Is Pakistan ready for cryptocurrency?

In Blog, National Security
November 17, 2021
Mahnoor Islam
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Despite the debate over banning cryptocurrency, it is no secret that cryptocurrency has become increasingly popular in Pakistan, especially Bitcoin. Interestingly, Binance, which is a cryptocurrency exchange, is the fourth most downloaded app in Pakistan. The ban by the State Bank of Pakistan has little relevance as the Khyber Pakhtunkhwa government has also announced plans

Despite the debate over banning cryptocurrency, it is no secret that cryptocurrency has become increasingly popular in Pakistan, especially Bitcoin. Interestingly, Binance, which is a cryptocurrency exchange, is the fourth most downloaded app in Pakistan. The ban by the State Bank of Pakistan has little relevance as the Khyber Pakhtunkhwa government has also announced plans to build cryptocurrency mining farms. Furthermore, despite the hurdles, citizens have found a way to invest in cryptocurrency by using offshore wallets.

There is no denying that cryptocurrency has become very popular in Pakistan however the question is Pakistan ready for cryptocurrency? The cryptocurrency market has attracted criminals and people who are involved in tax evasion and money laundering. This can prove to be a challenge for Pakistan who is already under the radar of the Financial Action Task Force (FATF) and has been unable to get out of the grey list since 2018.

In 2019, FATF announced that the ‘threat of criminal and terrorist misuse of virtual assets is serious and urgent’. FATF’s recommendation 15 requires countries to take all possible measures which includes licensing and sanctions in order to ‘to assess and mitigate their risks associated with virtual asset activities and service providers’. It is widely understood that cryptocurrencies are very difficult to regulate as they do not have a single controlling entity. Therefore, regulating cryptocurrency will prove to be a challenge for Pakistan and will land Pakistan in hot waters if any criminal activity is found.

Bitcoin is not backed by governments or other agencies instead its price is at the mercy of speculators therefore making it an extremely volatile domain. Over the past few months, only a tweet by Elon Musk has made a difference in the prices of Bitcoin and Dogecoin. Investment in Bitcoin can be dangerous as one can never estimate the value of it and can therefore cause loss instead of profit.

Since cryptocurrencies are done online there is a certain level of technical sophistication that is required. Pakistan faces a number of IT related issues and the local people may not have enough technical knowledge that is needed to use cryptocurrency. There are also a number of computer viruses as well as hacking mechanisms which can easily steal the credentials required for cryptocurrency. Similarly, people can also be tricked into investing in fraudulent and fake cryptocurrencies due to lack of awareness regarding misinformation. Jurisdictional issues may also arise since cryptocurrency is happening all over the world.

Cryptocurrencies have given rise to dark markets which deal in drugs, weapons and other illicit goods. Hackers have been able to disrupt computer operations and have been able to extract information from companies and governments. In the cases of hacking, theft or fraud, a further problem that comes with regards to cryptocurrencies is that there is no way to track down criminals, to reverse transactions or sanction illegal businesses since the currency is not being regulated by an organization. Therefore, if an incident like this does occur, there is nothing that can be done.

Regardless of the drawbacks of cryptocurrency, cryptocurrency has many supporters from Pakistan. Cryptocurrency makes transactions easier and cheaper, it allows for more confidential modes of transaction. Investors are the sole owners of their wallet and unless management of the wallet has not been delegated to a third party, no one can exercise power over it. In comparison with the traditional banking systems, the banks have control over their customers’ funds.

While regulating it is difficult, Pakistan needs to come up with a strategy which deals with cryptocurrency. Pakistan has a history of banning apps and websites which will not be an ideal solution when it comes to cryptocurrency as many people have invested in it. What is required is a balanced approach between adopting a financial infrastructure that can provide benefits to citizens and too much freedom to people which may be a threat towards a country’s national security.