EDITORIAL: That Pakistan recorded about $20 billion in cryptocurrency value in 2020-21 and ranked third on the Global Crypto Adoption Index for that year, recording an abnormal increase of approximately 711 percent, is very serious news and should prompt the State Bank of Pakistan (SBP) to finally make up its mind about what status it wants to give what is definitely a formidable asset class. This commotion has got the Policy Advisory Board (PAB) of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) to come out with a research report recommending authorities to regulate cryptocurrencies ‘by implementing a legal framework to better align with the Financial Action Task Force (FATF) and International Monetary Fund (IMF) guidelines’.
Yet cryptos still fall under a grey legal area in Pakistan with the SBP prohibiting all entities under its control from indulging in so-called digital currencies inspired by the creation of Bitcoin, largely because our two biggest lending and trading partners, IMF and the government of China, continue to view them with suspicion. But the kind of windfalls that can be generated by tapping into this sector is now forcing platforms like FPCCI to urge the government to regularise it in order to channelise accumulated virtual currency assets of Pakistani investors, especially dual nationals, to bolster reserves and pump additional capital into the already challenged economy. A one-time asset declaration scheme with some kind of capital gains tax is highly recommended.
Whichever way the government eventually leans will have to be decided very quickly because any undue delay in converting this new trend into solid gains will definitely divert them to countries where they will be taken more seriously. But it’s not an easy decision for SBP to make. It made some noise about coming out with its own digital currency earlier on, but quickly shelved the plan when it realised the many complications in the way.
Pakistan is not the only country left scratching its head by the rise of cryptocurrency, of course, since pretty much the whole world is unable to come to a definitive conclusion about its viability and acceptability.
It must be noted though that despite all the complications and novelties, digital currency is the future because it represents the privatisation of money which, considering the advances and integration made possible by digital innovation, is the future. It’s only natural for such change to run into initial headwinds as governments and investors try to wrap their heads around it.
For now the main concerns revolve around the mystery surrounding cryptos, central bank’s apprehensions about money laundering and terror financing that such things will no doubt facilitate, and the fact that it is not backed by any tangible assets or basket of real currencies. That is why the initiative of the company formerly known as Facebook — its plans to launch its own Libra digital currency which was going to be backed by a number of currencies including the dollar and euro — spooked central banks even more and led to fierce lobbying against it a few years ago and eventually forced CEO Mark Zuckerberg to abandon the idea for the time being.
It’s understandable for such seismic shifts in the international financial order to cause anxiety early on. But it’s also true that such transformation is as natural as it is inevitable. Money has changed forms often enough in its long journey; from gold, silver and metallic coins to the controversial fiat system which backs paper notes with nothing more than sovereign guarantees. Investors are always eager to embrace such advances because they provide ease of moving money and carrying out complicated transactions.
But governments need to be very careful and erect foolproof safeguards because they can also change the game when it comes to financing terrorism as well as political agitation on a very large scale. Yet such huge are the speculative gains made possible by this phenomenon that even countries that are hesitant about accepting cryptos as legal tender, as El Salvador recently adopted Bitcoin, are looking for ways to formalise it as an asset class.
Islamabad faces similar changes, and will need to be that much more careful because of the IMF and FATF spotlight on it, but it must still put very serious thought into legalising and profiting from this sector. The future of money is here, and we do not want to be left out of the innovation that stands to thoroughly shake the international financial order.
Copyright Business Recorder, 2021