While I withdrew my coins and cash from www.urdubit.com with a heavy heart, I felt sorry for the exchange that happened to be Pakistan’s first bitcoin exchange. For me, it was not just an exchange but a major event in Pakistan’s startup history. Urdubit was a sign of embracement of new technologies by Pakistanis and representation of intellectual repository in the country. It definitely had given courage to many other startups to enter the scene and has led to implementation of blockchain technology. Don’t take it as an obituary of Urdubit but I thought to share my sentiments that I’m sure many of my readers can resonate with.
Read more about Urdubit here
With the news coming out, there was a panic and disappointment (rightly so) among bitcoin holders. Uncertainty about their investment led to anxiety and social media was filled with questions and answers. Unfortunately, we couldn’t see any expert or any representative from SBP to clarify the confusion. So, I decided to share my two cents, based on mostly asked questions.
Is Cryptocurrency illegal or banned?
If we read the wording by SBP circular carefully, it clearly mentions that:
Virtual Currencies (VCs) like Bitcoin, Litecoin, Pakcoin, OneCoin, DasCoin, Pay Diamond etc. or Initial Coin Offerings (ICO) tokens are not legal tender, issued or guaranteed by the Government of Pakistan
I dont think its a valid debate but since many people raised this question, I thought to have it in perspective. If SBP has instructed banks and financial institutions not to deal in cryptocurrency and some banks still do that, will it be considered an illegal activity and a crime? I think yes. So, I conclude that it’s an illegal activity for the types of institutions mentioned in the circular to deal in virtual currencies. One can argue that it applies only to buying and selling of virtual currencies but that’s not true since the statement uses the word legal tender which means it cannot be used as a payment method either.
The next part is straightforward. It says there is no individual or business authorized by SBP to deal in virtual currencies in any capacity. This makes any exchange operating in Pakistan illegal. In fact any exchange that has or is still operating is not a registered entity in Pakistan.
SBP has not authorized or licensed any individual or entity for the issuance, sale, purchase, exchange or investment in any such Virtual Currencies/Coins/Tokens in Pakistan.
Another question that came up was role of banks and financial institutions in all this. Let’s look at next part:
In view of the foregoing, all Banks/ DFIs/ Microfinance Banks and Payment System Operators (PSOs)/Payment Service Providers (PSPs) are advised to refrain from processing, using, trading, holding, transferring value, promoting and investing in Virtual Currencies/Tokens.
Since to buy currencies you need to deposit or transfer money from your account to the exchange account, and similarly, to convert your coins into cash you need to sell and have exchange transfer funds from its account to your account, banks come into play. They have been clearly advised not to be a supporting entity in any process associated with virtual currencies.
Note that, it mentions PSO’s and PSP’s as well. This means the current process of buying currencies using Mobile Accounts (as by some exchanges in Pakistan) falls under illegal activity by the exchange operators.
But, does this apply to individuals buying and selling in personal capacity? I think it does not. So, any Pakistani citizen can hold virtual currencies bought from international exchanges(since locally the entry and exit points are seemingly closed now). However, the guidelines clearly warn individuals too to abstain from these investments as they dont have any legal standing.
To clarify this, take an example of a rupee note. A 1,000 rupee note has some value and if you go to a bank, its value will be recognized. You can deposit this amount in your or someone else’s bank account. This value is established because its a legal tender and is recognized by SBP as a currency. A virtual currency is not recognized by Government of Pakistan and it has advised all entities to not to.
Similarly, if you pay someone Rs 1,000 to buy something and your goods are not handed over to you (either from online store or a brick and mortar shop), you cannot go to any consumer court and register a case of fraud. Why? Because the government of Pakistan does not recognize this currency and hence any transaction that involves this currency.
Who else is affected?
Many e-commerce stores were supposedly developing ways to accept virtual currencies in exchange of goods. Now they cannot. Simply put, if you register yourself in Pakistan as a business, you cannot accept virtual currencies as mode of payment. This is illegal.
What is not mentioned in circular?
The thing that is causing confusion is no mention of repercussions if individual or an entity is found violating this rule. However, it says that
Any transaction in this regard shall immediately be reported to Financial Monitoring Unit (FMU) as a suspicious transaction.
What action FMU takes is not clear.
Bitcoin is not Blockchain
Many people are confusing bitcoin with blockchain. Though often bitcoin is taken synonymous to blockchain since whole concept of it is dependant on it but we can safely separate the two. I will consider bitcoin or any cryptocurrency for that matter just as an application of blockchain. The given circular specifically refers to the virtual currency and not the technology as of now. So, startups working on blockchain will continue developing app exploiting the power of blockchain. There might be some areas where SBP can consider blockchain as untrustworthy in future but completely banning is quite unlikely just like internet. No one owns internet and no one can shut it down.
What SBP is thinking?
Many people have criticized SBP for this ruling. However, I think we should try to have a broader perspective here. Virtual currencies have actually been used as a tool to entice naive users to buy into the idea of high returns overnight and wasting their money. We all have seen the Facebook [In case you are interested in Facebook’s privacy issues, read here #DeleteFacebook] ads claiming high returns. Virtual currencies are still operating on shaky grounds and are very unpredictable and volatile in nature.
May be SBP is working on a framework and regulatory guidelines before it starts recognizing it. Maybe it doesn’t have any intention at this stage to acknowledge it as a valid legal tender. We don’t know. But, we should have this trust that the directive is in greater good of the masses.
Can government of Pakistan completely eliminate virtual currencies usage in Pakistan. Probably it will never be able to because of the decentralized nature of it. However, it can control it and the purpose of this circular is the same i.e. to manage it and keep it within acceptable boundaries of risk.
This is debatable and your comments are welcome.
Disclaimer: The writer is not an expert in virtual currencies and ICOs and has tried to understand the circular and share his personal opinion. By no means, it is an official stance of any entity or criticism on the official statement by SBP.