KARACHI: If you’re a bank customer, chances are that it has formally warned you against using your debit or credit card for crypto trading.

But regardless of the sternly worded SMS that every bank sends out en masse every few weeks, cryptocurrencies are getting increasingly popular in Pakistan.

“My understanding is that the annual trading volume of cryptocurrencies for Pakistan-based wallets has gone up to $25 billion, up from $18-20bn a year ago,” said Zeeshan Ahmed, country general manager at Rain Financial, a Gulf-based trading platform for cryptocurrencies.

The State Bank of Pakistan (SBP) doesn’t recognise crypto assets, which are digital currencies in which transactions are verified and recorded by a decentralised system. The SBP issued a formal notice last year advising the general public to be cautious of, and refrain from, trading cryptocurrencies.

Annual crypto trading volume for Pakistan-based wallets is estimated to have hit $25bn

Yet the estimate by Rain Financial, which is actively trying to convince the SBP to recognise cryptocurrencies, shows the annual trading volume of these digital assets has gone up by 25-39 per cent over the last year alone.

As for the crypto wallets, which hold the keys to investors’ digital coins stored on public blockchain networks, Mr Ahmed believes their number has almost doubled from five to six million a year ago to 9-10m.

There’s no official word on the extent of the crypto trading taking place in Pakistan. The SBP didn’t immediately respond to a request for comment.

One rule of thumb often used by experts to arrive at a ballpark figure for total crypto asset holdings is the division of the annual trading value by three. Using this loosely defined criterion, it can be assumed that Pakistan-based wallets hold at any given time crypto assets worth $8.3bn.

So how exactly do people buy and sell cryptocurrencies if the practice is outright banned by the central bank?

Experts say the process is as easy as pie. One of the most popular ways of investing in cryptocurrencies involves registering a wallet on a trading platform like Coinbase and then asking an overseas friend or acquaintance to buy and deposit assets on your behalf. In exchange, the ultimate buyer back in Pakistan transfers the equivalent amount in rupees to the local bank account of the overseas Pakistani.

Another way of buying and selling cryptocurrencies is through local crypto traders. They already own coins that they’ve purchased using the illegal remittance system. They play counterparty to anyone wanting to buy or sell crypto assets using hard cash. Yet another method of trading in cryptocurrency is via person-to-person payments. One receives the digital currency in their wallet and transfers the money to the bank account of the local seller.

Mr Ahmed says his convincing efforts haven’t yielded any concrete results, but it’s not a lost cause. “The government and regulators are in a fire-fighting mode given the overall economic conditions. Innovative strategic projects are on the back burner. But that doesn’t mean we’ve given up. A lot of conversation is still taking place with all stakeholders,” he said.

Speaking to Dawn on the condition of anonymity, a technology entrepreneur with numerous successful projects under his belt said he has been “in close contact” with both Coinbase and Binance, two of the popular crypto exchanges in the world, for their possible entry into the Pakistan market.

“They’re very keen to start operations here. But the regulator here is quite reluctant. I’ve suggested to the SBP that we should formalise crypto trading using geo ring-fencing,” he said.

One of the major hurdles in legalising crypto trading appears to be the expected outflow of dollars as a result of Pakistanis buying assets on foreign exchanges. Geo ring-fencing solves that problem to a large extent, he said.

One must declare their country of origin while opening an account with a crypto exchange. The two prominent crypto exchanges have agreed to the use of geo ring-fencing, according to him. It means the two platforms will ensure that any crypto assets held in Pakistan-based wallets will only be sold to Pakistan-based wallets. “Geo ring-fencing will ensure that $6bn-$10bn held by Pakistanis in crypto assets will stay with Pakistanis,” he said, adding that the government can also collect tax on those holdings.

Pakistan Mercantile Exchange (PMEX) Managing Director Ejaz Ali Shah told Dawn he’s eager to roll out cash-settled futures contracts of crypto-currencies. But that’ll become possible once the SBP recognises cryptocurrencies as assets, he said.

The country’s only commodity futures exchange lets roughly 25,000 investors buy and sell different sorts of contracts — ranging from gold, silver, oil and gas to copper, palladium and even the indexes of global stock exchanges — on its platform every day. Except a few contracts in gold that are deliverable, all of these futures contracts are cash-settled. In other words, their values are tied to international prices, but the actual payment is made in rupees.

“It’s my considered view that the PMEX should offer crypto futures contracts,” he said, noting that the cash-settled nature of such contracts means no outflow of foreign exchange.

“Crypto contracts are listed on the Chicago Mercantile Exchange (CME), which is the largest futures exchange in the world. The CME accepts crypto contracts, so should the PMEX,” said Mr Shah.

Published in Dawn, April 30th, 2023