We have witnessed a drastic development and innovations in the digital payments especially in the recent few years. One of the area that has gained vast popularity is the crypto or virtual currencies. A cryptocurrency is a form of virtual currency or electronic money, working on a P2P basis, which allows users to transfer funds to and fro without a financial intermediary. These types of virtual currencies are not issued or backed by any government. Unlike legal currencies which are issued by a central bank or monetary authority, the crypto currencies are generated through a computer algorithm.
Cryptocurrencies are gaining attention of the world because of their cost effectiveness, instant transfer of value, transactional security and anonymity. In a short period of time, cryptocurrencies have shown robust progress and acceptability among the masses. Given the popularity and acceptability of the crypto currencies, Facebook – world’s biggest social networking site – announced to issue its own crypto currency called Libra. Moreover, financial sector giant`s like JP Morgan and Goldman Sachs have also jumped on the bandwagon. JPMorgan has also developed a digital currency called “JPM Coin” while Goldman Sachs is planning to develop its own cryptocurrency.
Bitcoin was the first cryptocurrency launched in 2008. Soon various other crypto currencies such as Ethereum, Ripple and Litecoin followed the suite. As per the latest data available on coinmarketcap.com, there are total 5,405 crypto currencies in trading with a market capitalization of USD 245.5 billion. Bitcoin alone has a market share of 64.7% of the total crypto currency market.
Crypto currencies basically work on the basis of block chain technology. The National Conference of State Legislature, USA explains block chain as a technology where the buyer initiates the purchase, known as the block, which contains transaction data such as the date, time and payment amount. Both the buyer and seller can see the block of transaction data, so both parties can confirm that the payment was sent and received. Each transaction’s block is created in a shared online accounting ledger that can involve multiple buyers and sellers within a network. As new transactions occur between the buyer and seller, each data block is recorded and forms the chain that documents the transaction history.
Proponents of the block-chain technology and crypto currencies argue that the crypto currencies can potentially act as an alternative form of money and eliminate cost associated with the transfer of value. Furthermore, the block chain technology can be used for other important activities such as online voting, medical records, property records etc.
While the antagonists of the crypto currencies maintain that they have no centralized issuing authority, their volume is limited, they do not have geographical boundaries and most importantly they are anonymous in nature. They believe that it is not a currency as it is not backed by the sovereign guarantee, rather it is merely a virtual commodity. Because these currencies endorse anonymity, it is feared that they can be used for illegal and unlawful activities thus prone to menace of Money laundering and Terrorism Financing. The ability to transact freely without jurisdiction can expose countries to transnational ML and TF risk.
Additionally, these currencies are highly volatile as the price of one Bitcoin skyrocketed to nearly USD 20,000 in December 2017, slumped to below USD 5,000 in March 2020 and currently trading at around USD 8,840.
In October 2018, Financial Action Task Force (FATF) – the global watchdog on ML & TF – clarified their position and used the word “virtual assets” for these type of currencies. According to FATF, virtual assets are digital representations of value that can be digitally traded or transferred and can be used for payment or investment purposes, including digital representations of value that function as a medium of exchange, a unit of account, and/or a store of value. Further, the FATF underscored that the virtual assets are separate from fiat currency or the legal tender of the country. Moreover, FATF called on the countries to issue licenses to virtual asset service providers and ensure that they are compliant with AML/CFT regulations including conducting customer due diligence, ongoing monitoring, record-keeping, and reporting of suspicious transactions.
Although the FATF did not prohibit operations or trading of virtual assets, it has kept the decision to legitimize or de-legitimize them at the discretion and risk assessment of the respective country.
There has been a mixed reaction regarding acceptability of the crypt currencies around the world with some of the major countries like United States of America (USA), European Union (EU) and Canada have welcomed the block-chain technology and crypto currencies.
Recently, the EU promulgated its 5th Anti-Money Laundering Directive (5AMLD) to bring cryptocurrencies and their services providers under the ambit of regulatory scrutiny.
On the contrary, there are some major countries which have shown reluctance to accept crypt currencies. Countries such as China, Russia, and Indonesia have either banned or made it illegal to engage in crypto currencies. China has maintained a stance that only sovereign cryptocurrency i.e. issued by the central bank (PBOC) shall be deemed as a legitimate digital currency.
Similarly, the State Bank of Pakistan (SBP) issued its policy on the crypto currencies in April 2018 whereby dealing in Virtual Currencies (VCs) was strictly prohibited. So much so that the SBP advised banks to report any such transaction to Financial Monitoring Unit (FMU) as a suspicious transaction. The SBP advised public as well as financial institutions to refrain from engaging, investing and promoting VCs in Pakistan.
The decision of SBP to prohibit crypt currencies is primarily based on the following risk assessment:
- VCs provide high degree of anonymity and potentially can be used for facilitating illegal activities.
- High price volatility as investments tied to crypto currencies are highly unstable and are primarily based on speculations.
- Failure/closure of virtual currency exchanges/businesses due to any reason including action by law enforcement agencies.
- Hacking/security compromises of crypto currency exchanges and wallet businesses as a number of instances have been recorded around the world where huge amount of funds have been lost.
Given the extreme stance of the SBP, there are slim chances that virtual or crypto currencies and their service providers are allowed to operate within Pakistan in near future.
