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We continue with our survey of crypto and digital currency initiatives from around the globe, all of which are officially sanctioned to enhance national competitive advantage (in the event crypto overtakes the US dollar as the global reserve currency). It is the cumulative adoption rate of state-sanctioned crypto and digital currency legalization and regulation that will propel this innovative system for value exchange as a global currency standard.
In previous posts, we provided an analysis of crypto and digital currency initiatives in Vietnam, Colombia, China, El Salvador, Panama, Ukraine, India, Argentina, and Russia. We also provided an analysis of the major central bank digital currency (CBDC) initiative in the U.S., Project Hamilton, which is a technical collaboration between the Federal Reserve Bank of Boston and The MIT Digital Currency Initiative.
The next country, Pakistan, ranks #3 in the primary research report on which we have based our list of countries to survey: the 2021 Chainalysis’ Global Crypto Adoption Index. The fate of cryptocurrency and digital currency in Pakistan is playing out right now in a battle royale between the State Bank of Pakistan (SBP), which has called for banning crypto entirely, and industry leaders, who advocate for regulation as sophisticated as those applied to any other financial markets in the country.
When researching the crypto and blockchain innovation marketplace in Pakistan, the current climate in the country was just plain confusing. The basic question of whether cryptocurrency is banned in Pakistan can be answered: No. But with more than a few caveats. The fuzziness and confusion of the market in Pakistan is, strangely enough, a positive function of the fact that in October 2021 a high court in Pakistan called for the regulation of crypto within three months. The ban by the State Bank is a response to the high court directing “the government to form a committee headed by the federal secretary of finance to determine the legal status of cryptocurrency.” (1)
What is confusing is, that as early as 2018, there had been a recommendation for official regulation and law enforcement activity (mainly concerned with the financing of terrorism). Before things were “kicked up” to the high court and federal government level of regulation, the Financial Action Task Force (FATF) recommended “regulation and oversight of digital assets to counter terrorism financing, tax evasion, and money laundering.” (2) Ironically, such regulation presupposes that crypto will be ‘flowing’ through the country and, by default, implicitly suggests that a wholesale ban of cryptocurrency (at the time of the release of the report) was not on the table.
“… characteristics of virtual currencies, coupled with their global reach, present potential anti-money-laundering (AML)/counter the financing of terrorism (CFT) risks, such as the anonymity provided by the trade in virtual currencies on the internet, the limited identification and verification of participants, the lack of clarity regarding the responsibility for AML/CFT compliance, supervision and enforcement for these transactions that are segmented across several countries, [and] the lack of a central oversight body.” (2)
CAUTION REGARDING RISKS OF VIRTUAL CURRENCIES
General Public is advised that domestic and international payment and money transfer services in Pakistan are regulated by SBP under the applicable laws.
English: https://t.co/FbLXO1Mr5s
Urdu: https://t.co/Ft2aZgAznn— SBP (@StateBank_Pak) April 6, 2018
At the time, the SBP agreed with the FATF’s regulatory approach, introducing Electronic Money Institution (EMI) regulations to “combat money laundering and terrorism financing while it will also help regulation of digital currency throughout the country.” (2)
In December, over 1,064 bank accounts and cards of crypto traders were frozen in Pakistan.
In May, The Pakistani government “formed three committees to decide whether to establish a legal framework for cryptocurrency or ban it. The committees will review all aspects of the cryptocurrency business and come up with recommendations on the country’s crypto policy.”
The Atlantic Council webinar linked above, The Transformative Potential of Crypto and Blockchain for Pakistan, is cued to the discussion of regulation in Pakistan. The entire video is worth a watch if this region is of particular interest to you or your organization. The video is also of note for the panelists, all of whom are Pakistani-born, living and working in the U.K (with one panelist who has moved back to Pakistan to start a cryptocurrency company), all of whom have resumes stacked with vast experience from top-tier financial institutions in the UK. The panelists represent 1) whatever the UK must be doing right with their foreign visa policy and 2) the sophistication of the players involved in the nascent stages of the crypto and blockchain marketplace in Pakistan.
Even though the conversation pre-dates all the activities described above, moderator Kalsoom Lakhani offered a pretty accurate description of the regulatory climate at the time:
“People think that crypto is banned in Pakistan. That is actually not totally the case. It’s not technically banned, but you cannot use it as a means of payment, so it’s really difficult to buy crypto with your Pakistani credit card, but you can hold crypto and leverage finance from a P2P perspective in order to get crypto in the first place. Generally, there is a lot of confusion and questions marks around the regulatory framework which I think represents an opportunity. Oftentimes when we have seen when this grey area happen we have seen countries, in the case of China, become hostile towards crypto, or in the case of the Philippines being very friendly towards crypto and friendly towards the space altogether. So right now the fact that Pakistan is sitting in this interesting grey area represents an opportunity to hopefully go in the right direction.”
Lakhani then went on to ask the panelists: Where are we in the regulatory framework right now? Are people more friendly and open to things right now? What are the considerations that regulators should make when building this framework from the ground up?
In Summary: the regulatory climate remains the same as described by Lakhani in December 2021 until the government committees make their recommendations. Conventional wisdom is that “traditional” markets do not like uncertainty. This Pakistan situation begs the question of whether this axiom applies to these new digital financial monetary systems. If they are treated like traditional markets, then the priority should be to provide sensible regulation so as to eliminate market uncertainty and stabilize the transactional platforms. The SBP has reacted to the disruption in an adversarial way, which will make uncertainty more of a feature, not a bug, of an ecosystem that will continue to innovate and disrupt, if necessary, in and around and on the edges of official regulation as a function of creative destruction.
In February, the Atlantic Council released their latest offering in the conversation on crypto in Pakistan, Realizing the promise and potential of “Web3” for Pakistan, by Uzair Younus (Director of the Pakistani Initiative at the Atlantic Council):
The last few months have exponentially increased societal, investor, and policy interest in the crypto, blockchain, and Web 3.0 technologies, increasingly referred to as Web3. Cryptoasset price volatility and the promise of exponential returns is a primary driver of interest, and a dramatic surge in crypto asset investors is in turn forcing regulators to take notice of developments in this ecosystem. Pakistan ranks third in terms of crypto adoption in the Chainalysis 2021 Global Crypto Adoption Index; we estimate that Pakistan has more crypto assets than public equity investors.
This paper is an initial attempt to frame the debate about the Web3 ecosystem in Pakistan – which is a $100+ billion opportunity – and make recommendations on how policymakers should approach regulating this sector. To realize this emerging opportunity, policymakers in Pakistan must:
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About the Author
Daniel Pereira is research director at OODA. He is a foresight strategist, creative technologist, and an information communication technology (ICT) and digital media researcher with 20+ years of experience directing public/private partnerships and strategic innovation initiatives.
Informing your decisions with actionable intelligence
Informing your decisions with actionable intelligence