Pakistan Wants To Ban Crypto - Masterstroke or Misstep?

@sankritk

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On May 16, 2023, the government of Pakistan announced a plan to impose a ban on cryptocurrency trading and services in the country. The ban is not yet in effect, but it is expected to be implemented shortly. The government still needs to release details about the specific measures that will be taken to implement the ban.

The Minister of State announced the impending ban for Finance and Revenue, Dr. Aisha Ghaus Pasha, at a session of the Senate Standing Committee on Finance and Revenue. Pasha said the ban was necessary to protect the country's financial system from the risks of cryptocurrencies.

"Cryptocurrency will never be legalized in Pakistan."

— Dr. Aisha Ghaus Pasha | Minister of State for Finance and Revenue, Pakistan

In this article, we will discuss the potential implications of Pakistan's crypto ban on the nation's economy and the subsequent fallout on the global crypto market. We will examine if this is a masterstroke or a misstep by the Pakistani government.

Risks and Grey Lists: Unveiling Pakistan's Concerns about Cryptocurrencies

The decision to ban cryptocurrency activities in Pakistan comes as a response to the conditions set by the Financial Action Task Force (FATF), an intergovernmental body focused on combatting money laundering and terrorist financing.

One of the key factors driving Pakistan's anti-crypto position is its desire to maintain compliance with the FATF and avoid being placed on the organization's "grey list" of countries under increased monitoring due to deficiencies in countering illicit financial activities.

The FATF's "grey list" is a list of countries that are considered to have strategic AML/CFT deficiencies. Countries on the grey list are subject to increased monitoring by the FATF and its member jurisdictions. This means that financial institutions in these countries may be subject to enhanced due diligence requirements and that countries may be subject to other measures, such as travel bans and asset freezes.

The FATF does not explicitly require a ban on virtual assets and virtual asset service providers, but it does expect countries to address money laundering and terrorist financing risks associated with the crypto sector. Pakistan sees the ban as a necessary step to meet the FATF's requirements and safeguard its financial ecosystem.

Support for the ban has come from the State Bank of Pakistan (SBP), which has expressed concerns about the potential disruptions cryptocurrency transactions could cause to the country's financial system. Citing examples such as the Terra and FTX incidents and the resulting contagion effect, SBP director Sohail Jawad highlighted the perceived dangers associated with digital currencies.

Uncharted Waters: Navigating the Economic Impact of the Crypto Ban

The impending crypto ban in Pakistan is expected to have significant economic implications for the country. While the ban aims to address concerns related to cryptocurrency scams, money laundering, and financial stability, it is essential to consider the potential negative consequences of such a decision.

Surge in Brain-Drain

The crypto ban in Pakistan has raised concerns about a potential surge in brain drain.

Pakistan has seen a growing number of professionals and experts in the crypto industry and blockchain technology possessing valuable skills and knowledge. As per the 2022 Global Crypto Adoption Index by Chainalysis, Pakistan ranks 6th in cryptocurrency adoption, just below the United States. The ban's implementation could lead to a significant outflow of these talented individuals seeking more favorable environments for their expertise.

Brain drain goes beyond the loss of individuals. It represents a drain on knowledge and skills crucial to Pakistan's technological advancement. Losing crypto experts means losing their expertise, research, and insights that could have propelled the local industry forward. Rebuilding expertise in emerging technologies takes time and effort.

The ban's impact extends beyond the crypto industry. It hinders innovation and entrepreneurship by stifling the creativity and ambition of bright minds. Entrepreneurs and innovators may relocate to countries with more favorable regulatory environments, resulting in a loss of potential economic growth and hindering Pakistan's culture of innovation.

Curbs Remittance Flows

The crypto ban could also lead to a drop in remittance flows. Pakistan is among the top 10 countries receiving remittances worldwide, with an inflow of almost $30 billion in 2022 alone.

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With inflation rates reaching 19.9% in 2022 and still rising, remittances play a crucial role in supporting the economy and alleviating financial pressures for many households.

Remittances are an essential source of foreign currency inflow for Pakistan. Many individuals work remotely from Pakistan for international companies and receive their salaries in major currencies such as USD, EUR, or GBP. These individuals then spend their earnings within Pakistan, contributing to the local economy. However, if the crypto ban comes into effect, it may limit or even halt such transactions, impeding the flow of remittances into the country.

Moreover, remittances also contribute to the stability of the country's foreign exchange reserves. Reduced inflows may strain the reserves, impacting Pakistan's ability to manage its external obligations and maintain a stable currency.

Ripples in the Digital Ocean: How Pakistan's Ban Could Make Waves in Global Cryptocurrency Markets

Pakistan's decision to implement a ban on cryptocurrencies has the potential to create significant ripples in the global cryptocurrency markets. With over $8 billion worth of crypto estimated to be held in Pakistan-based wallets, the ban carries implications that extend beyond the country's borders.

One immediate concern is the impact on market sentiment. The ban could trigger fear, uncertainty, and doubt (FUD) among investors and participants in the cryptocurrency ecosystem. Such sentiments often lead to increased sell pressure as individuals rush to liquidate their holdings in response to regulatory actions. This could result in market volatility and downward price pressures for various cryptocurrencies, affecting not only Pakistan but also the broader global market.

Further, the ban may disrupt the flow of cryptocurrencies across international exchanges. As Pakistani traders and investors are restricted from participating in global crypto markets, it could lead to reduced liquidity and trading volumes. This limitation can have spillover effects on market dynamics, affecting price discovery and overall market efficiency.

The sheer size of the estimated $8 billion worth of crypto held in Pakistan-based wallets highlights the potential magnitude of the impact. If a significant portion of these funds is sold off or transferred out of the country, it could further intensify the selling pressure and amplify the market's response.

Beyond the immediate market reactions, the ban in Pakistan underscores the global regulatory challenges facing cryptocurrencies. It serves as a reminder that regulatory actions in one jurisdiction can reverberate throughout the interconnected and borderless nature of the crypto market. It reinforces the need for cohesive and well-thought-out regulatory frameworks to address the complexities of cryptocurrencies while fostering innovation and protecting investors.

Is Crypto Done For Good In Pakistan?

Pakistan's crypto ban is likely to spell the end of crypto's growth in the country. Despite its huge potential, innovation and development of the technology might come to a standstill as Pakistani developers are halted from creating new products and services.

However, all is not lost for crypto enthusiasts in Pakistan. There have been some reports that the government may reconsider its stance on the matter and allow for the trading of cryptocurrencies while still enforcing its anti-money laundering regulations. If this is indeed the case, it may offer a ray of hope to individuals interested in using cryptocurrencies for legitimate purposes.

It is worth noting that despite the strong opposition to digital currencies, the Pakistani government still recognizes the potential of blockchain technology. President Dr. Arif Alvi has praised the benefits of blockchain and its ability to improve processes within the country. In fact, Pakistan has plans to launch its own central bank digital currency (CBDC) by 2025, with expectations that blockchain will underpin its implementation.

At present, one thing is becoming increasingly clear — this step by the Pakistan government seems like a misstep (but one that can be taken back quite effortlessly). The smarter way forward is likely to regulate the crypto market in a way that fosters innovation while discouraging malicious actors.

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