United Nations Policy Brief Cryptocurrencies 2022: Risks & Costs Outweigh Benefits, Top 5 Countries are Ukraine, Russia, Venezuela, Singapore & Kenya, 19,000 Cryptocurrencies
20th August 2022 | Hong Kong
The United Nations (UN Conference on Trade & Development, UNCTAD) has released 3 policy briefs on cryptocurrencies, examining the risks & costs of cryptocurrencies including the threats of cryptocurrencies on financial stability, domestic resource mobilisation, and the security of monetary systems. The top 5 countries with highest digital currencies ownership in 2021 are Ukraine (12.7% of population), Russia (11.9%), Venezuela (10.3%), Singapore (9.4%) and Kenya (8.5%). There are currently over 19,000 cryptocurrencies (2018: 1,500), with the top Richest 100 Bitcoin accounts owning around $115 billion, and over 80,000 Bitcoin accounts hold a balance of at least $1 million. Key insights from the UN Policy Brief include how cryptocurrencies risks & costs outweigh the benefits, impact on National Monetary Sovereignty, Policy Space & Macroeconomic Stability, Impact on Payment Systems, and Illicit Financial Flows & Tax Havens Version 2. Policy recommendations include ensuring financial regulation, restricting advertisements related to cryptocurrencies, and providing a safe, reliable and affordable public payment system. UN Policy Brief: “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 cryptoization), this could jeopardize the monetary sovereignty of countries.”
“ Risks & Costs Outweigh Benefits, Top 5 Countries are Ukraine, Russia, Venezuela, Singapore & Kenya, 19,000 cryptocurrencies “
United Nations Policy Brief on Cryptocurrencies
Key Summary on Cryptocurrencies
- Top 5 countries with highest digital currencies ownership in 2021 are Ukraine (12.7% of population), Russia (11.9%), Venezuela (10.3%), Singapore (9.4%) and Kenya (8.5%)
- Top Digital Currencies Ownership: 15 of the top 20 economies are from emerging market & developing economies
- Current: 19,000 cryptocurrencies (2018: 1,500)
- Over 80,000 Bitcoin accounts hold a balance of at least $1 million
- Top Richest 100 Bitcoin accounts: $115 billion
- Illicit financial flows: Old problem, new channels
- Cryptocurrencies share all the characteristics of traditional tax havens – the pseudonymity of accounts, and insufficient fiscal oversight or weak enforcement.
- Cryptocurrencies are under-regulated, enabling individuals to bypass tax authorities’ efforts to address offshore tax evasion. (In effect, cryptocurrencies can serve as tax havens version 2.0 or super tax havens.)
- Balances kept in cryptocurrencies are essentially untaxed.
- 2 Main Uses: Remittance (Speed & Low Cost), Financial investment & speculation
- Risks & cost of Cryptocurrencies outweigh benefits
- Cryptocurrencies may lead to financial instability risks. If prices plunge, monetary authorities may need to step in to restore financial stability. Importantly, in developing countries, the use of cryptocurrencies provides a new channel for illicit financial flows.
- Cryptocurrencies undermines the effectiveness of capital controls
- Cryptocurrencies may become a widespread means of payment and even replace domestic currencies unofficially (jeopardize the monetary sovereignty of countries)
- Crypto-exchanges play a crucial role in enabling their broader deployment (Clearinghouses, intermediating conversions between cryptocurrencies & sovereign currencies).
- Current: Over 450 Crypto-exchanges
- Largest crypto-exchange: 28 million users (Record level of daily trading in November 2021, $76 billion)
- Stablecoins: New class of cryptocurrency aims to maintain a stable price relative to a sovereign currency, or a basket of currencies, by holding financial assets as collateral.
- In May 2022, several stablecoins are no longer pegged to the United States dollar. This has provoked anxiety among holders of cryptocurrencies and resulted in market turmoil associated with a significant sell-off.
United Nations Recommendations:
- Comment: “A systemic crisis was not triggered – this time”
- Comment: “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 cryptoization), this could jeopardize the monetary sovereignty of countries.”
