Daily Times

Digital transformation has been reshaping global financial systems over the past decade, leading to an evolving landscape of Central Bank Digital Currencies (CBDCs). These government-backed digital currencies represent a significant shift in how people access and use money, carrying substantial implications for both developed and developing economies. As of 2024, over 130 nations, representing nearly the entire global GDP, have explored or implemented CBDCs. Pakistan, with its unique socioeconomic landscape and a largely cash-dependent economy, stands at the precipice of adopting this innovation. The State Bank of Pakistan’s (SBP) plans to pilot a digital currency align with a global movement toward modernizing financial ecosystems. With the right approach, Pakistan’s journey toward a digital currency could advance its economy, bolster financial inclusion, and set a precedent for balancing modern innovation with cultural and religious values.

Unlike cryptocurrencies like Bitcoin, which operate on decentralized, unregulated platforms, CBDCs are issued and controlled by a country’s central bank, providing an official and regulated digital form of fiat currency. This regulatory backing offers a sense of security, accountability, and control that distinguishes CBDCs from private cryptocurrencies. The SBP’s 2023 announcement to pilot a digital currency by 2025 represents a forward-thinking shift in policy, recognizing the potential for digital currency to address several persistent challenges in Pakistan’s economy. Notably, nearly 80 million Pakistanis remain unbanked, meaning they lack access to formal financial services. A digital currency, if implemented thoughtfully, could bring financial services to these underserved populations, particularly in remote or rural regions where physical banking infrastructure is sparse.

Financial inclusion stands as one of the most promising benefits of a CBDC for Pakistan. By leveraging mobile phone penetration and digital wallets, a state-backed digital currency can provide low-cost, accessible banking services to millions of Pakistanis. For many unbanked households, the inability to save securely, make digital transactions, or access credit limits their economic potential. A digital currency, integrated with mobile technology, could democratize financial services, empowering individuals with savings options, credit opportunities, and financial literacy resources. This integration would also create opportunities for microfinancing, allowing rural and marginalized populations to invest in education, agriculture, or small businesses. In a country where informal employment and the informal economy constitute a significant portion of economic activity, this inclusion could bolster productivity, economic participation, and financial stability.

A gradual, phased approach to rolling out digital currency could help Pakistan draw lessons from China’s pilot program and the European Union’s cautious methodology.

Beyond financial inclusion, the cost implications of digital currency are also significant. The traditional cash-based system in Pakistan incurs substantial expenses in printing, distributing, and securing physical money. By reducing reliance on cash, a digital currency could minimize these costs, potentially saving millions annually. Moreover, cash handling entails security risks such as theft, fraud, and counterfeiting. A digital currency mitigates these risks by offering a secure, traceable transaction system. In turn, this could curb counterfeit currency circulation, a problem that has strained Pakistan’s economy and law enforcement. A traceable digital currency can also facilitate more efficient tax collection, reducing the extent of the informal economy and increasing transparency within the financial system. Tax avoidance, a common challenge in Pakistan, could be addressed through digital transactions that are easily monitored, fostering accountability and enhancing the government’s revenue base.

As Pakistan moves closer to implementing a digital currency, several global examples serve as valuable references. China’s digital yuan, also known as the e-CNY, has pioneered the use of state-backed digital currency. Piloted in various regions and sectors, China’s digital currency initiative has processed over $986 billion in transactions, showcasing its scale and integration. China’s phased rollout model underscores the value of region-specific pilots, allowing policymakers to refine security, scalability, and infrastructure gradually. Nigeria’s e-Naira, which focuses on financial inclusion and remittances, emphasizes the importance of accessible, user-friendly platforms. This case illustrates how digital currency can enhance remittance services and reach remote populations, which is also highly relevant for Pakistan, a country with millions of expatriates who remit funds. The European Union’s proposed digital euro, meanwhile, places a premium on data privacy, regulatory standards, and cybersecurity. The EU’s cautious, research-based approach highlights the importance of a robust legal and regulatory framework to support a secure and inclusive digital currency.

