India's First International News Journal

India's First International News Journal

Wednesday, September, 28, 2022

UN’s drops bomb on the crypto world – “All that glitters is not gold”

UNCTAD: "How cryptocurrencies can undermine domestic resource mobilization in developing countries"

The UN drops a bomb on crypto’s use in developing nations slamming their “social risks and costs” in shocking clarity.

UN states, “The high cost of leaving cryptocurrencies unregulated.” It further states, “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.”

Not a day goes by when I don’t read how crypto will be the savior of developing nations by “crypto bros” who have likely never left the comfort of their mother’s basement. Here we have the UN slamming crypto and warning developing nations that “all that glitters is not gold.”

What makes the UN’s warning so important is that it is a neutral party when compared with the IMF, BIS, or entity with ties to the banking system. If crypto did help, the UN would be strong advocates, but they’re not. Let that sink in.


READ: Why is the current “Crypto Winter” unique for the entire industry?


All that glitters is not gold

Paper 100 “All that glitters is not gold” is a guide to shutting down crypto use.

  • Require the mandatory registration of crypto exchanges and digital wallets and make the use of cryptocurrencies less attractive.
  • Ban regulated financial institutions from holding stablecoins and cryptocurrencies or offering related products to clients.
  • Regulate decentralized finance (such finance may, in fact, not be fully decentralized).
  • Restricting or prohibiting the advertisement of crypto exchanges and digital wallets in public spaces and on social media.

UN’s understanding of stablecoins

The official United Nations report also states, “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.”

Public payment systems in the digital era

Paper 101 “Public payment systems in the digital era” shows why CBDC is the answer!

  • To ensure that payment systems function as a public good, monetary authorities should carefully consider the implementation of a central bank digital currency.
  • Authorities could alternatively create a fast retail payment system.
  • Moreover, given the risk of accentuating the digital divide in developing countries, authorities should maintain the issuance and distribution of cash.
  • A fast retail payment system operated by a profit-seeking private institution carries considerable risk unless it is strictly supervised.

UNCTAD also raises the question “Digital currencies in developing countries: Why so alluring?”

The UNCTAD report states, “The cryptocurrency ecosystem expanded by 2,300 percent between September 2019 and June 2021, particularly in developing countries.4 According to some estimates of digital currency ownership, in 2021, 15 of the top 20 economies in this field were emerging market and developing economies.”

United Nations digital currency ownership share of population
Source: UNCTAD, based on data from https://triple-a.io/crypto-ownership/
– The classification of economies (blue, advanced economies; red, emerging and market economies) is based on that in International Monetary Fund, 2020, World Economic Outlook: A Long and Difficult Ascent (Washington, D.C.).

The cost of doing too little too late

Paper 102: “The cost of doing too little too late” shows how crypto undermines developing countries!

  • Financing for development requires that developing countries staunch leakages of financial resources, including leakages through a new channel – cryptocurrencies.
  • Although cryptocurrencies may facilitate remittances, given the negative socioeconomic impact these private digital currencies bring about, countries should consider imposing higher taxes on them.
  • Countries should redesign their capital controls to include flows channeled through cryptocurrencies to maintain their effectiveness.

Official Policy Brief

All that glitters is not gold: The high cost of leaving cryptocurrencies unregulated

UN POLICY BRIEF

UN further raises the question of financial stability and security-related risks of the cryptocurrencies also. It also suggests, “To harness the opportunities and minimize the risks of digitalization in developing countries, authorities need to consider creating a digital version of a national payment system in the light of social and economic realities.”


READ: UAE legitimizes the cryptocurrencies


Central bank digital currency

In its recent report, UNO also suggests, that “a central bank digital currency is a digital representation of a sovereign currency, which is backed, issued, and controlled by a national monetary authority.5 Until recently, there was no direct connection between monetary authorities and citizens. Access to payment options relied on intermediaries, such as commercial banks. Through the use of a central bank’s digital currency, citizens can have direct access to a currency and related payment options backed by a central bank.”

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The crypto world will rail against the UN’s conclusions but the UN has a lot more experience with the world’s poor than the crypto community.

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Author

Shehzan Memon
Shehzan Memon
Technology Editor at The Eastern Herald. He is a Mechanical Engineering graduate from the American University of Sharjah. He covers Artificial Intelligence, Robotics, and Web3 including Cryptocurrency, Blockchain, NFTs, and DeFi.

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