KARACHI: As cryptocurrencies become increasingly popular among both retail and institutional investors around the world, and are embraced by big names like PayPal and Mastercard, regulators and central banks are grappling with how to keep the industry in check.
In April 2018, the State Bank of Pakistan (SBP) declared that cryptocurrencies are not legal and not recognised, issued or guaranteed by the government.
Earlier this year, the Sindh High Court, federal government and the State Bank of Pakistan recommended a complete ban on cryptos. Among concerns is that the asset could be used for money-laundering and terrorism financing, and that it will deplete national foreign reserves.
At the Karachi Literature Festival last weekend, Dr Reza Baqir, the SBP governor, reiterated this stance: “There is no way that a law enforcement agency has visibility on who is doing transactions and for what purpose. And, therefore, around the world there is a lot of misuse [of cryptocurrency], including human rights violations, money laundering and many other things.”
He said the central bank’s main aim is to promote financial inclusion and stop misuse of the financial system, “especially because Pakistan is a country that is on the grey-list of the FATF”.
But Pakistani citizens remain undeterred. They continue to use online exchanges like Binance and Kraken to buy and sell crypto, in part spurred on by celebrity Waqar Zaka, arguably the country’s biggest crypto advocate.
Analysts say benefits, such as democratising finance and reducing the negative impacts of high inflationary pressures on purchasing power, outweigh the cons. And to ban cryptos would be to disregard how popular they are in this country.
Yes investing in crypto is risky. As the UK Financial Conduct Authority has warned, traders can stand to lose all their money. Bitcoin, the biggest crypto by market cap, was up 60% in 2021, but it’s been tumbling in 2022.
So is a blanket ban the answer? Or does Pakistan need a strong, regulatory framework? What about having its own digital currency?
A ban would certainly draw the ire of Pakistan’s sizeable cryptocurrency investor base: the country ranked third in the Global Crypto Adoption Index in 2020-21, after India and Vietnam. And the Federation of Pakistan Chamber of Commerce and Industry said it recorded around $20 billion of cryptocurrency value in 2020-21.
“Given that crypto-trading apps are among the most popular downloads in Pakistan, it is clear that the population desires accessible channels to buy, trade, and use crypto and other digital assets. The government should not stand in their way,” Reeve Collins, co-founder of NFT platform BLOCKv, told Business Recorder.
“Cryptocurrency’s potential to democratise finance is contingent on governments allowing its citizens to access these new markets,” he added.
He did not mince his words when he said that an outright ban is “highly concerning” and would only hamper Pakistan’s economic development “and needlessly impede citizens’ access to financial assets that have benefitted millions of people globally”. He admitted concerns around the illegal use of cryptos are not without justification, but they just reinforce the need for secure, verified trading platforms, and intelligent regulation.
Collins also added that data shows negative use cases of crypto assets are few and far between - Blockchain data platform Chainalysis found that illicit activities made up only 0.15% of all cryptocurrency activity in 2021 – “meaning that the drawbacks of crypto are vastly outweighed by the benefits it can bring to unbanked communities across the world.”
Furthermore, he said an outright ban won’t stop people from investing, because they see a chance to make big bucks – it will only push this activity to unregulated shadow economies, making crypto assets in banned jurisdictions become even more popular, as has happened in countries like Nigeria.
Kunal Sawhney, CEO at equities research firm Kalkine Group, had similar thoughts.
“Cryptos offer a chance to create wealth,” he told Business Recorder. “It cannot be ignored that bitcoin is a top asset by market cap and a part of the list dominated by tech giants Apple and Microsoft.”
He said the reason S&P Dow Jones is tracking cryptos’ values by creating Bitcoin and Ether indices is that by allowing trade in them, economies may give a fair chance to investors to minimise the negative impacts of high inflationary pressures on purchasing power.
On the flip side, he said cryptos are “the most misunderstood assets”, especially for amateur young investors who mostly read the headlines about bitcoin becoming a top asset by market cap, but ignore its hyper-volatility.
Retail investors often fail to realise the profits they make on crypto assets due to the popular HODL (hold on for dear life) approach, he said, and seasoned investors may be booking profits at the expense of these amateur investors.
He also admitted illegal activities are real - Pakistan is on the increased monitoring list of the Financial Action Task Force (FATF) and was just recently retained on it - and he believes no decision should be taken without considering how the country’s inclusion in the grey list is hampering its economic growth and access to capital.
Evamarie Augustine, director of FinTech at Quantum Economics, noted that cryptos are popular in emerging markets because they make remittances easier as citizens face complex remittance processes, currency devaluation and government distrust.
The recent devaluation of the lira and record-high inflation prompted more Turks to buy crypto, she said, even after the country made crypto payments illegal in 2020.
If Pakistan goes ahead with the ban it wouldn’t be alone - Egypt, Iraq, Qatar, Oman, Morocco, Algeria, Tunisia, Bangladesh, and China have all banned the digital asset.
India is leaning towards a similar ban, but the difference is it wants to establish an official digital currency to be issued by the Reserve Bank of India. China too, is moving full speed ahead to develop its own central bank digital currency (CBDC). Perhaps this is something Pakistan should consider.
Baqir is open to the idea of CBDC - digital tokens, similar to cryptocurrency, issued by a central bank and pegged to the value of that country’s currency. They can help improve financial inclusion, reduce cross-border transaction costs and make payment systems more efficient.
“The work underway in many countries in many international institutions on CBDCs is welcome,” said Baqir. “This work in our view should be evaluated from the perspective of how CBDCs can contribute to each regulator’s goals.”
Copyright Business Recorder, 2022