Nepal faces a high risk of capital flight through investments in cryptocurrencies although the country has barred Nepalis from investing abroad, the Nepal Rastra Bank has said.

Nepal’s Act on Restricting Investment Abroad, 1964 prohibits Nepalis from investing in foreign countries. There is also the risk of tax dodging, money laundering, and financial instability, such investment can negatively impact monetary policy and pose challenges to consumer protection, the central bank said in a notice on Tuesday.

The central bank’s notice has come amid reports that Nepalis are increasingly investing in cryptocurrencies.

According to the central bank, it has received information that people have been lured into investing in virtual currency-related hyper funds and network marketing related to virtual currencies such as Jocial, Crowd 1 and Solemax Global.

There is a growing trend of developing networks of investors in different countries by luring people through promises of handsome commissions and ultimately cheating them, according to the central bank.

“In a country like Nepal where there is limited capital and people are banned from investing abroad, it is a huge challenge to stop capital flights in the form of investment in cryptocurrencies,” the notice reads.

“There is the risk of capital flights through illegal Hundi for cross-border network marketing [of cryptocurrencies].”

According to the notice, such illegal investments abroad also threaten Nepal’s foreign exchange reserves.

“Our assessment is that the growing trend of investing in cryptocurrencies is also one of the reasons for the fall in remittance income in recent months,” said Prakash Kumar Shrestha, chief of the economic research department at the central bank.

As of the first five months of the current fiscal year 2021-22, remittance inflow dipped by 7.3 percent to $3.26 billion on a year-on-year basis, while foreign exchange reserves dropped 14.7 percent to $10.03 billion in mid-December 2021 from $11.75 billion in mid-July 2021, according to the central bank’s statistics.

“With transactions taking place outside the government’s system, the risk of tax dodging is also high,” said Shrestha.

On January 25, the Department of Revenue Investigation registered a case at the Kathmandu District Court against four people on the charge of foreign exchange misappropriation amounting to Rs376.41 million through illegal investment in virtual currencies.

Besides the risks to the economy, there is a bigger danger for individuals investing in cryptocurrencies, according to the central bank.

It argues that investing in cryptocurrencies means a violation of the Foreign Exchange (Regulation) Act-1962, which does not recognise cryptocurrencies as foreign exchange and bars their use for payment, exchange and as monetary instruments.

“Even Nepali nationals living abroad will face punishment for violating the Foreign Exchange Regulation Act if they facilitate capital flight from Nepal,” the notice says.

“On the other hand, there is no legal remedy for investors if any dispute arises in connection with cryptocurrency transactions,” states the central bank. “While investing through others, there is the risk of non-recovery of such funds in cases of fraud.”