Developing countries ignoring cryptocurrency at their own risk: UN

Digital currency is an alternative form of payment created by using encryption algorithms (Photo: freeimages)

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

The United Nations Conference on Trade and Development (UNCTAD) says that over seven per cent of Indians already own digital currency, as the use of cryptocurrency rose globally at an unprecedented rate during the Covid-19 pandemic.

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

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

In terms of sheer numbers, the Indians are by far the largest group using cryptocurrencies, going by the UNCTAD figures, translating into over 100 million users. The growth in number of users has come even in the face of total uncertainty about the status of cryptocurrencies in India as the government has at various times changed its stance – from calling them illegal to taxing cryptocurrency transactions, while simultaneously and insisting very tongue in cheek that the tax did not legalise cryptocurrencies.

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

In a clear warning to the global community about ignoring cryptocurrencies, instead of taking a call on them and regulating them, the policy brief titled All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated examines the reasons for the rapid uptake of cryptocurrencies in developing countries, including facilitation of remittances and as a hedge against currency and inflation risks. It said that recent digital currency shocks in the market suggest that there are private risks to holding crypto, but if the central bank steps in to protect financial stability, then the problem becomes a public one.

If cryptocurrencies become a widespread means of payment and even replace domestic currencies unofficially (a process called cryptoisation), this could jeopardise the monetary sovereignty of countries, it said.

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Multiple risks to monetary system & consumers

In developing countries with unmet demand for reserve currencies, stablecoins pose particular risks. For some of these reasons, the International Monetary Fund has expressed the view that cryptocurrencies pose risks as legal tender, it said.

The IMF policy brief titled Public payment systems in the digital era: Responding to the financial stability and security-related risks of cryptocurrencies focuses on the implications of cryptocurrencies for the stability and security of monetary systems, and to financial stability.

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

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

UNCTAD asks governments to take actions to curb the expansion of cryptocurrencies in developing countries, including ensuring comprehensive financial regulation of cryptocurrencies through regulating crypto exchanges, digital wallets and decentralised finance, and banning regulated financial institutions from holding cryptocurrencies (including stablecoins) or offering related products to clients.

It also called for restricting advertisements related to cryptocurrencies, as for other high-risk financial assets; providing a safe, reliable and affordable public payment system adapted to the digital era; implementing global tax coordination regarding cryptocurrency tax treatments, regulation and information sharing and redesigning capital controls to take account of the decentralised, borderless and pseudonymous features of cryptocurrencies.

Despite all these dangers resulting from turning their back on cryptocurrencies and let the investors, read the common persons, face the music or be taken for a long ride on the roller coaster that cryptocurrencies have been ever since they were launched.

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