Crypto Thrives Despite Legal Status: An In-Depth Look at the Growing Popularity of Cryptocurrencies in Pakistan

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Cryptocurrencies are gaining popularity in Pakistan despite the country's central bank not recognizing them as legitimate assets. According to Zeeshan Ahmed, the country general manager at Rain Financial, a Gulf-based trading platform for cryptocurrencies, the annual trading volume of cryptocurrencies for Pakistan-based wallets has increased to $25 billion, up from $18-20bn a year ago. Mr. Ahmed also believes that the number of crypto wallets has almost doubled from five to six million a year ago to 9-10m. These estimates indicate that despite the lack of official recognition, crypto trading is on the rise in Pakistan.

One of the most popular ways to invest in cryptocurrencies in Pakistan is to register a wallet on a trading platform like Coinbase and then ask 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 is through local crypto traders, who already own coins 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.

Despite the popularity of crypto trading, the State Bank of Pakistan (SBP) issued a formal notice last year advising the general public to be cautious of and refrain from trading cryptocurrencies. The SBP doesn't recognize crypto assets, which are digital currencies in which transactions are verified and recorded by a decentralized system. One of the major hurdles in legalizing crypto trading appears to be the expected outflow of dollars as a result of Pakistanis buying assets on foreign exchanges. Geo ring-fencing has been suggested as a solution to this problem.

Geo ring-fencing would ensure that any crypto assets held in Pakistan-based wallets would only be sold to Pakistan-based wallets. This solution would mean that $6bn-$10bn held by Pakistanis in crypto assets would stay with Pakistanis, and the government could also collect tax on those holdings. The two prominent crypto exchanges, Coinbase and Binance, have agreed to the use of geo ring-fencing, according to an anonymous technology entrepreneur who has been in close contact with them for their possible entry into the Pakistan market.

Pakistan Mercantile Exchange (PMEX) Managing Director Ejaz Ali Shah is eager to roll out cash-settled futures contracts of cryptocurrencies, but that'll become possible once the SBP recognizes cryptocurrencies as assets. The PMEX 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 for 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. Mr. Shah believes that the PMEX should offer crypto futures contracts, noting that the cash-settled nature of such contracts means no outflow of foreign exchange.

In conclusion, despite the lack of official recognition and warnings from banks, cryptocurrencies are gaining currency in Pakistan. The use of geo ring-fencing has been suggested as a solution to the problem of expected outflow of dollars as a result of Pakistanis buying assets on foreign exchanges. The PMEX is eager to roll out cash-settled futures contracts of cryptocurrencies once the SBP recognizes them as assets. It will be interesting to see how the situation evolves as crypto trading becomes more mainstream in Pakistan.

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