The United Nations Conference on Trade and Development has said financial regulation of cryptocurrencies through exchanges, digital wallets, and decentralised finance will enable global authorities to tax digital assets.
The agency said balances presently kept in crypto were untaxed, and most developing countries did not have tax regulations on digital currencies, enabling owners to evade and avoid tax payments.
It disclosed this in its Policy Brief No. 102 titled, ‘The cost of doing too little too late: How cryptocurrencies can undermine domestic resource mobilisation in developing countries.’
UNCTAD explained that while crypto could facilitate remittances, it could also enable tax evasion or avoidance through offshore flows whose ownership is not easily identifiable, curbing the effectiveness of capital controls, a key instrument for developing countries to preserve their policy and fiscal space and macroeconomic stability.
It said, “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 crypto exchanges. 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.”
It further stated that despite the recent regulatory tightening in developed countries, most developing countries did not have tax regulations on crypto, with regard to the legal status of the private digital currencies.
The UN agency said contrary to the widely held view that cryptos are not intermediated, but function using automated protocols, there are in fact countless service providers including crypto exchanges, digital wallets, and decentralised finance platforms, which enable the use and holding of crypto.
It stated that once regulated, these service providers would have no option than to contribute to tax reporting, helping authorities in the process.
While urging authorities to financially regulate crypto, UNCTAD also advised authorities to ban regulated financial institutions from holding cryptocurrencies or offering related products to their clients.
The agency’s recommendation reads, “To improve taxpayer compliance rates and combat tax evasion, tax authorities should clearly define the legal status of cryptocurrencies and require crypto exchanges, e-wallet providers, and DeFi platforms to report gross inflows and outflows on all business and personal accounts.
“Given the fast-evolving nature of cryptocurrencies and their ecosystem, countries urgently need to agree and implement a global tax cryptocurrency regulation that considers the needs and challenges of developing countries and gives them adequate representation.
“Apart from global tax coordination, a comprehensive system of information sharing on cryptocurrency holding and trading is necessary, such as through a common reporting standard. Such measures would support countries to detect evasion of capital controls and enforce taxes. These three recommended policies are also crucial to the effectiveness of two other initiatives:
“Although cryptocurrencies may facilitate remittances, given the negative socioeconomic impact these private digital currencies bring about, countries should consider imposing higher taxes on them in comparison to other financial assets to discourage holding and transacting cryptocurrencies.
“Countries should redesign their capital controls to include flows channelled through cryptocurrencies. Alternatives include imposing a financial tax on cryptocurrency trading and limiting the amount of individual transactions on crypto exchanges. Moreover, central bank digital currencies could be designed to allow for the functioning of capital controls. Without adapting to new digital alternatives, the effectiveness of these controls may be undermined.”
A recent report by the agency disclosed that 6.3 per cent of Nigerians owned crypto in 2021. It added that the crypto ecosystem grew by 2,300 per cent between September 2019 and June 2021, especially in developing countries.
According to the agency, 15 of the top 20 crypto economies in 2021 were in emerging markets and developing economies. It added that this was driven by, “First, the use of cryptocurrencies was an attractive channel, in terms of price and speed, through which to send remittances.
“During the pandemic, the already high costs of traditional remittance services rose even higher during lockdown periods due to related disruptions.
“Second, 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.”
Financial institutions in Nigeria are currently banned from facilitating crypto transactions by the Central Bank of Nigeria. Despite this ban, Nigerians traded at least N497.35bn ($1.16bn) worth of Bitcoin between January 2021 t0 to June 2022.