The global use of cryptocurrencies has increased significantly during the COVID-19 pandemic and reinforced a trend that was already underway. The United Nations however believes that cryptocurrencies could pose a threat to monetary sovereignty in developing nations and is recommending strict policy options to curb such risks.
In a policy brief published in June entitled “All that glitter is not gold: The high cost of leaving cryptocurrencies unregulated”, the United Nations Conference on Trade and Development (UNCTAD) warns of the risk associated with leaving the industry unregulated, stating that the disadvantages posed to developing nations far outweigh the benefits they may bring to individuals and financial institutions. The policy brief goes as far as to suggest that developing nations should ban advertisements related to cryptocurrencies and should require the mandatory registration of all crypto wallets, as well as “providing a safe, reliable and affordable public payment system adapted to the digital era.”
Who Bears the Cost?
The UN cautioned that the returns derived from cryptocurrency trading and holding, as with other speculative trades, are highly individual, and on balance, are overshadowed by the risk they pose the developing nations. The brief notes a variety of reasons to be cautious.
First, cryptocurrencies may result in financial instability. Due to the price volatility, monetary authorities may need to step in to restore financial stability. In developing nations, the use of cryptos may also provide a new channel for illicit financial activities.
Secondly, cryptocurrency undermines the effectiveness of capital control which is an essential instrument in developing countries with which to curb the buildup of financial and macroeconomic vulnerabilities. Finally, if cryptocurrencies are left unchecked, they may become a widespread means of payment that could replace domestic currencies, thereby jeopardizing the monetary sovereignty of countries.
What Are Developing Nations to Do?
In an effort to mitigate the risk cryptocurrencies pose to developing nations, the brief recommends that governments “make the use of cryptocurrencies less attractive.” It suggests that imposing taxes on transactions using technology and making it mandatory for digital wallets and exchanges to be registered could be helpful in deterring the use of cryptos. The UN proposes the idea of banning financial institutions from holding digital assets and preventing them from offering crypto-related services to clients. Further suggestions include restricting or prohibiting the advertising of cryptocurrency firms in public places or on social media, claiming that it is an “urgent need in terms of consumer protection in countries with low levels of financial literacy.”
The brief’s final suggestion for developing nations is to develop a payment system that would serve the public in the same way government-built infrastructure does and explore the creation of a central bank digital currency. While the brief does maintain that it is pertinent that developing nations address the risks of cryptocurrencies, it does acknowledge that “there is now a one-size-fits-all policy response.” The UN urges countries to take a pro-active approach to implement regulation, saying,
Doing too little or taking action too late will lead to higher costs in the future.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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