KARACHI: The Pakistan Mercantile Exchange (PMEX) is eager to introduce cash-settled contracts of cryptocurrencies to help local investors take exposure to the increasingly popular peer-to-peer global digital payment system.

Speaking to Dawn in a recent interview, PMEX Managing Director Ejaz Ali Shah said the central monetary authority should revisit its 2018 decision against cryptocurrencies because they’re getting worldwide recognition as a medium of exchange.

“It’s only a matter of time. How can you stay away from something that’s being adopted by the rest of the world so rapidly?” said Mr Shah who heads the country’s only commodity futures exchange.

Dealing in cryptocurrencies is officially banned in Pakistan, although the country boasts of having one of the highest cryptocurrency adoption rates globally, according to the 2021 Global Crypto Adoption Index by Chainalysis.

Yet its growing traction continues to stay under the radar because of the numerous operators running illegal futures trading platforms across the country. “Drive through Sharea Faisal and you’ll come across such operators after every kilometre. They’re connected with foreign brokers and work as their local agents,” he said, adding that these are illegal entities and should be shut down at once.

By his own estimate, the PMEX is handling only five per cent of the total futures trading business that’s currently taking place in the country.

Futures trading

From gold, silver, oil and gas to copper, palladium and even the indexes of global stock exchanges, the PMEX lets roughly 25,000 investors buy and sell different sorts of contracts on its platform every day. Except for some contracts in gold that are deliverable, all of them are cash-settled as their values are tied to the international commodity prices.

Trading on the PMEX takes place on margin. For example, an investor has to come up with only Rs5 to buy a contract of Rs100. They make a profit of Rs2 if the price increases to Rs102 and book a loss of Rs2 if the price declines to Rs98. Although they never get the actual delivery of the commodity, businesses can theoretically hedge against volatility in the prices of their input materials through the PMEX.

“We have a state-of-the-art trading system in place. Allowing cryptocurrencies will ensure that there’s no outflow of foreign exchange. All dealings will be in rupees. It’ll be documented and can be taxed. We’ll do KYC [know-your-customer] and ensure investor protection. The SBP should review its decision,” he said.

Contracts of treasury bills

In addition to cryptocurrencies, the PMEX has been working on a proposal to introduce contracts of treasury bills on the exchange, which will complement the government’s plan to promote retail participation in the trading of its short-term debt.

“We’re holding serious discussion with the SBP on this issue. The central bank is very keen on it. They’ve told me in principle that they want the PMEX to do it. We’re now developing a proposal and coming up with the modalities for their review,” he said.

The government has long been pushing the Pakistan Stock Exchange (PSX), the only national platform for shares trading, to develop a secondary marketplace for short-term government debt. However, that’s not happened so far because the PSX’s client base is mainly corporate, according to Mr Shah.

“Those corporates have their own treasuries. They don’t need the PSX for trading in treasury bills. Similarly, stockbrokers have little interest in this segment.

Banks resist it as well because retail participation will cannibalise their deposit base,” he said, noting that the mainly retail nature of the PMEX investor base makes the exchange a perfect platform for the promotion of treasury bills.

Published in Dawn, December 19th, 2021