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ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has not issued approval/license to any trading platform for cryptocurrencies, as the commission does not regulate cryptocurrency/virtual currency or any trading platform providing such services.

Senior SECP officials told Business Recorder here on Tuesday that the SECP does not regulate cryptocurrency/virtual currency or any trading platform providing such services.

In line with the State Bank of Pakistan (SBP) circular, the SECP has issued instructions on August 27, 2020 circular dated April 6, 2018, wherein, the SECP has directed all companies and Limited Liability Partnerships to ensure compliance of the SBP's circular.

The said circular prohibits dealing in virtual currencies. Responding to a query, officials added that it is once again emphasised that all currencies related matters are under the regulatory domain of the SBP and no approval/license to any trading platform for cryptocurrencies has been awarded by the SECP.

According to the SECP, the SECP can regulate digital/virtual assets including security tokens, but it does not include any form of virtual/cryptocurrency or central bank digital currency. One of the key advantages of digital assets is the ability to fractionalise each asset.

Digital assets can be broken into more affordable and transferable units that create an opportunity for greater liquidity and investor diversity. Fractional ownership and trading of digital assets in secondary markets unlock liquidity in previously illiquid markets, creating entirely new tradable assets - such as real estate tokens - and enabling a more standardised form of trading for currently illiquid assets, such as corporate bonds.

Moreover, the barriers to issue an asset or security are significantly lowered opening up greater opportunity for smaller issuers, while existing issuers benefit from new forms of securities. The digital asset landscape has matured significantly and momentum is now being fueled by innovation in areas such as custody, settlement and post-trade - which remain critical functions in regulated financial markets.

The SECP will continue to engage with market participants and welcome industry feedback in deciding how to regulate the digital assets domain. This area has the potential to drive major improvements in efficiency and cost-reduction for the end-users by combining trading, settlement and custody services into one seamless service offering.

The SECP's objective of the regulatory framework is to support financial inclusion efforts and the advancement of technological innovation in a responsible and balanced manner; ensure the safety and efficiency of capital market and its institutions; ensure consumer and investor protection; minimise opportunities for regulatory arbitrage; combat the circumvention of exchange control rules and regulations; illicit financial flows, money laundering and the financing of terrorism.

The SECP stated that there is a need to develop a policy and regulatory response to digital assets in Pakistan is driven by the following: (i) Digital assets are a form of innovation that may impact the financial sector of the country; (ii) Digital assets do not fit within the current regulatory framework; (iii) Digital assets may create conditions for regulatory arbitrage while posing risks; and (iv) Increasing interest, investment and participation in digital assets.

The SECP has also explained in detail two types of digital assets i.e. utility token and security token. An option would be registering the Initial Exchange Operators (IEOs), who shall perform due diligence to allow public offering through capital market by mode of issuing security tokens.

Probable process can be an issuer to submit its application including a white paper to an IEO operator for approval. The IEO operator will then assess the issuer and white paper and, if approved, facilitate the offering of the tokens to investors.

The SECP will be working with the IEO operator in assessing the IEO issuer. Once approved, the public may then invest in the issuer's tokens from the IEO platform. This would require designing regulations to register IEOs as well as prescribe a criterion to operate as such by the Commission. Resultantly, the IEOs can only be offered by registered operators meeting the suitability criteria.

Copyright Business Recorder, 2021

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