Should Pakistan ban cryptocurrency?

Pakistani investors injected $20 bn into cryptocurrency while SBP’s foreign exchange reserves stood at $17.68 bn

The popularity of cryptocurrency has grown rapidly in recent years, particularly in 2021, as a result of landmark decisions such as El Salvador adopting Bitcoin – the gold standard of cryptocurrency – as its legal tender, and the launch of the first Bitcoin-linked exchange traded fund (ETF) in the United States. These developments have pumped investor optimism to new heights. Moreover, the infamous digital coin was able to break through its historical peak and reach nearly $69,000 in value. On the other hand, China, the second biggest economy in the world, imposed a complete ban on cryptocurrency, sparking a debate about whether other countries should follow suit.

This debate has sparked interest among Pakistani authorities over the last few days following the discovery of an online fraud by the Federal Investigation Agency (FIA) involving approximately Rs17.7 billion (USD100 million). According to market reports, investors in Pakistan were using mobile applications that allowed them to trade cryptocurrency, but these applications mysteriously vanished, wreaking havoc among investors. These applications were allegedly linked to Binance, one of the world’s largest cryptocurrency exchanges. The FIA has initiated an investigation into the matter and summoned a local Binance representative for questioning.

Responding to the situation, the State Bank of Pakistan (SBP) submitted a report to the Sindh High Court (SHC) calling for a complete ban on cryptocurrency. Consequently, the SHC has ordered the report to be reviewed by the law and finance ministries before a final decision can be made on whether to make the use and trading of cryptocurrency illegal within Pakistan. The SHC also added that the law and finance ministries should carry out their own research on whether a potential ban on cryptocurrency is in the best interest of the nation. The ultimate goal is to finally put this issue to rest and move forward with a solid framework in place to tackle any further problems.

In 2021, interest in cryptocurrency among Pakistani investors grew rapidly, and the crypto sector, along with real estate, was among the best performing assets in the country. According to a report published by the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Pakistani investors injected an incredible $20 billion into the digital asset. This is truly surprising given that the SBP’s foreign exchange reserves stood at nearly $17.68 billion as of December 31, 2021, which is less than the amount invested in cryptocurrency. Besides that, it was also found that Binance is the most popular tool used to exchange cryptocurrency in Pakistan.

Despite rising traction in the digital sector, it is important to answer whether cryptocurrency should be completely barred in an era where digitisation is in full swing and consumers prefer using digital applications to perform so many tasks. Furthermore, we are living in the midst of a pandemic due to which many people prefer online modes of payment instead of the physical exchange of money. Based on current events, it is clear that this digital presence will likely dominate the future, with companies and individuals alike shifting their work online, eventually reaching a point when virtual reality could potentially rival physical presence.

In such an environment, traditional finance models must evolve since online applications require secure and efficient payment systems to be in place. This is precisely what cryptocurrency provides: a decentralised means of making payments that is, by design, much more secure and efficient than the traditional banking services we are accustomed to.

However, the decentralised nature of blockchain technology has made it extremely difficult for governments all over the world to protect their citizens from fraud, money laundering and terrorist financing. This is why countries such as China have outrightly prohibited the use and trading of digital currencies. Similarly, officials in India are working to have the asset class banned in coming months. The main issue that authorities face when attempting to create a regulatory framework is determining how to classify cryptocurrency i.e. whether digital coins should be treated as a currency or an asset. If governments were to classify cryptocurrency as assets, compliance and market risks would be taken care of. However, countries will continue to face significant risks from capital flight, illicit activity funding and financial instability.

Considering that Pakistan remains on the Financial Action Task Force’s (FATF) grey list and that Pakistan’s currency has been rapidly depreciating under Prime Minster Imran Khan’s administration, the SBP’s recommendation to ban cryptocurrency appears to be a sound strategy. It is worth noting that the FATF has stated that Pakistan has “structural deficiencies” in implementing procedures to prevent money laundering and terrorism financing. Both of these shortcomings are at further risk of being aggravated if cryptocurrency is wholeheartedly adopted without any restrictions.

All in all, the SBP’s recommendation to ban cryptocurrency seems like the right strategy for the time being. This is because we still do not have any case studies to look at in order to understand how to develop an effective strategy that allows Pakistan to reap the benefits of the digital currency sector while avoiding its potential dangers. As we are still in the early stages of cryptocurrency adoption, it is prudent to adopt a ‘wait and see’ approach since we cannot afford to be associated with facilitating illicit activities or any type of capital flight during our current economic crisis.