk that stablecoins pose to 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,” the agency said.
The second guidance note focuses on the implications of cryptocurrencies for the stability and security of monetary systems and 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.
The final policy brief explains how cryptocurrencies have become a new channel for undermining domestic resource mobilization in developing countries and warns of the dangers of doing too little, too late.
While cryptocurrencies can facilitate remittances, UNCTAD has warned that they could also enable tax evasion and evasion through illicit financial flows – similar to a tax haven, where property does not 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.
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.
As with other high-risk financial assets, advertising related to cryptocurrencies should also be regulated.
Governments were called upon 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.