It has been far too long since we saw still-stuck-in-the-1980s policymakers propose something completely out of touch with the changing world. Two months had passed since the removal of the ban on TikTok and boomers were probably looking for a new prey which they found an easy one in cryptocurrencies as a committee formed by Sindh High Court and constituting members from the State Bank (SBP) and other regulators recommended a complete ban on cryptocurrencies.

While such a move by the regulatory authorities is not exactly surprising to anyone, it is nonetheless a little strange as earlier in 2020, the Securities and Exchange Commission of Pakistan was mulling a framework for the tokenisation of digital assets and their regulation. What exactly triggered this 180-degree shift in their stance then?

Blockchain is too complex and rapidly developing an industry that needs more nuanced understanding, instead of simplistic recommendations, to deal with which the policymakers seem rather ill-equipped to do

Let’s see. To start with, the apex regulator noted in the panel constituted by the Sindh High Court that assets are a provincial subject and thus beyond its scope. The committee noted that cryptocurrencies cannot be classified as a legal tender or any financial asset under the current legal and regulatory regime.

Meanwhile, the SBP’s stance was that “cryptocurrencies’ risks far outweigh the benefits for Pakistan”. It adds that “the only use of cryptocurrency in Pakistan seems to be speculative in nature where people are being enticed to invest in such coins for the purpose of short-term capital gains.” Fair enough, one can argue that the idea here is to protect investors which is appreciable.

But is speculation specific to cryptocurrencies only? Aren’t equities, bonds or the forex market also subject to this risk? In the case of stocks, the exchange has made its rules very clear with respect to risk disclosure of which speculative trading is one. “Almost all investment activities involve speculative risks to some extent, as a customer has no idea whether an investment will be a blazing success or an utter failure,” the risk disclosure specimen document on Pakistan Stock Exchange’s website reads.

It continues: “Day trading strategy is a common example of speculative trading in which customers buy and sell the same security/derivative within the same day, such that all obligations are netted off and closed and no settlement obligations stand. The customer indulging in a day-trading strategy needs to be more vigilant and informed than the customers investing for a longer period, as the market may not move during the day as the day-trader originally anticipated, resulting in a loss to them.” As for capital gains, perhaps the local financial market professionals have become so used to the value scrips that they fail to grasp the idea of the underlying shift towards a preference for growth now.

Of course, there is no denying that crypto assets are particularly volatile, which the committee blames on how they are not backed by any government or real assets. While there is some merit to that criticism, the growing emergence of decentralised finance (DeFi) protocols and other use cases of blockchain are alleviating that problem. That can be seen from how DeFi startups — with use cases ranging from lending to insurance — raised over $2 billion during 9MCY21, up from just $329 million in all of 2020, according to CBInsights.

But all of that seems secondary. The key objection of the SBP seems to be that crypto assets “may result in the flight of precious foreign exchange as well as the transfer of illicit funds from the country.” After comforting us about the strong external account position for that short spurt of growth seen during 2021, the central bank has lately turned its panic mode on, placing restrictions on imported cars, changing prudential regulations and other forms of capital control. Admittedly, the committee did discuss the possibility of allowing a domestic distributed ledger to be traded but then mentioned that there is no way to distinguish between locally or internationally minted coins.

None of this is to argue that there aren’t any inherent risks associated with cryptocurrencies, which the report warns as well, including that of frauds. But with the evolution of know-your-customer and compliance tools, the number of fraudulent transactions as a share of total value has consistently declined over the past two years, as corroborated by Chainalysis data. Even beyond that, blockchain is too complex and rapidly developing an industry that needs more nuanced understanding, instead of simplistic recommendations, to deal with which the policymakers seem rather ill-equipped to do. Here’s to hoping against hope the regulators realise that technology will move faster than their minds can grasp and the way to handle it is not to try to stop advancements in tech but maybe be open to new developments. And increase their intake of almonds.

Published in Dawn, The Business and Finance Weekly, January 17th, 2022

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