The UN organization is urging countries with emerging economies to implement regulation to head off the potentially destabilizing influence of cryptocurrency.
The United Nations Conference on Trade and Development (UNCTAD) released a policy brief Wednesday on cryptocurrency. It is the third brief in a row the agency has dedicated to crypto, and together they represent a detailed assessment of the risks crypto presents for developing economies and options for resolving those risks.
UNCTAD Policy Brief No. 102, dated July but newly released, argues that although cryptocurrency can facilitate remittances and encourage financial inclusion, it can also undermine domestic resource mobilization in developing economies by enabling tax evasion by hiding the ownership of financial flows and directing them out of the country. The authors of the brief state, “Cryptocurrencies share all the characteristics of traditional tax havens – the pseudonymity of accounts, and insufficient fiscal oversight or weak enforcement.”
Most developing countries do not have tax regulations covering cryptocurrencies, and the lack of a third-party reporting system makes it easy to hide crypto holdings, the brief noted. It continued:
“Contrary to the widely held view that cryptocurrencies are not intermediated, but function using automated protocols, there are countless service providers, including cryptoexchanges, digital wallets, and decentralized finance (DeFi) platforms, that enable the use and holding of cryptocurrencies. Once regulated, these service providers could contribute to improved tax reporting.”
The brief recommends that developing countries define the legal status of cryptocurrencies and set reporting requirements for crypto service providers. In addition, it recommends the implementation of a “global tax cryptocurrency regulation” and crypto holding and trading information sharing system. Higher taxes on cryptocurrencies compared to other assets would discourage holding them and using them for transactions, the brief noted.
This is the third publication focused on crypto that UNCTAD has released in recent weeks. Its previous policy brief encouraged developing countries to implement a central bank digital currency (CBDC) or fast payment system to co-opt the payment benefits of cryptocurrency without the potential for undermining national economic stability and security.
UNCTAD Policy Brief 100 discussed the need for crypto regulation in developing countries. It noted the overarching necessity of crypto regulation in the developed countries where service providers are located, but recommended a number of restrictive measures in developing countries to counteract “considerable risks and costs regarding national monetary sovereignty, policy space and macroeconomic stability.”