SBP Exhibits No Flexibility to Permit Trading in Cryptocurrencies in Pakistan

The banking regulator advised regulated firms not to process, use, trade, hold, transfer value, promote, or invest in virtual currencies/tokens.

In the special section of the Financial Stability Review, SBP restated that it does not authorise or licence any individual or business to issue, sell, purchase, exchange, or invest in any such Virtual Currencies (VCs)/Coins/Tokens in Pakistan.

In its 2018 Circular, SBP warned that cryptocurrencies are not legal money, issued, or guaranteed by Pakistan. Thus, it maintained its ban on bitcoin trading and investment organisations.

Although the banking regulator and government banned cryptocurrency trading in Pakistan, investors and traders of the digital currency are fighting for its legality through various renowned cryptocurrency operators.

Global authorities have not adequately addressed cryptocurrencies or agreed on a collective approach to this innovation, according to an assessment of global practises. It needs regulatory clarity from conception to definition and use.

China, Tunisia, Morocco, and Algeria banned cryptocurrency. Pakistan, Saudi Arabia, Bangladesh, Türkiye, Indonesia, and Allowed US, India, Germany, France, England, Japan, Russian Federation. Only El Salvador accepts cryptocurrencies as currency.

In its current Financial Stability Review, SBP outlined why it strongly recommends banning cryptocurrency trading and investment in Pakistan.

Monetary Policy

Crypto Assets are unregulated, which weakens monetary policy transmission channels.

Central banks may struggle to assess and regulate their financial system and economy effects. Central banks and monetary authorities may struggle to stabilise prices.

Capital Flight Implications

CAs' scalability and ability to connect users across borders without foreign exchange authority oversight can challenge FX-related control mechanisms and cause a capital outflow that can worry a country with foreign exchange issues.

Financial Security

Financial stability in foreign markets and institutions. CAs and the technology underlie the recent collapse of several banks with strong crypto sector exposure. Due to their opaque activities, the crypto-ecosystem can transfer weaknesses to the formal financial system, causing financial stability issues.

Consumer Rights

CAs can be used for fraud, theft, tax avoidance, etc. due to their opaque nature. Complexities, lack of openness, standardisation, and behaviour supervision can hinder customers' decision-making.

Market Inconsistency and Volatility

Bitcoin, a first-generation cryptocurrency, dominates the cryptocurrency market. Most of the crypto sector is volatile. Crypto sector market capitalisation has dropped 75% since November 2021.

Energy and Environment

Crypto-asset operations, especially mining, utilise a lot of energy, causing greenhouse gas (GHG) emissions, pollution, noise, and other neighbourhood consequences.

The rapid expansion of crypto-assets like Bitcoin, which don't generate real economic activity, could hamper the world's efforts to reach net-zero carbon pollution.

Stable Coin Dynamics

Stablecoins, which are backed by assets, are safer than unbacked tokens, although Terra USD's fall revealed financial stability issues such reserve sufficiency. Due to their increasing interconnectivity with traditional banking and its "stability" problems, stablecoins represent contagion hazards.

Cryptocurrency Advantages

Crypto assets have some benefits, but they require pre-conditions. Consumers of traditional financial products and crypto assets must be financially and technologically literate to increase financial inclusion.

While Ripple's XRP is helping promote cross-border payments, it's still a tiny fraction of the total.

Recent discussions underscore the benefits of underlying technologies and the benefits of regulating CAs, but they do not rule out banning them. Targeted limitations may be better than rigid bans, depending on domestic conditions, policy goals, and government capacity.

Crypto assets are allowed in several countries with mature financial sectors and substantial external account cushions, although the laws focus on tax and AML/CFT threats.

Due to its lack of economic activity, the crypto sector is also considered unsustainable. Recent industry turbulence has reinforced this perception.