During the COVID-19 pandemic, the global use of cryptocurrencies increased significantly, reinforcing an already existing trend. The UN, on the other hand, believes that cryptocurrencies may pose a threat to developing countries’ monetary sovereignty and has recommended stringent policy options to mitigate such risks.
The United Nations Conference on Trade and Development (UNCTAD) warns of the risk associated with leaving the industry unregulated in a policy brief published in June titled All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated, stating that the disadvantages posed to developing nations far outweigh the benefits they may bring to individuals and financial institutions. The policy brief even suggests that developing countries prohibit cryptocurrency advertisements and require the mandatory registration of all crypto wallets, in addition to “providing a safe, reliable, and affordable public payment system adapted to the digital era.”
Who pays the price?
The UN warned that the returns from cryptocurrency trading and holding, like those from other speculative trades, are highly individual and, on balance, outweighed by the risk they pose to developing countries. The brief mentions several reasons to be cautious.
For starters, cryptocurrencies may cause financial instability. Because of the price volatility, monetary authorities may be required to intervene in order to restore financial stability. Cryptocurrencies may also provide a new channel for illicit financial activities in developing countries.
Second, cryptocurrency undermines the effectiveness of capital control, which is a critical tool in developing countries for mitigating the accumulation of financial and macroeconomic vulnerabilities. Finally, if cryptocurrencies are not regulated, they may become a popular means of payment, potentially replacing national currencies and jeopardizing countries’ monetary sovereignty.
What Should Developing Countries Do?
In order to reduce the risk that cryptocurrencies pose to developing countries, the brief suggests that governments make the use of cryptocurrencies less appealing. It suggests that levying taxes on technological transactions and requiring digital wallets and exchanges to be registered could help to discourage the use of cryptos. The UN proposes prohibiting financial institutions from holding digital assets and from providing clients with crypto-related services. Other suggestions include restricting or prohibiting cryptocurrency firms from advertising in public places or on social media, citing an “urgent need in terms of consumer protection in countries with low levels of financial literacy.”
The brief’s final recommendation for developing countries is to create a payment system that serves the public in the same way that government-built infrastructure does, as well as to investigate the creation of a central bank digital currency. While the brief maintains that developing countries must address the risks of cryptocurrencies, it does acknowledge that “there is now a one-size-fits-all policy response.” The UN urges countries to be proactive in implementing regulations, stating: Doing too little or acting too late will result in higher future costs.
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