State Bank of Pakistan (SBP) has shown no sign of any flexibility to allow any institution to roll out their businesses of cryptocurrency in Pakistan.
The banking regulator warned all regulated entities to refrain from processing, using, trading, holding, transferring value, promoting, and investing in Virtual Currencies/Tokens.
In the special section of the Financial Stability Review, it reiterated its stance on crypto assets saying that SBP does not authorize or license any individual or entity for the issuance, sale, purchase, exchange, or investment in any such Virtual Currencies (VCs)/Coins/Tokens in Pakistan
SBP through its Circular issued in 2018 cautioned the public that cryptocurrencies are not legal tender, issued or guaranteed by the Government of Pakistan. Therefore, it maintained its decision to retain a ban on activities by an organization that claims to offer trading or investment in cryptocurrency.
Although the banking regulator along with the government decided to ban the trading of cryptocurrency in the country, there is a legal battle introduced by the investors and traders of the digital currency seeking the legality of the cryptocurrency in Pakistan through various renowned operators of cryptocurrency.
A review of global practices shows that global regulators have not yet sufficiently addressed the phenomenon of cryptocurrencies, or settled on a collective approach to this innovation. From conceptualization to definition and potential usage, it remains an area that requires further regulatory clarity.
Leading countries that imposed a ban on cryptocurrencies include China, Tunisia, Morocco, and Algeria. Pakistan was included among the list of the country imposed an implicit ban which also included Saudi Arabia, Bangladesh, Türkiye, Indonesia Allowed US, India, Germany, France, England, Japan, Russian Federation. El Salvador is the only country that trades cryptocurrency as legal tender.
SBP in the latest Financial Stability Review explained the reason behind its strongly suggested ban on the trading and investment of cryptocurrencies in Pakistan.
Implications for Monetary Policy
Crypto Assets can affect the effectiveness of monetary policy as they are not subject to oversight and control like traditional elements of money supply in the economy resulting in weaker monetary policy transmission channels.
Central banks may face challenges in assessing and regulating their impact on the financial system and economy. This can make it difficult for central banks and monetary authorities to achieve price stability.
Implications for Foreign Exchange Regime and Capital Flight
Due to their scalability and ability to connect users across borders without the oversight of any foreign exchange authority, CAs can create challenges for FX-related control mechanisms and lead to an untoward outflow of capital that can be a source of concern for a country facing foreign exchange challenges.
Financial Stability
Foreign Stability i.e. concerns for the financial soundness of financial institutions and markets. The recent failures of a few banks which, inter alia, have significant exposure to the crypto industry, highlight the significance of CAs and the underlying technology. In addition, due to the opaque nature of their operations, there can be a build-up and transfer of vulnerabilities from the crypto-ecosystem to the formal financial system leading to financial stability concerns.
Consumer Protection and Fair Treatment
Due to the opaque nature of activities, CAs can be misused to commit various illegal activities such as fraud, theft, tax evasion, etc. Inherent complexities, lack of transparency and standardization, coupled with absence of, or weak, conduct supervision can impede the customers’ ability to make informed decisions.
Market Imperfection and High Volatility
The crypto-industry is dominated by Bitcoin, which is a 1st generation cryptocurrency and distinct from stable coins, in terms of market capitalization. This means that most of the crypto industry is prone to volatility. This is illustrated by the fact that the market capitalization of the crypto industry is down by 75 percent from its November 2021 peak.
Environment and Energy Consumption
Some crypto-asset operations (particularly mining) use considerable energy resulting in greenhouse gas (GHG) emissions as well as additional pollution, noise, and other local impacts on communities living near mining facilities.
The accelerated growth of crypto-assets including Bitcoin – that generally do not contribute to real economic activity – could hinder the world’s efforts to achieve net-zero carbon pollution.
Stable Coin and its Dynamics
While stablecoins are generally considered safer than unbacked tokens (as they are usually backed by assets), there are still some financial stability concerns e.g., adequacy of reserves that were also exposed with the collapse of Terra USD. In addition, due to their increasing interconnectedness with traditional finance, stablecoins pose contagion risks as there are still questions surrounding their “stability”.
Benefits of Cryptocurrencies
While crypto assets offer some benefits, the realization of these benefits still requires enabling pre-conditions. For example, to enhance financial inclusion through crypto assets, consumers need to be financially and digitally literate – the same challenge that consumers of traditional financial products face.
Furthermore, while some encouraging work is being conducted to support cross-border payments (e.g., through Ripple’s XRP), it still is only on a minuscule level compared to the volume of cross-border payments globally.
Recent deliberations on this subject highlight the benefits of underlying technologies and merits of regulating CAs, however, they do not rule out the option of banning them. It is recognized that strict bans may not be the first best option, however targeted restrictions could apply, depending on the domestic conditions, policy objectives, and capacity constraints of the authorities.
In some countries, with developed financial sectors and ample external account cushions, crypto assets are considered permissible activities under their regulatory ambit; however, the regulations primarily focus on key policy issues of tax and AML/ CFT risks.
Some observers also note that the crypto industry faces severe issues of sustainability as it does not generally contribute to real economic activity. Recent volatility and turmoil in the industry have particularly strengthened this view.
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