Cryptocurrencies “would never be legalized” in Pakistan, according to recent remarks by Dr. Aisha Pasha to the Senate standing committee on finance, and the State Bank and Ministry of IT are working to discourage crypto usage with a view towards their eventual prohibition. Having produced a sizeable body of work on the subject, including an upcoming analysis of global cryptocurrency regulation, I believe that outlawing cryptocurrencies has clear merits and is a sensible move. However, there are specific caveats in Pakistan’s case that must also be carefully considered.
On the one hand, the logic for banning cryptocurrencies is backed by a mountain of evidence that they are detrimental to the overall financial system. First, cryptocurrencies are a significant conduit for money laundering and criminal financing. Large dossiers compiled by the US Department of Justice and other major institutions reveal that the semi-anonymity, decentralized layout, and transboundary nature of the technology, all facilitate nefarious elements in siphoning and transferring large quantities of money. This is an important reason why the Financial Action Task Force (FATF) has taken a keen interest in the matter and issued guidelines of its own. The mere fact that not proceeding against cryptocurrencies could draw the ire of FATF against Pakistan should be reason enough to prohibit them, since Pakistan’s experience on the FATF gray list has been, to put it mildly, unpleasant. Pakistan must do the utmost to remain outside the gray list by fostering a well-functioning, transparent, and well-regulated financial system, against which cryptocurrencies do serve as an impediment.
Secondly, cryptocurrencies are volatile and speculative by nature, which means that they can cause severe financial harm to investors. This volatility is embedded in cryptocurrencies for a variety of reasons, including: the lack of intrinsic value (productive cash flows), marketing gimmicky with get-rich-quick schemes, dishonest intermediaries (as in crypto exchanges like FTX), weak hedging potential against broad market declines, and disproportionate ownership in a few large wallets (the “whales”). From a shariah perspective, several bodies have issued edicts against crypto based on their unproductive nature and speculative character. The mega-frauds that have come to light since 2022, including the FTX and Terra-Luna debacles, give an indication of just how severe the societal damage of bad actors can be in such a space.
Given the conduits to criminal activity and to investor harm, the remarks about “never” allowing cryptocurrencies to be legal in Pakistan are sensible and desirable. On the other hand, however, there are finer points to consider in our situation. The first pertains to the value of our own currency. Since 2018, the value of the Rupee has sunk from Rs.100/$ to worse than Rs.300/$. Our currency is weak because of serious fundamental issues that include the twin deficit problem, which means that, with the passage of time, one can imagine the currency falling precipitously without meaningful structural reforms. The historical trend was that the Rupee would depreciate by about 7% per year, but the trend has accelerated in recent years. Why would Pakistanis want to hold on to such a poorly performing currency? In addition, the traditional substitutes for the Rupee, such as gold and other precious metals, have soared in price and gone out of the reach of many. The property market has tanked, and one would require substantial savings to participate in it anyways, while major international currencies (particularly the dollar) are extremely difficult to obtain in the open market. In such precarious circumstances, with poor economic governance and widespread socioeconomic volatility, cryptocurrencies actually look reasonable by comparison.
Secondly, the State Bank has become a strange broker of dollars in the market through its ad-hoc policy for opening letters of credit (LCs), and now represents poor monetary authority with low credibility. Parts of its measures include making the legal transfer of money into the country extremely cumbersome, and so people earning from abroad struggle to repatriate their earnings in a reasonable manner. In such circumstances, using cryptocurrencies as alternate payment mechanisms can actually offer a reasonable alternative, better even than the hawala systemthat is denominated in Rupees at the local end. The miserable conditions of moving money around therefore do make cryptocurrencies a sensible vehicle for some users.
Thirdly, the current inflationary conditions make holding on to any currency a somewhat tenuous bet, and since inflation is much higher in Pakistan than even other developing countries, the substitutive value of cryptocurrencies is in fact considerably more appealing. The main cryptocurrencies, especially Bitcoin, are deflationary in nature, with a finite ultimate supply (21 million BTC) that has mostly been mined (created) already. It is therefore especially strong as a hedge against the current inflationary wave.
Fourthly, cryptocurrencies and other blockchain-based technologies offer avenues for technological innovation, and young educated Pakistanis can be quite savvy about the possibilities that may emerge from further breakthroughs in this field. This is evidenced by a flurry of little basement startups in urban centers which have sprung up in the country over the last five years with an interest in the crypto space. In banning cryptocurrencies, however, one sees a simplistic regulatory approach being undertaken in a space where new entrants, even from modest backgrounds, might have innovative ideas, so long as they can experiment with this technology. In fact, it is hard to see the enforcement capacity of the relevant agencies actually being effective against this technology, which would put a crypto ban in the same category as many other prohibitions in Pakistan: Illegal in theory, but unenforced in practice. Those who are into crypto can still remain engaged with it, whether the Senate committee says so or not.
In conclusion, while there are sound reasons for banning cryptocurrencies in a normal economy, the abnormal state of Pakistan’s economy offer specific reasons to think a little bit differently about the value of crypto in the local context. For there to be a credible dissuasion against crypto as substitute, it would be nice to have a credible, stable, inclusive and well-managed mainstream economy instead. With blanket bans on alternatives like crypto, and yet having a deadbeat formal economy as an alternative, one sees only that those who should be raising us up economically are further letting us down.
Dr. Usman W. Chohan is Advisor (Economic Affairs and National Development) at the Centre for Aerospace & Security Studies, Islamabad, Pakistan. He can be reached at email@example.com.
Image Design: Dr. Usman W. Chohan