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Pakistan’s foray into cryptocurrencies: Financial revolution or regulatory dilemma?

According to a report by Chainalysis - a blockchain data platform - Pakistan is ranked 3rd in the Global Crypto Adoption Index 2020-21 - just behind Vietnam and India. The data 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.

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The crypto sphere seems like an elusive topic in Pakistan’s financial debate. Blockchain technology is barely comprehensible 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 9 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 – more than roughly $17 billion in foreign reserves held by the State Bank of Pakistan (SBP).

According to a report by Chainalysis – a blockchain data platform – Pakistan is ranked 3rd in the Global Crypto Adoption Index 2020-21 – just behind Vietnam and India. The data 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.

Read more: India to launch digital cryptocurrency

Understanding the matter better

The SBP Governor Dr. Reza Baqir recently addressed the Annual Investment Forum in Riyadh. While he acknowledged that the blockchain technology would ultimately “Democratise 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.” Earlier, 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 of 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.

All the reservations are justified – at least to some extent. Decentralized digital currencies are predominantly speculative and thus, have not been formally adopted by emerging economies. China and Russia, for instance. Both countries are quite literally the living embodiment of ideal developing economies. Both have taken stern 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. 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.

Read more: Facebook gives up on its crypto project

Pakistan is already undergoing thorough restructuring under the scrupulous IMF Program

On another front, Pakistan awaits the FATF plenary to make a hopeful exeunt from the notorious grey list. The focal points of the reforms are the aspects of money laundering and capital flight that has 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 grey list.

The rupee is pandering to record low levels against the US dollar, and inflation is raging in double figures. 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 sensible option is sadly the long-term plan adopted by the State Bank of Pakistan.

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. However, 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. Thus, whether the plan is to launch a Central Bank Digital Currency (CBDC) – a digital rupee offered by the SBP –  or allow veritable 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.

 

The writer is currently working as a writer for South Asia Magazine and a columnist for Modern Diplomacy – a European Think Tank. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.