Pakistan’s central bank reportedly plans to ban crypto

    17 Jan 2022

    Pakistani government and its central bank have recommended banning cryptocurrency, arguing in a document submitted in a provincial court that allowing it would cause capital flight. Reuters reported that an official report recommends declaring all cryptocurrencies illegal, citing local media.

    The Sindh High Court has been hearing a constitutional petition filed in 2019, which seeks to overturn central bank guidance from 2018 advising banks and payment system operators against processing and investing in virtual currencies.

    The court sought advice from a committee headed by a deputy governor of the central bank, which submitted its report on Wednesday.

    The document was compiled by a committee headed by Sima Kamil, a deputy governor of the State Bank of Pakistan (SBP). Other members included representatives from the Ministry of Finance, the Securities and Exchange Commission of Pakistan (SECP), and the Federal Investigation Agency of Pakistan (FIA).

    “The State Bank of Pakistan has concerns over the trading of cryptocurrencies by individuals and entities, as it results in outflow of foreign exchange from the country,” the committee wrote in the report, reviewed by Reuters.

    It noted that cryptocurrencies were all issued outside of Pakistan, and said Pakistani residents buying such tokens would send capital abroad.

    “After a careful risk-benefit analysis, it emerged that risks of cryptocurrency far outweigh its benefits for Pakistan,” the report said.

    According to the local media reports collected by CoinDesk, the submission is the first time the central bank has taken a clear position. In addition, the inclusion of government and regulatory representatives on the committee gives the report additional authority as a reflection of possible policy initiatives. For example, in 2018, the SBP issued a circular prohibiting banks from dealing with cryptocurrency exchanges.

    “This indicates that, unlike in the past, this is a policy move which has greater consensus and coordination,” said Ali Farid Khwaja, a partner at Oxford Frontier Capital and chairman of KTrade KASB Securities a stock brokerage in the capital, Karachi. “The SBP-led report has been accompanied with a coordinated crackdown on peer-to-peer network and illegal crypto operators by FIA and also warning letters issued by SECP.”

    Earlier this week, the FIA said it wants to talk to Binance as part of an investigation into a suspected scam it said has cost several thousand investors more than $100 million.

    The committee submitted the report to the Sindh High Court, hearing a case about digital currencies, and ordered its formation. It cited concerns on the use of crypto for money laundering and financing terrorism.

    The case was brought by Waqar Zaka, a television host and crypto entrepreneur who wanted the court to rule that cryptocurrencies be declared legal as many Pakistanis are interested in them. The country has the third-highest crypto adoption rate in the world, according to the Chainalysis Global Crypto Adoption Index.

    The court referred the 38-page report to the finance and law ministries for consideration. According to a news report, it also ordered them to determine if a ban against cryptocurrencies is constitutional.

    “The mindset if something is going wrong is to simply ban it,” said Majyd Aziz, the former president of the Karachi Chamber of Commerce and Industry. “Rather than trying to figure out the background, more often than not, they go for a ban before going through the process. You can’t ban digital currencies.”

    The government has set up a separate committee to consider a regulatory approach following the Financial Action Task Force (FATF) call, the global money-laundering watchdog. Pakistan has been on the organization’s gray list of countries since 2018, hurting its ability to get international financial aid.

    “I don’t think this means Pakistan has decided to ban it,” said Faisal Aftab, a co-founder of Zayn Capital. “I think they are still exploring regulation. The ambiguity is about whether Pakistan will consider cryptocurrencies as an asset. But it’s almost clear that it will not be considered a legal tender.”

    Pakistan has been grappling with a currency devaluation, high inflation, current account deficit, and dwindling foreign reserves, Reuters said.

    Back in November, the High Court of Sindh has urged the federal government to regulate cryptocurrencies in Pakistan and formed a committee to look into the matter.

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