Daily Times

The Laws and regulations play an important role in the governance and the legal framework of any country. Through effective laws and regulations governments achieve their goals of economic growth and stability, alleviation of poverty, ensuring human rights, as well as safeguarding the fundamental rights of all citizens. In the same vein, the constitution of Pakistan ensures the provision of necessities and access to necessaries in wake of public policy, besides harmony with the global practices in tandem.

However, on the contrary, excessive laws and regulations can negatively impact people and businesses. Pakistan is among those jurisdictions where the government instead of applying for a modern approach in dealing with issues, either totally prohibits new initiatives or through strict legislation make their compliance extremely complicated. This approach on the one hand impact the overall economy and on the other hand, creates turmoil amongst investors. There are various living examples to strengthen this argument; however, the focus here is on Pakistan approach in dealing with virtual currency.

The overall regulatory scenario of Pakistan towards this industry appears unimpressive.  The State Bank of Pakistan (SBP) through BPRD Circular No. 03 of 2018 dated April 06, 2018, and FE Circular No. 03 of 2018 dated April 18, 2018, specifically prohibited all Banks, DFIs, Microfinance Banks and Payment System Operators (PSOs), Payment Service Providers (PSPs) from processing, using, trading, holding, transferring value, promoting and investing in Virtual Currencies and Tokens. Through these Circulars SBP further directed that banks/DFIs/Microfinance Banks and PSOs, PSPs will not facilitate their customers, account holders to transact in VCs and ICO Tokens. Any transactions in this regard shall immediately be reported to Financial Monitoring Unit (FMU) as a suspicious transaction.

The SBP external relations departments vide Circular No. ERD/M&PRD/PR/01/2018-31 dated April 06, 2018, also instructed the public to take caution regarding risks of virtual currencies. The Circular states that due to the ambiguous nature of virtual currencies, no legal protection or recourse is available to any individual in the event of a loss incurred due to high price volatility, closure of any virtual currency exchange business including action by the law enforcement or security compromises of cryptocurrency exchange etc.

These instructions by the SBP were issued in April 2018 almost nine years later than the creation of the first decentralized cryptocurrency bitcoin. During these nine years, cryptocurrency improved its market share, different coins were introduced and added to attract the attention of global economies and investors. Such as in April 2011 Namecoin was created, October 2011 Litecoin was released etc.   Keeping in view of the rapid changes in this industry, various economies initiated studies to assess the future impact of virtual currency. In this regard, the United Kingdom completed a study on cryptocurrency in August 2014 to understand its role and impact on their economy. However, Pakistan ignored this technology-based invention and failed to claim its fair share in the sector which surpasses the market cap of USD 2 trillion. Pakistan’s actions towards cryptocurrency show that we have willfully missed the chance as we are yet to adopt new technologies. Therefore, no mechanism to assess, monitor and mitigate the risks is introduced till now which could have provided a sense of safety to potential investors.

On the other hand, despite the State Bank of Pakistan’s clear instructions, investors in Pakistan are showing keen interest in cryptocurrency and as per Statista report, Pakistan share in bitcoin trading volume on online exchanges in various countries worldwide in 2020 is around USD 12.4 million dollars. However, in this entire trading activity, the government exchequer failed to generate a single penny in terms of taxes.

Does the question arise that as to whether we are wasting revenue-generating avenues and offering alternative opportunities to criminals to launder their funds using an unregulated system accessed without the government scrutiny and checks?

We need to ascertain that is it really a challenge for Pakistan to regulate virtual currency? The answer is very simple. The initiative of regularization of virtual currency requires WILL of the government, characterization or classification of the currency, sales regulations, applicability of money laundering and terrorist financing laws, taxation procedure which will generate revenue for the government, licensing, territorial restraints, disclosures, and reporting requirements. These simple processes can help us to claim our fair share in this rapidly growing sector. However, the first step which requires the WILL of the government shows that we are least bothered to regularize it.

There are no serious efforts made to deal with its administrative and legal aspects and even there is no determination exhibited by the relevant ministries to onboard the relevant institutions and the law enforcement agencies including State Bank of Pakistan, Securities and Exchange Commission of Pakistan, Financial Monitoring Unit, Federal Investigation Agency, Federal Board of Revenue, and other stakeholders directly or indirectly involved with trading related matters. Hence, no comprehensive study at the national level has been presented so far by the ministries as well as the relevant institutions to assess the risks posed by this sector, their mitigation, and their impact on our economy.

