KUALA LUMPUR (April 13): Cryptocurrency remittances can account for 30% and even as high as 40% of Gross Domestic Product (GDP) when it comes to many developing countries, and in Central Asia which is much in the news these days, said World Bank chief economist Carmen Reinhart.

Describing remittances as not a “small potato”, Reinhart said the use of crypto in remittances, and very interestingly the use of crypto during times of stress or crisis, can skyrocket.

“When in 2015, Greece introduced capital controls and it was a banking holiday and people did not have access to their cash and withdrawals in cash machines were limited, we saw a spike in the use of crypto for cross border capital flight,” she said.

Reinhart said this was also seen more recently, with the implementation of strict capital controls in Russia and Ukraine and with how this impacts Central Asia, which is intimately interconnected with the Russian banking system in the capital controls there.

“Crypto is our new age of capital flight,” she said in her keynote address at the Finance 3.0 virtual event organised by Project Syndicate on Wednesday.

Looking ahead, Reinhart opined that the big challenge is what this would all mean for regulatory and financial sectors policies.

“How do we roll out regulating crypto use and still take advantage of its very useful provision of services.

“I would like to reiterate that do not underestimate the importance for many countries of crypto as a vehicle for remittances in regular cross border transactions.

“I would [also] have to be very upfront and say the space that we look at within the crypto markets is tiny but the implications for its growth and being the latest entrant into the broad spectrum of cross border capital movements should not be underestimated,” she said.

Meanwhile, former governor of the Reserve Bank of India Raghuram Rajan said regulators are continuing to try to understand what exactly is going on regarding the whole issue of cryptocurrency and regulation.

“They are an investment vehicle for a lot of people, and any investment vehicle requires a certain amount of regulation just to make sure these are not fly-by-night operators who take your money and run.

“And especially in an area where we have 6,000 plus cryptocurrencies. We have a lot of people who have issued versions of the same kind of digital assets. Who knows whether they are legitimate or not?

“And so that requires a certain amount of regulation, at least a registration to make sure that you are on the up and up rather than a fly-by-night operator,” he said.

Raghuram observed further that the dilemma for regulators is how to allow the surge while limiting the extent of risks both for the financial system, the crypto system as well as for the public.

“The one concern the authorities have to have is that regulations should be a stamp of approval because we have regulated these things, the value is certified, so go ahead and invest.

“I do not think you want to put that stamp at this point until we understand better the nature of the beast,” he said.