Embracing Crypto: Pakistan’s Regulatory Struggles and the $3 Trillion Opportunity [Opinion]

Written by: Khalique Zaman, Mohtashim Ahmad Siddiqi and Humza Khan As cryptocurrency adoption surges in Pakistan, the government faces mounting pressure to establish a clear regulatory framework. Despite warnings from the State Bank of Pakistan (SBP) and recent crackdowns, digital currencies like Bitcoin continue to gain popularity among the populace, highlighting a complex relationship between innovation and regulation. Moreso, it highlights the importance of a regulatory framework to be formulated and implemented on an urgent basis. In 2018, the SBP issued a public notice cautioning citizens about the risks associated with virtual currencies, prohibiting financial institutions from facilitating cryptocurrency transactions. This stance reflected a limited understanding of cryptocurrencies and their underlying blockchain technology at the time. However, the crypto landscape in Pakistan has evolved significantly since then. Despite regulatory hurdles, Pakistan now ranks sixth in the global crypto adoption index, with an estimated market value between $18 billion and $25 billion. With annual inflation exceeding 25%, many Pakistanis view cryptocurrencies as a safeguard against currency devaluation amid political and economic instability. And for more seasoned investors, the option to trade with global liquidity and high returns continues to boost crypto’s popularity. Furthermore, online groups like “Bitcoin Pakistan” demonstrate a robust community of crypto enthusiasts advocating for mainstream acceptance. Blockchain technology, the backbone of cryptocurrencies like Bitcoin, is an encrypted, decentralized, and distributed digital ledger that records transactions across multiple nodes in real time. It offers immutable records, ensuring that once a transaction is recorded, it cannot be altered or removed, which enhances transparency and reduces fraud—aligning with regulatory goals of accountability and security. Its decentralization allows for efficient peer-to-peer transactions without intermediaries, potentially reducing costs and increasing accessibility. While users can operate pseudonymously, advancements in blockchain technology are facilitating better compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations, providing regulators with effective tools to monitor and ensure lawful activities. Beyond cryptocurrencies, blockchain technology holds significant promise across various industries, from intellectual property rights management to real estate transactions, offering opportunities for regulatory frameworks to support and foster innovation. While cryptocurrencies are not yet officially recognized as legal tender in Pakistan, the absence of explicit prohibition opens avenues for progressive regulatory development. Reflecting regional support for digital assets, the Khyber Pakhtunkhwa province took a pioneering step in December 2020 by passing a resolution to legalize cryptocurrency. This initiative signals a positive shift towards embracing digital innovation within the country. Additionally, the involvement of the Federal Investigation Agency (FIA) highlights the government’s proactive approach to addressing the need for a clear regulatory framework around crypto assets. These developments indicate a collaborative effort towards establishing regulations that ensure both the growth of the crypto industry and the protection of consumers. Despite the current restrictions, there are strong indications that Pakistan may move towards a more regulated approach to cryptocurrencies in the near future. The economic challenges faced by the country, including high levels of poverty and unemployment, are prompting policymakers to explore avenues that could potentially stimulate economic growth and job creation. The government’s interest in establishing cryptocurrency mining projects in Khyber Pakhtunkhwa (KPK) and the Sindh High Court’s directive for regulatory frameworks suggest a recognition of the potential benefits of digital assets. Moreover, India’s regulatory journey—from initial resistance to establishing a structured framework for licensing crypto exchanges, including taxation—offers a promising model for Pakistan. Despite early hurdles, India is progressively building towards a framework that accommodates digital currencies, highlighting the advantages of embracing regulation. It is plausible that Pakistan will adopt a similar approach, especially as the government has previously indicated intentions to formulate cryptocurrency regulations. By moving towards a regulated environment, Pakistan can fully realize the benefits and potential of cryptocurrencies, fostering innovation and contributing to economic growth. Despite the lack of formal taxation on crypto assets, proposals have been put forward to tap into this burgeoning market: One of the main considerations in advancing cryptocurrency regulation in Pakistan is aligning it with Islamic finance principles. While cryptocurrencies have been associated with “gharar” (uncertainty) due to their high volatility and speculative nature—which is traditionally discouraged in Islamic finance—this challenge presents an opportunity for regulators to develop frameworks that mitigate these concerns. By establishing clear guidelines and oversight, the elements of uncertainty and risk can be managed in a manner consistent with Sharia law. Additionally, although the decentralized nature of blockchain technology raises questions about accountability, proper regulation can introduce mechanisms to ensure transparency and prevent fraud, addressing concerns about the absence of a central authority. The ongoing scholarly debate among religious scholars and financial experts about the permissibility of cryptocurrencies under Sharia law further highlights the potential for consensus through thoughtful regulation. By engaging with Islamic finance principles, Pakistan has the opportunity to pioneer regulatory approaches that harmonize modern financial innovation with traditional values. Pakistan’s regulatory dilemma mirrors challenges faced globally, offering a valuable opportunity to learn from international experiences. In the United States, for instance, regulatory agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have navigated jurisdictional complexities in overseeing different aspects of the crypto market. The SEC considers many crypto assets as securities, requiring them to be registered and regulated to protect investors, while the CFTC views cryptocurrencies like Bitcoin as commodities, focusing on preventing fraud and manipulation in the derivatives market. Similarly, several Muslim-majority countries have begun embracing cryptocurrency regulation in ways that align with their legal and cultural frameworks. The United Arab Emirates (UAE), for example, has established comprehensive regulations to support blockchain and crypto assets, aiming to become a global hub for digital innovation. Bahrain has introduced regulatory frameworks to encourage fintech and cryptocurrency development, fostering a supportive environment for crypto businesses. Malaysia regulates cryptocurrencies under its securities laws, ensuring consumer protection while promoting technological advancement. By observing these developments, Pakistan has the opportunity to develop a cohesive and effective regulatory framework that addresses the unique characteristics of cryptocurrencies, ensures consumer protection, and aligns with both international best practices and Islamic finance principles. Embracing regulation can foster innovation, attract investment, and position Pakistan as a leader in the digital economy. Despite previous crackdowns, there is growing optimism that Pakistan may adopt a more favorable stance toward cryptocurrencies. Influential bloggers and social media figures are actively trading and promoting cryptocurrencies, calling for clear and supportive regulations. Recognizing the substantial market size and growth potential, regulators may consider the significant economic benefits of a regulated crypto industry, which could boost the economy and create new job opportunities. By embracing blockchain technology, Pakistan has the opportunity to position itself as a regional leader in innovation, fostering technological advancement and attracting global investment. This article is co-authored by Barrister Khalique Zaman, Mohtashim Ahmad Siddiqi, Solicitor of England & Wales, the founding partners of Barsols Legal Consultants and Humza Khan. Khalique Zaman specializes in corporate law, taxation law, and policy development, having worked with diverse stakeholders to craft innovative legal strategies for complex regulatory challenges. Mohtashim Ahmad Siddiqi is an expert in fintech regulation, blockchain technology, and compliance frameworks, with extensive experience advising on the legal intricacies of cryptocurrency and emerging financial technologies. Together, they lead Barsols Legal Consultants, a firm celebrated for its forward-thinking approach to emerging technologies and regulatory reform. Humza Khan is a Web3/Crypto professional specializing in building both decentralized and centralized exchanges, with a focus on growth marketing and product development for the MENA/South Asia regions. He has emerging experience in advising policymakers and crafting strategies for the evolving landscape of cryptocurrency regulations.