The United Nations Conference on Trade and Development (UNCTAD) is calling on developing nations to monitor the growth of cryptocurrencies which it warns risks replacing ‘domestic currencies.’
According to the UN body, the use of cryptocurrencies in developing nations became widespread during the pandemic, with countries such as Kenya, Nigeria and South Africa, finding themselves in the top ten list when it comes to a share of a country’s population holding cryptocurrencies.
In the UNCTAD policy brief No. 100, the United Nations body indicates there are two main reasons for the increased use of cryptocurrencies in developing countries during the pandemic:
- First, the use of cryptocurrencies was an attractive channel in terms of price and speed through which to send remittances. During the pandemic, the already high costs of traditional remittance services rose even higher during lockdown periods due to related disruptions
- Second, cryptocurrencies, as part of financial investments and speculation, are mainly held by middle-income earners in developing countries and, particularly. in countries facing currency depreciation and rising inflation (triggered or accentuated by the COVID-19 crisis). In these markets, cryptocurrencies have been perceived as a way to protect household savings
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SEE ALSO: IMF Officials Urge Developing Nations to Tighten Control of Crypto Flows
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However, the UNCTAD is pointing out three major risks developing nations face from cryptocurrencies:
Crypto Growth Risks According to UNCTAD
- In its policy brief, UNCTAD warns that the use of cryptocurrencies may lead to financial instability risks.
According to UNCTAD:
“If prices plunge, monetary authorities may need to step in to restore financial stability. Importantly, in developing countries, the use of cryptocurrencies provides a new channel for illicit financial flows.”
– UNCTAD
- Second, the use of cryptocurrencies undermines the effectiveness of capital controls, an essential instrument in developing countries with which to curb the build up of macro-economic and financial vulnerabilities, as well as to increase policy space.
Actually, that second risk is similar to the ones raised by a group of IMF officials in May 2022 who urged Developing Nations to Tighten Control of Crypto Flows.
- Finally, UNCTAD warns that if left 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.
According to the UNCTAD policy brief:
“The use of stablecoins poses the greatest risks in developing countries with unmet demand for reserve currencies.
For example, the turmoil in May 2022 prompted a flight to higher quality stablecoins that publish audited holdings of their backings.”
– UNCTAD
UNCTAD adds that the International Monetary Fund (IMF) has expressed concerns with regard to the risks of using cryptocurrencies as legal tender.
Policy Interventions
In its policy brief, UNCTAD has a list of policies that it says have the potential to curb further spread of the risks associated with cryptocurrencies and stablecoins:
(a) Ensuring comprehensive financial regulation through the following actions:
- Require the mandatory registration of crypto exchanges and digital wallets and make the use of cryptocurrencies less attractive, for example, by charging entry fees for crypto exchanges and digital wallets and/or imposing financial transaction taxes on cryptocurrency trading
- Ban regulated financial institutions from holding stablecoins and cryptocurrencies or offering related products to clients
- Regulate decentralized finance (DeFi). Such finance may, in fact, not be fully decentralized, given its central management and ownership which form an entry point for regulation
(b) Restricting or prohibiting the advertisement of crypto exchanges and digital wallets in public spaces and on social media
This new type of virtual, and often disguised, advertisement requires policymakers to expand the scope of regulation beyond traditional media. This is an urgent need in terms of consumer protection in countries with low levels of financial literacy as even limited exposure to cryptocurrencies may lead to significant losses.
(c) Creating a public payment system to serve as a public good, such as a central bank digital currency (CBDC)
In the light of the regulatory and technological complexity of CBDCs, and the urgent need to provide safe, reliable and affordable payment systems, authorities could also examine other possibilities, including fast retail payment systems.
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Read / Download the full UNCTAD policy brief below:
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RECOMMENDED READING: 9 Out of 13 African Countries Chasing CBDCs Are in Research Phase, Says The IMF
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