For Pakistan, creating a sound regulatory environment is essential to digital currency’s success. Recently, the federal government has proposed amendments to the SBP Act to legalize digital assets, including cryptocurrencies, and empower the SBP to issue and regulate them. This shift from scepticism to active regulation indicates a major policy pivot. Legal recognition and regulatory oversight of digital currencies will protect users, reduce fraudulent activities, and provide the SBP with control over digital currency issuance and circulation. A well-defined legal framework also has the potential to attract international Fintech companies and investors, who might bring innovation, capital, and technology to Pakistan’s financial market. This regulatory clarity is critical in encouraging both local and international players to enter Pakistan’s digital financial ecosystem confidently.

Pakistan’s transition to digital currency also has potential cultural and religious implications, making it essential to consider an Islamic perspective. Islam encourages the equitable distribution of wealth and advocates for financial practices that prevent exploitation, usury, and undue risk – principles that align with the objectives of a state-controlled digital currency. Unlike unregulated cryptocurrencies, which often involve speculative trading, a CBDC can be structured to comply with Shariah principles by focusing on stability, transparency, and secure transactions. Digital currency can contribute to economic justice by offering transparent financial services accessible to all, promoting inclusive development. Additionally, if the currency is used to support interest-free microfinancing, it can further align with Islamic values by fostering financial inclusion without engaging in Riba (interest), a key Islamic financial prohibition.

Moreover, a CBDC could enable Pakistan’s Islamic banking sector to innovate within a digital framework. With over 17% of the banking industry in Pakistan operating under Shariah principles, integrating digital currency in compliance with Islamic finance laws presents an opportunity for growth. Digital currency can support Islamic banking’s expansion into remote areas by facilitating secure, cashless transactions, aligning to enhance equitable access to financial services. For instance, digital currency platforms could collaborate with Islamic banks to offer products like profit-sharing investments or Qard Hasan loans, which are interest-free and intended for social welfare. By providing access to Islamic banking options in underserved areas, a CBDC can strengthen social equity and align Pakistan’s financial goals with religious values, promoting a finance system that is ethical, inclusive, and beneficial to society.

However, Pakistan faces several challenges in its digital currency journey. Developing the technological infrastructure necessary for a secure, resilient digital currency demands investment and expertise. Robust cybersecurity measures are paramount to prevent fraud, hacking, and other cyber threats, which are common risks in digital financial systems. Cybersecurity lapses could undermine public trust, a critical factor in digital currency adoption. Establishing a secure digital currency infrastructure requires cooperation between the government, private sector, and international cybersecurity firms. Additionally, Pakistan’s energy infrastructure must be considered, as digital currency platforms require a stable power supply and internet connectivity. While urban centres may adapt relatively easily, rural regions, which often lack consistent electricity and internet access, will need targeted solutions.

Building public trust and promoting digital literacy is equally crucial to the success of a digital currency in Pakistan. Many Pakistanis remain unfamiliar with digital financial services, which could deter widespread adoption. An effective public awareness campaign, focused on educating citizens about the benefits, security, and functionality of digital currency, is necessary. This outreach can be achieved through partnerships with telecom companies, community organizations, and financial institutions. Engaging trusted religious scholars to discuss the Islamic perspective on digital currency could also play a significant role in gaining acceptance among conservative communities, helping demystify the technology and its alignment with Islamic ethics.

A gradual, phased approach to rolling out digital currency could help Pakistan navigate these challenges, drawing lessons from China’s pilot program and the European Union’s cautious methodology. Initial implementation in urban areas with established digital infrastructure would allow authorities to test and optimize the system before expanding into rural regions. This approach minimizes potential disruptions and allows for real-time feedback to improve the digital currency platform.

While the economic benefits of a digital currency are compelling, the symbolic value of modernizing Pakistan’s financial system is also significant. A successful CBDC could improve Pakistan’s global reputation, demonstrating its commitment to economic innovation and digital advancement. As digital currencies become increasingly central to international finance, Pakistan’s proactive approach could position it as a leader among emerging economies, attracting foreign investment and technology partnerships.

The writer is a financial expert and can be reached at jawadsaleem.1982@gmail.com. He tweets @JawadSaleem1982.