The crypto sphere seems like an elusive topic in Pakistan’s financial debate. Blockchain technology is barely grasped by a layman, and it would seem that the country is not yet ready for  the touted digital revolution. Yet, statistical data points in an absolute perverse direction. An estimated 4.1% of Pakistanis – totaling about nine million people – own some form of cryptocurrencies. A research report by the Policy Advisory Board (PAB) of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) revealed that this cumulative ownership in cryptocurrencies amounts to $20 billion – almost twice the $10.3 billion in foreign reserves currently held by the State Bank of Pakistan (SBP). According to a report by Chainalysis, a blockchain data platform, Pakistan is ranked 3^rd in the Global Crypto Adoption Index 2020-21, just behind Vietnam and India. The report also reveals that Pakistan recorded the highest growth in cryptocurrencies – expanding at 711% – over the period 2020-21, overtaking India’s adoption growth of 641% over the same period. These industry dynamics imply that the base of active crypto participants is quite substantial. However, the regulatory structure of Pakistan is still trailing to accept any change in the status quo.

The Purview of State Bank of Pakistan (SBP)

Earlier, the former SBP Governor Dr. Reza Baqir addressed the Annual Investment Forum in Riyadh. While he acknowledged that the blockchain technology would ultimately “Democratize Finance” for the general citizenry of Pakistan, he emphasized that the accompanying risks are far too flagrant to overlook. He stated: “In Pakistan, we as the central bank have reached a conclusion as of now that, for us and in terms of core objectives of the central bank, the potential risks far outweigh the benefits.” Recently, a committee under the directive of Ms. Sima Kamil – the SBP Deputy Governor (Financial inclusion, Digital financial services, and IT) – recommended a complete ban on cryptocurrencies in Pakistan. This insight signified a response to Sindh High Court’s (SHC) inquiry apropos of whether any form of cryptocurrency (or other related activities) should be permissible under Pakistani law. The committee echoed the concerns of Dr. Baqir, warning the court of law regarding the risks associated with the pioneering financial phenomenon of cryptocurrencies. The committee further opined that its risk-benefit analysis suggested that the risks override the benefits. 

The committee report presented to the provincial court stated that cryptocurrencies are highly speculative. Hence, subjects risk  financial fraud, transfer of illicit funds, and a convenient route for extortionists to evade litigation. Dr. Baqir highlighted other downsides of allowing cryptocurrencies into Pakistan’s mainstream financial operation. He stated: “Because of their [cryptocurrencies] speculative nature, acute price fluctuations, and most importantly, their distributed and decentralized nature, they can pose a risk to financial and monetary stability.” He further added: “Because of their anonymous nature, some cryptocurrencies are prone to be used for illegal economic activities.” The statements of Pakistan’s front-running economic policymakers and litigators reveal that they don’t disregard the positive attributes attached to the crypto sphere. However, they are also aware of the prohibitive costs that could dent the economy if the phenomenon eludes the regulatory grip – which is the value proposition of virtually all cryptocurrencies.

Risks of Crypto Legalization in Pakistan

All the reservations are justified – at least to some extent. The ongoing meltdown in the crypto market is a befitting example of the inherent price volatility that could upend traces of stability overnight. More than $300 billion have been wiped from the markets in a span of four days – primarily due to heavy speculation. Decentralized digital currencies are predominantly speculative and thus, have not been formally adopted by any major emerging economies. China, Russia, and India for instance. All three countries are quite literally the living embodiment of ideal developing economies. Each has taken restrictive measures against the crypto industry despite hosting the lion’s share of crypto enthusiasts. China has already banned all crypto mining activities and barred commercial banks from associating with crypto transactions. Russia – hosting a majority of bitcoin miners – is planning to launch its own digital currency while debating a ban on private cryptocurrencies. Albeit not explicitly prohibiting crypto services, the Reserve Bank of India (RBI) has actively asked its stakeholders to “exercise caution” when dealing in cryptocurrencies until a facilitative framework defines regulatory clarity.  Moreover, even developed economies like the United States are still grappling with regulations to tame the complex crypto markets. Naturally, Pakistan is in no better shape to take on a new challenge when it is already against the wall due to various other financial perils.

Pakistan is already undergoing thorough reforms under the scrupulous International Monetary Fund (IMF) Program. On another front, Pakistan still awaits the Financial Action Task Force (FATF) verdict to make a hopeful exit from the notorious gray list. The focal points of the reforms are the aspects of money laundering and capital flight that have been endemic to Pakistan for decades. Giving a green signal to the cryptocurrencies with anything short of an airtight regulatory framework could pull the rug from under the IMF loan program as tax evasion is quite a real possibility attached to the crypto market. Furthermore, a surge in money laundering in the guise of virtual wallets expanding beyond borders could plunge Pakistan into the black list of the FATF – instead of escaping the gray list. 

The rupee is down to record low levels against the US dollar, and inflation is raging in double figures. The policy rate is hovering at a regional high of 12.25%, while another rate hike of 150-200 basis points is highly expected. Understandably, the industry stakeholders are infuriated by the prospect of a ban when hedging is the natural course of action. However, with unprecedented crypto price swings, modest technological inclusion, and a lack of pervasive financial literacy in Pakistan, a hasty diversion to cryptocurrencies could trip the already weakened economy into a consistent downfall. Thus, the only sensible option at disposal is the long-term plan adopted by the State Bank of Pakistan. Nonetheless, the crypto industry is rapidly expanding while the regulators are trailing.

A Sustainable Solution

Despite the skeptical regulatory outlook, thousands of Pakistani traders actively invest via crypto platforms around the globe. Many renowned crypto exchanges continue to operate in Pakistan through ghost partners – completely bypassing the regulatory framework. The regulators should understand that banning crypto transactions does not quite translate into no crypto activity in Pakistan. Without a comprehensive legislative framework, the crypto exchanges would continue to operate as a shadow of an underground and unregulated sector of the economy. Strict oversight does not reflect thorough regulation. Hence, research on blockchain technology is essential to build the financial muscle necessary to tackle any regulatory loopholes and gradually allow the technology to normalize into orthodox markets. Instead of outright banning local crypto exchanges and levying fines, the State Bank (and government policymakers) should collaborate with the local visionaries and crypto enthusiasts to structure an inclusive environment. 

A structured crypto ecosystem could actually serve as a lifeline for the debilitated economy of Pakistan. Facilitative regulations could exact crypto exchanges to incorporate Anti-Money Laundering (AML) protocols into their blockchains. A digitalized currency exchange system could also assist regulators in the crackdown on terror financing and fraudulent activities. And a system of crypto exchanges integrated with the Federal Board of Revenue (FBR) could even help broaden the tax net – gradually shrinking the budget deficit. Thus, regardless of whether the plan is to launch a Central Bank Digital Currency (CBDC) – a digital rupee offered by the SBP – or allow private crypto tokens to operate legally. A collaborative environment would expedite the development of an industry-wide solution and could prepare the industry for the pros and cons that may follow. However, delaying the legislative procedure would only encourage the unregulated design. And soon, the sector would grow beyond the point of redemption.

(Senior Editor Francesca Julia Zucchelli edited this article.)

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.