Developing countries ignore cryptocurrency at their peril: UN

With over 100 million, India is the 7th largest user of cryptocurrencies in the world

The United Nations has issued a stark warning to world governments to turn a blind eye to the growing threat of unregulated cryptocurrencies around the world, saying it puts poor people and poor countries at increased risk.

Despite the Reserve Bank of India’s warnings about cryptocurrencies and the Indian government’s ambivalent response to cryptocurrencies, a large number of Indians have already acquired these digital assets, a United Nations report says.

The United Nations Conference on Trade and Development (UNCTAD) reports that more than 7% of Indians already own digital currency, as the use of cryptocurrency has increased at an unprecedented rate globally during the pandemic of Covid-19.

The UNCTAD report states that in 2021, developing countries accounted for 15 of the top 20 economies based on the share of population that owns cryptocurrencies.

Ukraine tops the list with 12.7pc, followed by Russia (11.9pc), Venezuela (10.3pc), Singapore (9.4pc), Kenya (8.5pc ) and the United States (8.3 pc). In India, 7.3% of the population owned digital currency in 2021, ranking seventh in the list of the top 20 global economies for digital currency ownership as a share of population.

In terms of numbers, Indians are by far the largest group using cryptocurrencies, according to UNCTAD figures, translating to over 100 million users. The growth in the number of users has occurred even in the face of complete uncertainty over the status of cryptocurrencies in India, with the government repeatedly changing its position – from labeling them illegal to taxing transactions with cryptocurrency, while simultaneously and very ironically insisting. that the tax did not legalize cryptocurrencies.

Global use of cryptocurrencies has increased exponentially during the Covid-19 pandemic, including in developing countries, UNCTAD said. He adds that while these private digital currencies have rewarded some and facilitate remittances, they are an unstable financial asset that can also carry social risks and costs.

In a clear warning to the global community to ignore cryptocurrencies, instead call and regulate them, the briefing note titled 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 facilitating remittances and as a hedge against currency and inflation risks. He said recent digital currency market shocks suggest that there are private risks involved in holding crypto, but if the central bank steps in to protect financial stability, then the issue becomes public.

If cryptocurrencies become a popular means of payment and even unofficially replace national currencies (a process called cryptoization), it could jeopardize countries’ monetary sovereignty, he said.

Multiple risks for the monetary system and consumers

In developing countries where the demand for reserve currencies is not met, stablecoins present particular risks. For some of these reasons, the International Monetary Fund has expressed the view that cryptocurrencies pose risks as legal tender, he said.

The IMF policy note titled Public Payment Systems in the Digital Age: Responding to Financial Stability and Security Risks of Cryptocurrencies focuses on the implications of cryptocurrencies for the stability and security of monetary systems, and for financial stability.

It indicates that a national digital payment system that serves as a public good could address at least some of the reasons for crypto use and limit the expansion of cryptocurrencies in developing countries, he said. said, adding that depending on national capabilities and needs, monetary authorities could provide a central bank digital currency or, more easily, a fast retail payment system.

Given the risk of increasing the digital divide in developing countries, UNCTAD urges the authorities to maintain the issuance and distribution of cash. He warns that cryptocurrencies can undermine domestic resource mobilization in developing countries. While cryptocurrencies can facilitate remittances, they can also enable tax evasion and evasion through illicit flows, as if heading for a tax haven where ownership is not easily identifiable. In this way, cryptocurrencies can also hamper the effectiveness of capital controls, a key instrument for developing countries to preserve policy space and macroeconomic stability, he said.

UNCTAD calls on governments to take action to curb the expansion of cryptocurrencies in developing countries, including ensuring comprehensive financial regulation of cryptocurrencies by regulating crypto exchanges, digital wallets and decentralized finance, and by prohibiting regulated financial institutions from holding cryptocurrencies (including stablecoins) or offering related products. to customers.

He also called for restricting advertising related to cryptocurrencies, as with other high-risk financial assets; provide a safe, reliable and affordable public payment system fit for the digital age; implement global tax coordination regarding cryptocurrency tax treatments, regulation, and information sharing; and rethink capital controls to account for the decentralized, borderless, and pseudonymous characteristics of cryptocurrencies.

Despite all these dangers resulting from turning one’s back on cryptocurrencies and leaving investors, reading ordinary people, facing the music, or being taken for a long ride on the roller coaster that cryptocurrencies have been since their launch .