KARACHI: Bahrain-based Rain Financial, a trading platform for cryptocurrencies, is persuading local regulators to issue a legal framework for the formalisation of crypto trading in Pakistan.

Speaking to Dawn in a recent interview, Rain Financial Country General Manager Zeeshan Ahmed said the trading in crypto assets — digital currencies in which transactions are verified and recorded by a decentralised system — currently exists in a regulatory “no man’s land”.

“There’s no law that declares crypto illegal. Have the authorities frowned upon crypto? Yes. But issuing a statement is one thing and translating it into a law is another,” he said.

Former central bank governor Dr Reza Baqir said in March the risks of using cryptocurrencies outstripped benefits. Earlier, the central bank issued a formal notice advising the general public to be cautious of, and refrain from, trading cryptocurrencies.

“Negotiations are taking place. These are large-impact decisions involving lots of ideas and proposals,” Mr Ahmed said, expressing hope that the authorities will realise the benefits of formalising an activity that’s already going on outside of the regulatory ambit.

According to data platform website Chainalysis, Pakistanis booked profits of more than $604 million in crypto trading during 2021. Pakistan is also among the top-ranking countries on the Global Crypto Adoption Index. This is despite the fact that the central bank doesn’t recognise cryptocurrencies as legal tender and, as such, hasn’t licensed any exchange to facilitate their trading.

Yet Pakistanis trade digital coins on crypto exchanges like Binance in peer-to-peer transactions. In simple words, buyers and sellers agree to trade coins on the exchange’s app, which leads to the same assets going into an escrow/frozen account. The buyer then transfers money to the seller within a short time window and produces the proof of payment to the trading platform to gain possession. Alternatively, one can use a hundi/hawala channel to buy or sell coins on a crypto exchange. The unregulated structure of trading means the government gets zero tax on any capital gains booked by investors.

“We believe in regularised, licensed platforms. When we want to move into a market, we first engage the regulator and show it the value-add and benefits (of cryptocurrencies). Unregulated markets like Pakistan face capital flight and risks to individuals and institutions,” said Mr Ahmed.

Rain Financial was incorporated in the sandbox of the central bank of Bahrain in 2017 as a crypto asset company. The federal monetary authority issued a crypto policy framework in 2018 and the company received its licence in 2019.

Mr Ahmed said the exchange is a major crypto trading platform in the markets it already operates in. The estimated volume of crypto trading in 2021 was close to $100 billion. “Our share was $2bn. A regional player currently, we’re poised to become a global one,” he said.

Crypto enthusiasts present digital currencies as a reliable medium of exchange, store of value, hedge against inflation, and a safe investment in the event of a catastrophe — attributes that have conspicuously been missing from the 10,000-plus cryptocurrencies that currently exist.

Rain Financial’s bid to enter the Pakistani market couldn’t have come at a less opportune time. As much as $2 trillion has been wiped out of the combined market capitalisation of cryptocurrencies over the last six months. The crash is so big that China’s Blockchain-based Service Network, a government-linked initiative to promote the commercial adoption of blockchain technology, has called cryptocurrencies the biggest Ponzi scheme in the history of humankind.

Mr Ahmed said momentary setbacks shouldn’t be construed as the final verdict of history. The ongoing evolution of cryptocurrencies, in his view, is as consequential an event as the industrial revolution.

“This volatility looks excessive in the short term, but it isn’t. The global (crypto) adoption (rate) is only seven per cent,” he said, noting that volatility will come down in the long run.

Mr Ahmed expects Pakistan’s will be a high-volume, low-transaction market for Rain Financial once the regulators allow formal trading of cryptocurrencies. Around 2m Pakistanis have so far downloaded the apps of crypto exchanges. The number will likely go up four times once the authorities grant legal cover to cryptocurrencies, he said.

“Within one year (of trade formalisation), I expect that 70-80m Pakistanis will be trading $7-10 worth of crypto assets a month each,” he said.

Published in Dawn, July 13th, 2022