Crypto mania raging in Pakistan

The crypto sphere seems like an elusive topic in Pakistan's financial debate. Blockchain technology is barely grasped by a layman, and it would seem that the country is not yet ready for the touted digital revolution.

Yet, statistical data points in an absolute perverse direction. An estimated 4.1% of Pakistanis - totaling about nine million people - own some form of cryptocurrencies.

A research report by the Policy Advisory Board (PAB) of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) revealed that this cumulative ownership in cryptocurrencies amounts to $20 billion - almost twice the $10.3 billion in foreign reserves currently held by the State Bank of Pakistan (SBP). According to a report by Chainalysis, a blockchain data platform, Pakistan is ranked 3rd in the Global Crypto Adoption Index 2020-21, just behind Vietnam and India. The report also reveals that Pakistan recorded the highest growth in cryptocurrencies expanding at 711% - over the period 2020-21, overtaking India's adoption growth of 641% over the same period.

These industry dynamics imply that the base of active crypto participants is quite substantial. However, the regulatory structure of Pakistan is still trailing to accept any change in the status quo.

Earlier, the former SBP Governor Dr. Reza Baqir addressed the Annual Investment Forum in Riyadh. While he acknowledged that the blockchain technology would ultimately "Democratize Finance" for the general citizenry of Pakistan, he emphasized that the accompanying risks are far too flagrant to overlook. He stated: "In Pakistan, we as the central bank have reached a conclusion as of now that, for us and in terms of core objectives of the central bank, the potential risks far outweigh the benefits."

Recently, a committee under the directive of Ms. Sima Kamil - the SBP Deputy Governor (Financial inclusion, Digital financial services, and IT) - recommended a complete ban on cryptocurrencies in Pakistan. This insight signified a response to Sindh High Court's (SHC) inquiry apropos of whether any form of cryptocurrency (or other related activities) should be permissible under Pakistani law. The committee echoed the concerns of Dr. Baqir, warning the court of law regarding the risks associated with the pioneering financial phenomenon of cryptocurrencies. The committee further opined that its risk-benefit analysis suggested that the risks override the benefits.

The committee report presented to the provincial court stated that cryptocurrencies are highly speculative. Hence, subjects risk financial fraud, transfer of illicit funds, and a convenient route for extortionists to evade litigation.

Dr. Baqir highlighted other downsides of allowing cryptocurrencies into Pakistan's mainstream financial operation. He stated: "Because of their [cryptocurrencies] speculative nature, acute price fluctuations, and most importantly, their distributed and decentralized nature, they can pose a risk to financial and monetary stability." He further added: "Because of their anonymous nature, some cryptocurrencies are prone to be used for illegal economic activities." The statements of Pakistan's front-running economic policymakers and litigators reveal that they don't disregard the positive attributes attached to the crypto sphere. However, they are also aware of the prohibitive costs that could dent the economy if the phenomenon eludes the regulatory grip - which is the value proposition of virtually all cryptocurrencies.

All the reservations are justified - at least to some extent. The ongoing meltdown in the crypto market is a befitting example of the inherent price volatility that could upend traces of stability overnight.