The Currency Switch

Author Name: M Mubashir Ehsan      24 Dec 2021     International Economy

A utopian dream for cryptocurrencies is to operate in countries with liberty, where the government has the least control over the financial systems. A most recent, unforeseen event was El Salvador’s announcement of Bitcoin to become its national currency. El Salvador became the first country to switch to cryptocurrency as a medium for day-to-day transactions. This financial system experiment could set a precedent for other emerging and developing economies to abstract lessons and outcomes.

The vision of the Salvadoran President for this currency switch was mainly motivated to reduce external influences on the country’s economy, especially US control. Many developing economies face similar external challenges where a country’s economic sovereignty is compromised. Pakistan as a developing country also faces similar external influences through the International Monetary Fund (IMF) and other economies which provide financial assistance.

Does Pakistan have the option to explore the currency switch measures that El Salvador has taken?

One would argue that such a drastic currency switch could have multidimensional obstacles and challenges for developing countries. The most prominent would be the risk and volatility of Bitcoin as a national currency. Individuals from several developing countries are participating in cryptocurrency actively. Pakistan is one of those countries as well. However, there is ambiguity regarding the rules and regulations about cryptocurrency in Pakistan. State Bank of Pakistan has cautioned regarding the use of cryptocurrencies but has not stated that it is illegal. On the other side, the Lahore High Court has ordered the Federal Government to ask the State Bank of Pakistan regarding the legality of the use of cryptocurrency in the country. Hence, at the moment regulation regarding cryptocurrency is in the grey area.

It might be a challenge for Pakistan to switch to the Salvadorian model due to the differences in its internal and external dynamics. There are differences in the size of the population, where Pakistan has a large population of 227 million compared to a much smaller population of El Salvador of 6.48 million. There is one interesting similarity between the two countries’ demographics though - both have a higher proportion of youth population.

The political regime in El Salvador is a dictatorship. On the other hand, Pakistan has a democratic system that allows the Parliament to decide on major transformational issues such as a currency switch. It would be challenging to convince policymakers towards such a step, as neither they nor the masses are not sensitized regarding cryptocurrency. In this case, if the government had formed Parliamentary Technology Offices (PTOs), it would have increased awareness regarding the crypto-assets within Parliament.

Another internal factor for a developing country taking such extraordinary steps is to evaluate its digital infrastructure and Internet penetration. Though El Salvador’s President aims to increase financial inclusion, the reality is that it does not have the digital infrastructure to facilitate these efforts. In 2017, only 33% of Salvadorans were internet users compared to 62.9% of Latin America and the Caribbean (LAC). The country has also not prioritized its expenditure on research and development compared to other states in the region. In contrast, Pakistan’s digital economy is going through a transformation phase.

A global concern regarding the Salvadoran currency switch is that there is no policy or monitoring instrument to prevent money laundering during the conversion process of bitcoins to dollars. The Government of Pakistan has made efforts to overcome money laundering and increase compliance with international regulations. Despite its endeavors, Pakistan remains on the FATF’s grey list. Considering such fluid assets as a national currency would mean stringent guidelines for Pakistan.

It is crucial for developing countries considering the option of ‘cryptoization’ to understand the instruments used to deal with capital flows that differ from their previously used channels and service providers. With the transition to cryptocurrency, countries must evaluate risks associated with unregulated financial instruments and channels.

Recently, the IMF proposed three elements to be considered for a global level regulation. Firstly, there should be authorization of crypto-asset providers, especially the ones who are performing critical functions. Secondly, there should be requirements designed according to “the main use cases of Crypto-assets and stable coins.” Thirdly, authorities should provide clear instruction regarding engagement with crypto-assets, ensuring risk assessments, liquidity requirements and investor suitability.

In this case, if the IMF rolls outs its global framework for cryptocurrency regulation, what will it mean for the global South? IMF voting structure, by design, is dominated by the US and Europe.

The evidence of this voting inequality is amplified by the fact that the value of an average person’s vote in the global North is eight times more than the global south, and the average, South Asian’s vote weight is one-20th of the global North. For Pakistan, the currency switch may be a difficult task to consider. The government must first take initial steps towards policy and regulation guidelines for the use of cryptocurrency.

 

M Mubashir Ehsan is a researcher at the Centre for Aerospace & Security Studies (CASS), Islamabad, Pakistan. He can be contacted at cass.thinkers@gmail.com.

Image Source: M Mubashir Ehsan

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