NOW is the time for Pakistan to regulate Bitcoin investing

Published May 20, 2021
Citizens have found a way to circumvent restrictions by using offshore wallets such as Neteller, Skrill and Payoneer. – Reuters Photo
Citizens have found a way to circumvent restrictions by using offshore wallets such as Neteller, Skrill and Payoneer. – Reuters Photo

Despite the “ban” on investing in cryptocurrencies, Bitcoin (and crypto-mania) has now fully penetrated Pakistan. We all have friends, family and relatives who have invested in crypto assets. To no one's surprise, Binance, a crypto exchange, is now the fourth most downloaded app in Pakistan.

As a result, relatively unknown wallets and shady platforms are flooding social media sites. Pakistani social media influencers on TikTok and Twitter, with millions of followers, are advising retail investors on how and where to invest in the crypto space.

This is dangerous.

The ban by the State Bank of Pakistan (SBP) now has little relevance and no credibility. It has even become redundant as the Khyber Pakhtunkhwa government has announced plans to build cryptocurrency mining farms.

Citizens have found a way to circumvent restrictions by using offshore wallets such as Neteller, Skrill and Payoneer. Further, hawala operators are facilitating the transfer of funds in offshore crypto exchanges in return for payment made domestically.

It is high time for Pakistan to formulate a regulatory framework for this asset class. The “ostrich strategy” of ignoring the emergence of crypto assets is no longer viable.

There are more than $2 trillion of assets in the crypto economy. Coinbase, the largest exchange, is a listed company with close to a $50 billion market cap.

All leading investment banks are facilitating investments in crypto to their clients and the largest fund managers such as Blackrock have begun investing in it.

Pakistan can no longer ignore this phenomenon.

The most frequent critique from regulatory circles is that crypto investments might not have effective Know Your Customer (KYC) and Anti-Money Laundering (AML) controls and might create some issues with Financial Action Task Force (FATF) compliance.

I am afraid this argument is merely a shield to justify inaction.

If indeed the regulators have legitimate concerns around these issues and if they truly do not want investors in Pakistan to put their savings in these assets, then they should earnestly enforce the ban.

After all, it is not difficult. The State Bank can direct PTA to use the cyber firewall to block all crypto apps and websites. If they want, they can also block offshore wallets used to fund them. And if the regulator wants to be even more proactive, they can write to European regulators and ask them to not accept Pakistani residents on wallets such as Skrill.

But the Ostrich strategy currently being implemented is quite counterproductive. It merely shifts the demand for crypto towards unregulated/underground operators, which is the worst possible outcome.

Firstly, it means that people are forced to use unregulated platforms where they have little investor protection. Secondly, it encourages growth in hawala/money laundering by providing those operators with customers who are attracted to this asset class.

Thirdly, it robs the taxman from collecting potential tax income from these transactions. And fourthly, it prevents potential investment into Pakistan from large, regulated financial companies that are operating in the crypto economy.

The crypto economy is large and growing rapidly. Pakistan can tap this capital for inbound investments. An example is the recent donation of 5 million STX tokens (now worth $10million) to LUMS by Stacks – a US-based blockchain technology company.

By setting up a regulatory framework, Pakistan can attract tier-1 blockchain companies and exchanges. These companies have lower risk thresholds compared to traditional financial services companies. So, while Paypal has declined the invitation to enter into Pakistan, crypto wallets and exchanges such as Coinbase, BlockChain.com and Binance would probably be more forthcoming.

This would only happen if there is a stable and supportive regulatory framework in place. These companies will ensure that in order to comply with local regulations, they put in place proper KYC/AML rules.

This, in turn, would get the asset class documented and make it part of the tax net, just like investing in other asset classes such as stocks, commodities and bonds.

It is high time to get the head out of the sand.


Ali Farid Khwaja, CFA, is the Chairman of KASB Securities. He lives in London with his wife and two daughters. He has worked in financial markets in the UK and Europe for over 17 years. He is an alumnus of Lums and was a Rhodes Scholar at University of Oxford.

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