Did the recent #cryptocrash pivot bitcoin and other cryptocurrencies into Pakistan’s financial spotlight? Or was it Waqar Zaka’s outrageous YouTube proclamations that did it?
It was neither.
Cryptocurrencies have attracted Pakistan’s astute investor community for at the past five years at least and some start-ups have gone so far as to propose:
• Mining their own currencies • Investing in bitcoin and other crypto on behalf of the public • Accepting crypto-based transactions.
Now, with a population of over 220 million people and forex reserves totalling over $16,100 million, according to Reuters, what is standing in the way?
Money Laundering Concerns
The anonymity of cryptocurrency transactions - considered one of the biggest strengths - is also the biggest problem. Central banks hesitate to include cryptocurrency in the mainstream fiat fold because transactions can be conducted anonymously through nodes and therefore large, undeclared sums of money can change hands without either party being obliged to disclose their identity or other details -contributing to one of the biggest issues confronting Pakistan’s financial front: money laundering.
It also erodes the protection normally accorded to investors through traditional banking channels via KYC (Know Your Customer) and AML policies. Rumour has it that ‘hawala’ operators are helping local crypto-traders via offshore wallets. And although Pakistan’s data protection laws are still very new, in other markets, exercising the ‘right to be forgotten’ could present serious problems for cryptocurrency victims of absconding counter parties.
Incentives To Mainstream Commerce
Pakistan’s average investor profile and investment motives present an interesting paradox in the global crypto game. According to the State Bank of Pakistan (SBP), in 2020 roughly 21.3% of Pakistan’s population had access to banking services. This figure is derived from the number of bank accounts, possibly over-representing it, (one person can have multiple accounts). When almost 80% of the population meets its financial needs through unregulated, undocumented and unsophisticated channels, how does one create a market for cryptocurrencies? Would it remain a toy for those at the top with virtually zero trickle down?
You may think the difference between blockchain, bitcoin and cryptocurrency would be well-understood by Pakistan’s most sophisticated financial minds. Not so. Even as late as February 2021, an article on terrorist financing used digital currency and cryptocurrency interchangeably. For many people, blockchain, bitcoin and crypto mean the same thing. Parties quick to describe virtual currencies as illegal didn’t do their homework - and the SBP has an ambiguous position on the issue, citing caution but not prohibition.
The technology behind cryptocurrency is also frequently-misunderstood. Speculators believe that like fiat currency, cryptos exist in abundance. Not so. They are expensive and eco-unfriendly to mine, limiting the volume of cryptocoins in the world. This explains why cryptocoins cannot be accessed by everyone and why speculation has such a powerful effect on its value. Even before the Elon Musk episode, traders were accustomed to dramatic dips and crashes, with values exceeding $60,000 per bitcoin at one point. Fascinating as these trends are, they dis-incentivise investors seeking stable, sustainable returns.
Even so, attitudes towards cryptocurrency are changing in Pakistan. Commercial banks and techpreneurs have initiated programmes to promote financial literacy (including the conceptual understanding of cryptography and digital finance). Broadening the national financial profile has also helped. Between 2020 and 2021, the promotion of home-based businesses, female entrepreneurship and new niches have added to the diversity of financial products pushing the boundaries of traditional finance.
Pakistan’s increasing participation in global services exports (especially through freelancing platforms) is encouraging citizens to come up with their own alternatives to PayPal and other global payment channels inaccessible in Pakistan. The News in March 2021 suggested that two hydroelectric-powered pilot “mining farms” are to be built in KPK to increase Pakistan’s participation in the global virtual capital market. In the same month, it was also reported that the government was developing a new Digital Currency Policy, aimed at addressing concerns regarding the legality of crypto in Pakistan, investor protection, as well as accessibility for low income segments.
Regardless of the outcome, one thing is certain. The thrill of the trading floor, once limited to the stock exchange, has effectively migrated to our screens.
Nayyara Rahman is an award-winning researcher and author. Her interest areas are in technology and business ethics, corporate transparency and process improvement. Nayyara Rahman's work in integrating marketing and technology is aimed at making organizations more efficient, accountable and transparent. She currently works at Arturo Labs.