UN said that the use of cryptocurrency rose globally at an unprecedented rate during the COVID-19 pandemic with India becoming the 7th highest country in digital currency ownership. As of 2021, 7.3% of Indian population owned assets in form of digital currency.
Developing countries accounted for 15 of the top 20 economies when it comes to the share of the population that owns cryptocurrencies as per 2021 data.
The UN trade and development body UNCTAD (United Nations Conference on Trade and Development) stated the figures for other countries too. Ukraine topped the list with 12.7 per cent, followed by Russia (11.9 per cent), Venezuela (10.3 per cent), Singapore (9.4 per cent), Kenya (8.5 per cent) and the US (8.3 per cent).
“Global use of cryptocurrencies has increased exponentially during the COVID-19 pandemic, including in developing countries,” UNCTAD said.
The UN body published 3 three policy briefs on Wednesday, which said 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.
Brief 1: All that glitters is not gold
One of the policy briefs 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, under the title ‘All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated’.
The brief also mentioned the risks of digital currencies stating that recent digital currency shocks in the market suggest that there are private risks to holding cryptobut if the central bank steps in to protect financial stability, then the problem becomes a public one.
Highlighting the vulnerability of the digital assets the it said, “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.”
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.
Brief 2: Public payment systems in the digital era
The 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.
The brief said, “It is argued 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 further stated, depending on national capabilities and needs, monetary authorities could provide a central bank digital currency or, more readily, a fast retail payment system.
UNCTAD urged authorities to maintain the issuance and distribution of cash since there is a risk of accentuating digital divide in developing countries.
Brief 3: The cost of doing too little too late
The third policy brief titled “The cost of doing too little too late: How cryptocurrencies can undermine domestic resource mobilisation in developing countries” discusses how cryptocurrencies have become a new channel undermining 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.
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 urged authorities 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.
Considering the new challenges digital currencies can pose, 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.
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