- Recommendation 1: Financial regulation, restrict advertisements, provide safe, reliable & affordable payment system
- Recommendation 2: Domestic digital payment system operated by the monetary authority
- Recommendation 3: Tax authorities define legal status of cryptocurrencies (Require cryptoexchanges, e-wallet providers & DeFi platforms to report gross inflows and outflows on all business and personal accounts), Global tax cryptocurrency regulation, Common system on cryptocurrency holding & trading (reporting standard), Higher taxes on cryptocurrencies, Capital controls to include flows channelled through cryptocurrencies
1) All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated
Top 20 Countries Digital Currencies Ownership in 2021 (% of Population):
Top 20 Countries Digital Currencies Ownership in 2021 (% of Population):
- Ukraine – 12.7%
- Russia – 11.9%
- Venezuela – 10.3%
- Singapore – 9.4%
- Kenya – 8.5%
- United States – 8.3%
- India – 7.3%
- South Africa – 7.1%
- Nigeria – 6.3%
- Colombia – 6.1%
- Vietnam – 6.1%
- Thailand – 5.2%
- UK & Northern Ireland – 5.0%
- Brazil: 4.9%
- Pakistan: 4.1%
- Philippines: 4.0%
- South Korea: 3.8%
- Peru: 3.8%
- Belarus: 3.7%
- Australia: 3.4%
15 of the top 20 economies are from emerging market & developing economies
Introduction – Cryptocurrencies
Cryptocurrencies can serve as financial assets. Advocates state that cryptocurrencies, or private digital currencies, have the potential to emancipate citizens from bank conglomerates and State control, while promoting financial inclusion. This potential is mainly based on the use of the underlying technology, namely, distributed ledger technology, of which blockchain is a subset. Such technology provides the means to use networks of connected computers to verify peer-to-peer private transactions. To ensure the integrity of the ledger in the absence of a central authority, the nodes on the network, or digital miners, confirm the records and are rewarded through remuneration in cryptocurrencies. Since 2009, when the first decentralized cryptocurrency was created, a complex and rapidly evolving cryptocurrency ecosystem has emerged. At present, there are over 19,000 cryptocurrencies, compared with 1,500 in 2018.
Main Use of Cryptocurrencies: There are 2 main reasons for the increased use of cryptocurrencies in developing countries during the pandemic.
- The use of cryptocurrencies was an attractive channel, in terms of price and speed, through which to send remittances.
- Cryptocurrencies, as part of financial investments and speculation, are mainly held by middle-income individuals in developing countries and, particularly in countries facing currency depreciation and rising inflation (triggered or accentuated by the COVID-19 crisis), cryptocurrencies have been perceived as a way to protect household savings.
Key Points:
- During the pandemic, the use of cryptocurrencies increased globally at an unprecedented pace
- The benefits that cryptocurrencies may bring to some individuals and financial institutions are overshadowed by the risks and costs they entail, particularly in developing countries
- The global reach of private digital currencies makes national regulatory responses challenging but developing countries are not left without choices; policy options for curbing such risks and costs are proposed in this policy brief
Policy recommendations for developing countries:
- Ensuring financial regulation
- Restricting advertisements related to cryptocurrencies
- Providing a safe, reliable and affordable public payment system adapted to the digital era (Eg. A Central bank digital currency or fast retail payment system).
Implication / Cost of Cryptocurrencies
The returns from cryptocurrency trading and holding are, as with other speculative trades, highly individual. On balance, they are overshadowed by the risks and costs they pose in developing countries.
- Cryptocurrencies may lead to financial instability risks. If prices plunge, monetary authorities may need to step in to restore financial stability. Importantly, in developing countries, the use of cryptocurrencies provides a new channel for illicit financial flows.
- Cryptocurrencies undermines the effectiveness of capital controls, an essential instrument in developing countries with which to curb the build up of macroeconomic and financial vulnerabilities, as well as to increase policy space
- Cryptocurrencies may become a widespread means of payment and even replace domestic currencies unofficially (a process called cryptoization), which could jeopardize the monetary sovereignty of countries. (use of stablecoins poses the greatest risks in developing countries with unmet demand for reserve currencies. For example, the turmoil in May 2022 prompted a flight to higher quality stablecoins that publish audited holdings of their backings. The International Monetary Fund has expressed concerns with regard to the risks of using cryptocurrencies as legal tender.)
