Yesterday the United Nations Conference on Trade and Development (UNCTAD) published a third paper warning of the risks of cryptocurrencies. On this occasion, the concern is that cryptocurrencies are used to funnel money out of developing economies, starving the countries of investment. Previous papers highlighted monetary sovereignty and financial stability risks.
The report refers to crypto as ‘tax havens version 2.0’ because tokens have pseudonymity and there’s insufficient oversight if transactions go through unregulated exchanges. In contrast, funneling money to conventional tax havens usually means going through banks that act as a third-party tax reporting system.
Developing countries often rely on capital controls to prevent capital flight which is tricky to block with crypto. It points to the use of Bitcoin in China to circumvent controls before the country’s ban. Significant capital outflows can impact the tax base rendering a country more reliant on debt markets which may not be sustainable.
The UNCTAD also notes that cryptocurrencies have attracted both wealthy individuals and ordinary people looking to hedge against exchange rate volatility.
While many advanced economies have enacted tax laws for cryptocurrencies, most developing countries have not.
Hence one of UNCTAD’s recommendations is to legally recognize cryptocurrencies and apply taxes, and require crypto exchanges to report inflows and outflows. UNCTAD also calls for global coordination on legal and tax regulation of cryptocurrencies to avoid regulatory arbitrage. It wants to implement a global data sharing regime on cryptocurrency holdings. No mention was made of privacy.
UNCTAD recommends imposing higher tax rates on cryptocurrency than other assets “to discourage holding and transacting cryptocurrencies.”
UN accepts crypto donations, earns from staking
While UNCTAD has slammed cryptocurrencies, other arms of the United Nations accept them as payment. For example, the refugee agency, UNHCR, has targeted the crypto sector for donations. Likewise, UNICEF launched its cryptocurrency fund in 2019 with a donation from the Ethereum Foundation. UNICEF also makes crypto investments through its Venture fund and, in May, started participating in Ethereum 2.0 staking to earn a return.