The United Nations Conference on Trade and Development (UNCTAD) is calling on developing nations to monitor the growth of cryptocurrencies, which it warns risk replacing “national currencies.”
According to the UN body, the use of cryptocurrencies in developing countries 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 portion of a population. country that owns cryptocurrencies.
In the UNCTAD Policy Brief No. 100The United Nations body indicates that 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 to send remittances. During the pandemic, the already high costs of traditional remittance services increased further during lockdown periods due to related disruptions.
- Second, cryptocurrencies, as part of financial investments and speculation, are mainly in the hands of middle-income people in developing countries and in particular. in countries facing currency depreciation and rising inflation (caused or accentuated by the COVID-19 crisis). In these markets, cryptocurrencies have been perceived as a way to protect household savings.
However, UNCTAD points out three main risks developing nations face due to cryptocurrencies:
Risks of the growth of cryptocurrencies according to UNCTAD
- In its policy brief, UNCTAD warns that the use of cryptocurrencies can lead to risks of financial instability.
According to UNCTAD:
“If prices crash, monetary authorities may need to intervene to restore financial stability. Importantly, in developing countries, the use of cryptocurrencies provides a new channel for illicit financial flows.”
- Second, the use of cryptocurrencies undermines the effectiveness of capital controls, an essential instrument in developing countries to curb the build-up of macroeconomic and financial vulnerabilities, as well as to increase policy space.
In reality, that second risk is similar to those raised by a group of IMF officials in May 2022 who he urged developing nations to tighten control of crypto flows.
- Finally, UNCTAD warns that, if left unchecked, cryptocurrencies can become a widespread means of payment and even unofficially replace national currencies (a process called cryptoization), which could endanger 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 May 2022 turmoil sparked a flight to higher-quality stablecoins that post audited holdings of their backers.”
UNCTAD adds that the International Monetary Fund (IMF) has raised concerns regarding the risks of using cryptocurrencies as legal tender.
In its policy brief, UNCTAD has a list of policies that it says have the potential to curb the further spread of risks associated with cryptocurrencies and stablecoins:
(a) Guarantee a comprehensive financial regulation through the following actions:
- Requiring mandatory registration of cryptocurrency exchanges and digital wallets and making the use of cryptocurrencies less attractive, for example, by charging entry fees for cryptocurrency exchanges and digital wallets and/or imposing financial transaction taxes on cryptocurrency trading .
- Prohibit regulated financial institutions from holding stablecoins and cryptocurrencies or offering related products to customers
- Regulate decentralized finance (DeFi). Such financing may, in fact, not be fully decentralized, given its central management and ownership that form an entry point for regulation.
(b) Restrict or prohibit the advertising of crypto exchanges and digital wallets in public spaces and on social networks.
This new type of virtual, and often disguised, advertising requires lawmakers 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 can lead to significant losses.
(c) Create a public payment system to serve as a public good, such as a central bank digital currency (CBDC)
In light of the regulatory and technological complexity of CBDCs, and the urgent need to provide secure, reliable and affordable payment systems, authorities could also examine other possibilities, including fast retail payment systems.
Read or download UNCTAD’s full policy brief below:
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