Crypto-exchanges
Regardless of the reason for the use of cryptocurrencies, crypto-exchanges play a crucial role in enabling their broader deployment. Such exchanges function as clearinghouses, intermediating conversions between cryptocurrencies and sovereign currencies. Currently, there are over 450 crypto-exchanges that, in May 2021, reached a combined peak of $500 billion in daily trades, equivalent to the maximum daily trading achieved on Nasdaq, the second-largest stock exchange worldwide, in January 2022. The largest crypto-exchange, which has 28 million users, reached a record level of daily trading in November 2021, at $76 billion
A systemic crisis was not triggered – this time
Another important component of the cryptocurrency ecosystem is stablecoins. This new class of cryptocurrency aims to maintain a stable price relative to a sovereign currency, or a basket of currencies, by holding financial assets as collateral. However, increasing profitability might be an incentive for stablecoin issuers to hold risky assets. A decrease in the value of such assets, or an undercollateralization of stablecoins, would result in issuers lacking the means to pay holders. Yet compared with a decrease in the value of cryptocurrencies, resulting in financial losses to holders, a more serious matter would be a drop in the price of stablecoin collaterals, which could require a public bailout, with taxpayers ultimately paying the costs. As of May 2022, several stablecoins are no longer pegged to the United States dollar. This has provoked anxiety among holders of cryptocurrencies and resulted in market turmoil associated with a significant sell-off. “ A systemic crisis was not triggered – this time! “
- Read: UN Full Policy Brief 100 – Cryptocurrencies
- Read: UN Full Policy Brief 101 – Payment System (Cryptocurrencies)
- Read: UN Full Policy Brief 102 – Capital Control (Cryptocurrencies)
2) Public Payment System: Financial Stability & Security-Related Risks of Cryptocurrencies
To mitigate the financial stability and security-related risks of cryptocurrencies, monetary authorities should provide digital payment options, to ensure that national payment systems function as a public good in the digital era. In cases where digital payment streams are not readily available to households, monetary authorities should carefully consider the implementation of a central bank digital currency or fast retail payment system, depending on national capabilities and needs.
UN Recommendation: Domestic digital payment system operated by the monetary authority
- Read: UN Full Policy Brief 100 – Cryptocurrencies
- Read: UN Full Policy Brief 101 – Payment System (Cryptocurrencies)
- Read: UN Full Policy Brief 102 – Capital Control (Cryptocurrencies)
3) Cryptocurrencies can Undermine Domestic Resource Mobilization in Developing Countries
Illicit financial flows: Old problem, new channels
Since the 2008 global financial crisis, several measures to reduce commercial and tax-motivated illicit financial flows, through trade mispricing, financial instruments or use of shell companies, have been undertaken at the multilateral and national levels. However, these efforts do not include cryptocurrencies, which have become a new channel for tax-motivated illicit financial flows. While attention has been given to the attractiveness and potential use of cryptocurrencies for criminal activities, estimates suggest that this represents a relatively small share of cryptotransactions, showing that less than 10 per cent of total transactions in Bitcoin could be attributed to criminal activity in 2020. But from the point of view of financing for development, cryptocurrencies remain problematic even when not related to criminal activity as the erosion of the tax base and the undermining of capital controls are crucial problems for developing countries.
Tax havens version 2.0
Cryptocurrencies share all the characteristics of traditional tax havens – the pseudonymity of accounts, and insufficient fiscal oversight or weak enforcement. The key difference is that international transfers of cryptocurrencies do not rely on banks or related legal and accounting services. Instead, cryptocurrency transactions are often channelled through unregulated cryptoexchanges. Hence, cryptocurrencies are under-regulated, enabling individuals to bypass tax authorities’ efforts to address offshore tax evasion. In effect, cryptocurrencies can serve as tax havens version 2.0 or super tax havens. Cryptocurrencies have quickly attracted the interest of wealthy individuals and firms. Taking Bitcoin as an example (the first cryptocurrency among the existing 19 thousand), over 80,000 Bitcoin accounts (referred to as “addresses”) hold a balance of at least $1 million. The top richest 100 Bitcoin addresses account together for US$115 billion. Balances kept in cryptocurrencies are essentially untaxed.
Cryptocurrencies undermine capital controls
In cases of political or macroeconomic instability, a broad range of households could potentially use cryptocurrencies as a hedge against exchange rate and inflation rise and as a channel for capital flight. This situation is potentially damaging in developing countries which typically rely on the use of capital controls to deal with the draining of domestic resources through capital flight.
UN Recommendation: Tax authorities define legal status of cryptocurrencies (Require cryptoexchanges, e-wallet providers & DeFi platforms to report gross inflows and outflows on all business and personal accounts), Global tax cryptocurrency regulation, Common system on cryptocurrency holding & trading (reporting standard), Higher taxes on cryptocurrencies, Capital controls to include flows channelled through cryptocurrencies
- Read: UN Full Policy Brief 100 – Cryptocurrencies
- Read: UN Full Policy Brief 101 – Payment System (Cryptocurrencies)
- Read: UN Full Policy Brief 102 – Capital Control (Cryptocurrencies)
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