Early this month, China introduced its first-ever digital currency. Days after that, State Bank of Pakistan (SBP) Governor Dr Reza Baqir told CNN that Pakistan was also actively studying such a prospect.

According to a Wall Street Journal report, China initially issued 750,000 digital yuan to its citizens through a lottery. They can spend these digital yuan online and initially at designated stores using a special app. It is expected that the use of digital yuan will later on become universal with necessary steps taken gradually by China’s central bank.

About 50 central banks from across the world are currently exploring the possibility of introducing their official digital currencies. Among them are the central banks of the United States, United Kingdom, European Union, United Arab Emirates, Saudi Arabia, Israel, Egypt, Indonesia, Japan, Thailand, Hong Kong and, yes, India, too.

The launch of a digital rupee that is freely exchangeable with the digital yuan may land Pakistan into the hot waters of the US-China currency scrimmage

This has become necessary as cryptocurrencies, including the two most outstanding Bitcoin and Ethereum, are fast becoming popular in every part of the world. A growing number of individuals and companies are using them. This leaves monetary authorities with no choice but to come up with a central bank–issued digital currency (CBDC) — or keep watching helplessly how these cryptocurrencies disrupt traditional dynamics of money transactions.

A greater problem is that these cryptocurrencies also serve as a mode of investment for many who accumulate them for some time — and sell them when the prices of these cryptocurrencies vis-à-vis hard currencies rise up to their expectations. A sudden rise in exchange rates of cryptocurrencies versus hard currencies leads someone somewhere to dump hard currencies — in the hands of some block-chain–veiled investor and buy these cryptocurrencies.

Now that is a matter of grave concern for the central banks watching over the circulation of hard currencies for the purpose of keeping inflation in check or for supporting growth.

This is also a matter of equally grave concern for all domestic and global institutions whose job is to check money laundering and terror financing. The reason is that different countries have different legal regimes for these cryptocurrencies. Obviously, there is a need for the rollout of CBDCs to overcome these and other problems associated with the ongoing free ride of privately issued cryptocurrencies.

In Pakistan, where hoarding hard currencies like the dollar, euro and the pound sterling was once a common mode of investment especially among those with ill-gotten wealth, these cryptocurrencies have emerged as an alternative avenue for parking illegal funds.

With a CBDC in place, the demand for such block-chain–powered cryptocurrencies would not completely end but could go down substantially. To make that a most likely scenario, the government and the central bank, after coming up with a CBDC, will have to make money transactions in some or all privately issued cryptocurrencies illegal.

Cryptocurrencies have raised a perfect monetary storm. The world is awaiting digital currencies of each nation anyway. Some 50 central banks are working on it. The digital rupee can become a reality sooner than many pessimists believe

In January this year, the SBP launched Raast — the first instant payment system for small-value transactions among individuals, businesses, including banks and fintechs, and government entities.

As Raast gradually takes roots in Pakistan’s financial system — just like the Pakistan Real-time Interbank Settlement Mechanism or Prism — the launch of official digital currency sometime in the future should come as a natural development.

Because an official digital currency cannot be circulated in an economy wherein the payments and money transfers do not take place in real time under an integrated system.

Prism was introduced back in 2008 and it took Pakistan 12 long years to move to the next step of Raast. But that does not mean a digital currency is as far away as 12 years from now.

Cryptocurrencies have raised a perfect monetary storm. China has already launched its digital yuan on a limited scale and the world is awaiting digital currencies of each nation anyway — the proof of which is that some 50 central banks are working on it. (Speculations about possible future penetration of cryptocurrencies in the payments and fund transfer systems that Elon Musk recently tweeted: you can now buy a Tesla with Bitcoin). So the digital PKR can become a reality much sooner than many pessimists believe. The SBP has already done some spadework in this regard and is able, at least, to make an initial announcement of how it plans to go about launching the digital PKR in the near future.

“We are studying that carefully,” Dr Baqir told CNN while expressing his views about the idea of central banks issuing digital currencies. “We hope to be able to make some announcement on that in the coming months.”

The introduction of official digital currency in Pakistan in due course of time will promote documentation of the economy and check tax evasion, financial corruption and capital flight.

But for the true success of a digital PKR, much would depend on the scope of its acceptability. If the proposed digital PKR is circulated with no restrictions of foreign transactions carried out through it with official digital currency of another country — the most obvious candidate in our case, the digital yuan — then Pakistan may find itself in a difficult situation.

The United States is concerned about how the recently launched official digital yuan would impact the dollar’s domination. The SBP is also watching carefully post-digital yuan developments in the world, particularly in Washington.

Until the United States comes up with its digital dollar — and Federal Reserve Chairman Jerome Powell said in February a digital dollar is a “very high priority” of the Fed — the launching of a digital PKR that can freely change hands with the digital yuan may land Pakistan into the hot waters of the US-China currency scrimmage.

Published in Dawn, The Business and Finance Weekly, April 19th, 2021