The remaining step does not require many efforts and somehow implemented by the different countries considering guidelines issued by the Financial Action Task Force (FATF). When it comes to classification or definition of the cryptocurrency, The FATF calls it, as a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and or (2) a unit of account; and or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction. It is not issued nor guaranteed by any jurisdiction and fulfils the above functions only by agreement within the community of users of the virtual currency.

The United States adopted its more technological agnostic definition. Similarly, the licensing requirement can be met under the law by forming a company and further meeting the requirements of investment or security, trading companies as per the model compatible with the functions of our regulatory bodies. In the United States cryptocurrencies are required to register as commodities trading advisor and commodity pool operators along with regulatory requirements mentioned in the Investment Company Act, 1940 as well as Investment Advisor Act 1940 along with relevant states investment laws. The United Kingdom treats cryptocurrency as a property, and licensing requirements depends on the regulated activities in terms of Financial Services and Market Act, 2000 and Payment System Regulators requirements etc.

The other important element relates to the protection of crypto transactions from money laundering and terrorist financing. In this regards United States through Financial Crimes Enforcement Network (FinCEN) guidance dated March 2018 classified that virtual currency exchanges and administrator of a centralized repository of virtual currency with the capacity to redeem and issue the virtual currency will be termed as Money Service Business. It includes those exchanges which accept and transmits a convertible virtual currency, buying and selling convertible virtual currency etc. By classifying the person administering, exchanging, or using virtual currency as MSB, FinCEN applied the same parameters of risk assessment and bound all the stakeholders to perform a comprehensive risk assessment to curtail the exposure of money laundering.

They are required to maintain an Anti-Money Laundering program which will include maintaining written policies and procedures including internal controls with reasonable assurance of ongoing compliance, designation of a compliance officer to ensure day to day compliance, training of the concerned staff including the training of suspicious activity reporting and independent review to assess the adequacy of the program. Similarly, no one would be allowed to access the system which will be listed on the sanction list maintained by the Government, UN or OFAC sanction list. Similarly, the United Kingdom formed the Anti-Money Laundering and Countering Terrorist Financing (AML/CTF) supervisor for the companies carrying out cryptocurrency ventures. Both United States and the United Kingdom require the companies to perform know your customer (KYC) and Customer diligence checks to all customers dealing with crypto verifying their basic information such as their legal names, proof of residence, government-issued identity documents etc. Pakistan already has a mechanism to regulate MSB’s under the money laundering act, 2010 and can be applied the same to regulate cryptocurrency as well.

The most important revenue-generating activity through cryptocurrency is its taxation. United states currently collecting approximately 39% on the short terms gains whereas around 15% to 23% on the long-term gains depending on the income brackets. The Inland Revenue Service (IRS) issued guidance via IRS Notice 2014-21, IRB 2014-216 on the tax treatment of transactions using virtual currency. Similarly, in the United Kingdom, virtual currencies are taxed under goods and services based on their profits from a sale.

The other steps such as mining, border restraints, disclosure of cryptocurrency on foreign trips as well as reporting requirements can also be sorted out in the light of international practices. We need to understand that crypto’s in now reality and delay in regulating this industry will bore no fruits. Though in April 2021, governor SBP Mr Reza Baqir told in an interview on CNN that Central Bank is studying Digital Currency, similarly, the Securities and exchange of Pakistan published Position Paper Regulation of Digital Asset Trading Platforms. However, this document is of a general nature and does not provide any draft regulation or way forward for trading in Virtual Currency.

We must understand that it is urgent to comprehensively design laws and regulations to facilitate the investors and regulate this sector. It is also necessary to regulate this sector to counter the potential risks of money laundering, terrorist financing as well as organized crimes associated with cryptocurrency. Simply issuing circulars with instructions that prohibit the public as well as the financial sector to trade in virtual currency will not mitigate your obligation to provide comprehensive regulations.

__________________________________________________________________

Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. He has recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions.