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The technological landscape has changed massively in the last few years and this has also transformed the financial sector around the world. New phenomena of digital currencies have emerged which are growing at a rapid pace and posing a threat to conventional financial mechanisms. These are being seen as substitutes and disruptive to conventional banking. Initially, due to lack of knowledge, these virtual assets (VA) and digital currencies were viewed with a lot of ambiguities, however, with more understanding about the operations and evolution of function of VAs and Virtual Assets Service Providers (VASP), now countries have started to regulate them. Various countries as well as regions have introduced a comprehensive regulatory framework for the regularization of this sector.

Financial Action Task Force (FATF), being an effective international body to formulate policies and standards to combat money laundering and financing of terrorism, first amended its ‘recommendation 15’ to regulate VASPs for Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT) by imposing the condition of obtaining a license or registration under the comprehensive system of its monitoring. The interpretive note of ‘recommendation 15’ explains the applicability of FATF requirements on VAs and VASPs and implementation of the risk-based approach on their activities and operations. The interpretive note requires that in addition to licensing and registration of VASPs, preventive measures, such as customer due diligence, recordkeeping, and suspicious transaction reporting, like sanctions and other enforcement measures; and international cooperation should be made part of proper monitoring.

In addition, ‘recommendation 16’ deals with domestic and cross-border wire transfers and sets high bars on all types of businesses to prevent access to terrorists and other criminals for the movement of their illegally generated funds. The FATF amended its regulations for travel rule by extending it to VAs and VAPS which was initially applicable to Banks only and in the recent G20 conference, the President of FATF urged members states to implement FATF Standards, including travel rule requirements, as soon as possible. The travel rule requires that VAPS should provide customer information which includes senders’/recipients’ identification information such as names, addresses and account details in case they trade up to a specific threshold. The United States (USA) has taken a lead role by enacting the regulation based on the Banking Secrecy Act which is a USA law that is equally applicable to VAPs as well.

The European Union introduced the 5th Anti-Money Laundering Directive (5AMLD) which was implemented in January 2020. Though the directive is not comprehensive as per the FATF rule, however, it requires similar information such as maintaining the record of customers’ activities and performing ‘know your customers’ requirements. Other countries like the United Kingdom (UK) earlier being part of the European Union, were initially following the same directive but as the FATF travel rule is effective now, the UK Financial Conduct Authority (FCA) requires the concerned sectors to implement the travel rule in true letter and spirit. Similarly, other jurisdictions in Europe and Asia are also observing this rule. Switzerland lowered the threshold limit to $1,000 from $5000 whereas Singapore has introduced the Payment Service Act, 2019 which sets clear directions for the industry to comply with AML requirements.

Since Pakistan has not legalized this sector, therefore, no such efforts have been undertaken to frame regulations. The government institutions have only issued caveats and notices about the consequences of investing in cryptocurrency but the regulatory framework is yet to be finalized. Central Bank believes that due to a high degree of anonymity these virtual currencies can be used for illegal activities and the communiqué by the State Bank of Pakistan (SBP) (ERD/M&PRD/PR/01/2018-31 & FE Circular No. 03 of 2018) explicitly bars from trading and even promoting Virtual Currencies, whereas Securities and Exchange Commission of Pakistan (SECP) issued a Position Paper on November 06, 2020 for Regulation of Digital Currencies. This consultation paper focuses exclusively on non-government or non-central-bank-issued crypto assets and not on central bank digital currencies though it contains basic guidelines in the light of FATF recommendations and contains some basic definitions, concepts, and inner workings of the Digital Assets universe. It also indicates the approach adopted by regulators towards digital assets globally, including a definition for digital assets in Pakistan and its mechanism for operation/regulation of digital assets. It explains the way forward for designing and developing a robust regulatory regime at par with the world for regulating Digital Assets and highlights the present policy proposals to industry participants and stakeholders. However, no effective regulations could be introduced to monitor this sector.

(To be continued tomorrow)

(Huzaima Bukhari & Dr Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions)

Copyright Business Recorder, 2021

Abdul Rauf Shakoori

The writer is a corporate lawyer based in the USA and an expert in White Collar Crimes and Sanctions Compliance. He has written several books on corporate and taxation law in Pakistan. He can be reached at [email protected]


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