PESHAWAR – Pakistan’s central bank has proposed a ban on all forms of cryptocurrency, saying the risks involved in trading Bitcoin, Ethereum and other crypto coins far outweigh the potential benefits.
The State Bank of Pakistan’s (SBP) “risk-benefit analysis” committee, constituted under a High Court directive, recently announced that cryptocurrencies were depleting national foreign reserves and encouraging illicit financing.
The body, comprised of representatives from the Ministry of Finance, Information Technology, Pakistan Telecommunication Authority (PTA) and Security and Exchange Commission of Pakistan (SECP) recommended a complete ban on virtual currencies and other related activities in Pakistan.
India, which has the second-highest crypto holdings worldwide, is moving in the same direction and plans to ban most cryptocurrencies as part of a proposed Cryptocurrency and Regulation of Official Digital Currency Bill, likely to be debated in the parliament’s winter session. The legislation aims to establish a framework for an official digital currency to be issued by the Reserve Bank of India (RBI).
However, Pakistan does not plan to introduce its own official digital currency to replace existing digital money. Instead, authorities intend to ban all forms of crypto, with proposals on the table to block even the websites dealing in cryptocurrencies.
The SBP committee believes a clampdown is necessary because existing laws governing electronic crimes, foreign exchange remittances and anti-money laundering lack provisions for criminalizing the misuse of cryptocurrencies.
Business leaders, blockchain experts and crypto influencers have countered with a proposal for a digital currency regulatory framework. A blanket ban, they claim, would backfire badly and further damage the economy, which is already in tatters.
Karachi Chamber of Commerce and Industry (KCCI) former president Majyd Aziz told Asia Times that the government’s mindset of imposing bans to deal with emerging risks was highly flawed. “The authorities seldom figure out the outcome to analyze the risks and benefits of such an action,” he said. “You cannot ban digital currencies before evaluating its impact on the huge investments people made in the digital economy.
“In my opinion, there is an imperative need for an International Cryptocurrency Regulatory Authority that could run the crypto-related activities in the country. We do not need to ban crypto because the people would still invest in digital currency despite a ban,” Majyd added.
At the same time, he echoed regulators’ concerns in warning, “Greed and lust for fast bucks always result in big-time losses and I pray that cryptocurrency investment may not become another Ponzi scheme.”
Opinion is mixed, however.
Waqar Zaka, a prominent crypto influencer with related online platforms with over four million followers, recently tweeted, “There are minds who are claiming that 20 billion dollars had left Pakistan because of Crypto, incorrect. When there is Hundi system in place, why would anyone want to be on the FATF radar? By the way, Facebook and YouTube ads are dragging out more dollars from a country where a majority still have no idea about crypto.”
Federation of Pakistan Chamber of Commerce & Industry (FPCCI) estimates total cryptocurrency investments in Pakistan at US$20 billion, or more than the country’s total foreign currency reserves now held by the central bank.
A FPCCI policy brief, compiled in late December, underscored the risks endemic in the lack of crypto-related legislation and other digital assets in the country. It also noted Pakistan’s trading and lending partners such as China and the International Monetary Fund (IMF) have both warned unregulated blockchain technology is susceptible to money laundering and other digital crimes.
The report also noted that the Financial Action Task Force (FATF), an intergovernmental body that fights money-laundering globally, has called on Pakistani authorities to better regulate its crypto industry, as most investors currently use a peer-to-peer (P2P) crypto investment mechanism that renders crypto assets almost undetectable.
Chainalysis, a blockchain data platform that provides data, software, services and research analysis, reported in October last year that Pakistan recorded 711% growth in crypto-related investments during the 2020-21 fiscal year, even higher than India’s explosive 641% growth.
The robust growth in digital currency holdings has made Pakistan one of the most robust crypto markets outside of Europe and the United States, with Chainalysis ranking the country third on its Global Crypto Adoption Index for the year 2021.
Chainalysis opined that Pakistan’s actual crypto holdings could be even higher than the official estimates because many citizens purchase bitcoin through P2P deals, which mostly remain undocumented.
Meet TripleA, a cryptocurrency and blockchain technology outfit, estimates that over 9 million people, or 4.1% of Pakistan’s total population, currently own cryptocurrencies. The firm claims that interest in Bitcoin, judging by online searches and other measures, has risen following the government’s discussion of new cryptocurrency regulations.
Meet TripleA said that despite Pakistan’s surging interest in cryptocurrency, the country’s potential was is being hampered by low banking penetration and limited proof-of-stake (POS) terminals for processing transactions and creating new blocks in a blockchain. Even so, the outfit said the bitcoin market is a “fast-growing sector of the economy.”
Regulatory screws are already tightening on crypto-trading platforms. Last week, Pakistan’s Federal Investigation Agency (FIA) said it approached Binance Holdings Limited, one of the world’s biggest Bitcoin hubs, as part of an investigation into a suspected $100 million scam.
The agency claimed that several thousand Pakistani investors had been cheated through “fraudulent online investment mobile applications” and money transferred to at least 26 suspect Binance blockchain wallet addresses. The agency directed Binance to give the details of these blockchain accounts and mark a lien on the funds.
Soon thereafter, FIA director-general Sanaullah Abbasi said during an SBP briefing in Karachi on January 15 that the agency would soon block websites dealing in cryptocurrencies to prevent fraud and possible money laundering.
The meeting was informed that there was no section of law available in the Prevention of Electronic Crimes Act 2016, Foreign Exchange Remittance Act 1947 (FERA) or Anti-Money Laundering Act 2010 (AMLA) to criminalize the misuse of cryptocurrency.
The meeting also observed that there was no regulatory framework for virtual asset service providers to comply with FATF requirements.
China, Bangladesh, Saudi Arabia, Egypt, Iraq, Qatar, Oman, Morocco, Algeria and Tunisia have all already banned crypto transactions, while 42 other countries, including Algeria, Bahrain, Bolivia, India and Pakistan have implicitly banned digital currencies by restricting banks and cryptocurrency exchanges from dealing in the digital assets.
In 2018, Pakistan’s central bank declared that it had not authorized or licensed any individual or entity for the issuance, sale, purchase, exchange, or investment in virtual currencies like bitcoin and others. Digital currencies, SBP said at the time, were not a legal tender issued under the bank’s guarantee.
The SBP not only prevented banks from processing, using, trading, holding, transferring value, promoting and investing in virtual currencies but also advised them not to facilitate their account holders’ cryptocurrency transactions. Now, that regulatory noose will likely tighten into an outright crypto ban.