By: Shahzeb Jafri, Nabeel Asghar, and Javed Bhugio
In Pakistan, even at the government level, there is ambiguity between the terms, “cryptocurrency” and “CBDC” (Central Bank Issued Digital Currency). Both share many characteristics, which thus add to the existing uncertainty, but there is one significant distinction between the two. Cryptocurrency is built on the blockchain structure, which allows for decentralized control of the currency. Digital currencies, on the contrary, are issued and centralized by the state bank.
The term “decentralized” is often misinterpreted to mean unsafe since there is no sovereign authority to control the mechanisms, but decentralization on the blockchain means that the data is immutable, which implies that it can never be altered as it is recorded on numerous servers around the world. The downside of decentralization, however, is exemplified by the extreme volatility of cryptocurrency market value, which is determined by market forces with no state intervention. The sheer volatility of a medium of exchange could be harmful to the economic and financial system. The value of the digital currency, on the other hand, is managed by the central bank, allowing volatility to be mitigated and the currency’s worth to be preserved over time. The authorities are most concerned about the high level of anonymity, which they believe encourages illegal transactions. Crypto supporters, on the other hand, contend that crypto transaction tracking is far more sophisticated than that of regular currency, but we cannot forget that complex security protocols have not been developed to cater to this sophisticated financial structure. Secondly, Pakistan cannot afford to regulate crypto without sufficient knowledge and management because it is already on the FATF’s grey list. For several months, the federal agency has been looking into digital transaction samples. It’s a clear indication of how stringent the federal watchdog’s standards have grown, as well as how quickly they’re being implemented.
Currently, in Pakistan, buyers transmit money directly to sellers under the peer-to-peer model for investing in cryptocurrencies, while service providers operate as middlemen and provide escrow services to mitigate counterparty credit risks. Due to the SBP’s prohibition on financial institutions operating under its jurisdiction, conventional international payment methods, including debit and credit cards, cannot be utilized to acquire these currencies. According to the FPCCI research, most investors use bank transfers or alternative methods such as JazzCash or EasyPaisa for this reason.
Although Pakistan ranks third on the Global Crypto Adoption Index, the State Bank of Pakistan remains skeptical about cryptocurrency and its regulation. In April 2018, the State Bank of Pakistan issued Circular No. 3 of the Banking Policy and Regulation Department (BPRD) prohibiting the trade of virtual assets. Moreover, a routine investigation was filed under RE-955/2021 a few months ago against the profiles of 1,064 people who completed 2,923 transactions. The transactions totaled Rs. 51 million and were carried out on several online exchanges, including Binance, Coinbase, and Coinmama. In Pakistan, roughly 67% of crypto investors use centralized services, while only 33% use decentralized finance (DeFi) platforms for crypto-related transactions.
Meanwhile, China, our friendly neighbor, has outright banned cryptocurrencies and has already released the digital yuan in twelve Chinese cities and regions. Following China, the Digital Euro and Indian Rupi are under development, while Pakistan’s State Bank announced in April 2019 that it was working on a plan to release Pakistani digital currency by 2025. Launching a digital currency has stated goals of increasing financial inclusion and reducing inefficiencies and corruption. SBP issued the National Payment Systems Strategy during the same year, in addition to the development of a digital currency to promote economic inclusion.
The current situation in Pakistan could mean one of two things: either the government fears crypto adoption and plans to regulate it after thorough research, halting transactions until then, or the government is gravitating toward launching CBDC to meet modern digital transaction needs while maintaining control through centralization. Given the facts, news, and current events surrounding cryptos and CBDC in Pakistan, it is safe to say that the latter has far more possibilities than the former.
Bachelors students of SZABIST Islamabad, who aim to promote financial literacy by spreading awareness on various topics.