In light of a ban on Pakistani-based financial services companies facilitating any transactions involving cryptocurrencies and digital tokens and a debate over their compatibility with Islamic finance, the question has to be asked if it’s the end of the road for the popular new market in the country. It is too soon to answer that question definitively. However, a closer look at developments around the financial services ban and heated discussion around the Islamic finance question might shed some light on the potential possible future, or lack thereof, cryptocurrencies have in Pakistan.
In early April Pakistan’s central bank, the State Bank of Pakistan (SBP), issued a circular forbidding regulated financial services companies operating within the country from transactions involving cryptocurrencies or digital tokens. Circular No.3 of 2018 was a strongly worded blanket ban on banks, microfinance companies, fintech operations and payment processors “processing, using, trading, holding, transferring value, promoting and investing in Virtual Currencies/Tokens”.
While the directive stopped short of an outright ban on cryptocurrencies in Pakistan, cutting of banking and payment processing services is a strong statement. It essentially cuts off the means for any Pakistani resident or cryptocurrency company to make transactions between fiat currency and cryptocurrency. No physical or corporate entity can buy cryptocurrencies or digital tokens online by making a payment directly from a Pakistani bank account or online wallet. This essentially limits Pakistani entities to cryptocurrency to cryptocurrency transactions or having to first transfer money out of the county and make any transaction from abroad.
The justification provided by the SBP for its decisive move to clip the wings of the cryptocurrency market in Pakistan is that digital currencies are not legal tender in the country and no entity has been authorised or licensed for the issuance, sale, purchase, exchange or investment in cryptocurrencies or tokens. Considerable risks to consumers were also cited and listed as:
- High volatility in price, primarily driven by speculation.
- The risk of loss posed by the failure or closure by regulators of cryptocurrency exchanges.
- The risk of loss posed by security breaches of cryptocurrency exchanges and wallets.
- High incidence of fraudulent and Ponzi schemes involving cryptocurrencies offered to Pakistani consumers.
Pakistani citizens who attempt to transfer funds outside of the country through the transfer of cryptocurrencies or digitals tokens were also warned they face prosecution.
The SBP ban does not definitively close the door on a future regulatory framework being put in place. South Korea made a similar move and banned ICOs before a March announcement by the government that it was preparing a policy plan that could reintroduce ICOs under a regulatory regime.
Are Cryptocurrencies Compatible with Islamic Finance?
There has been significant debate around the compatibility of cryptocurrencies with Islamic Finance. While there is unlikely to ever be complete agreement between Islamic Finance theoreticians on the subject, the consensus view may have a significant bearing on whether the SBP may be willing to offer the sector a future reprieve within a regulatory framework. Some of the core arguments for and against the compatibility of cryptocurrencies with Islamic Finance are:
Why Cryptocurrencies Are Compatible with Islamic Finance?
Mufti Muhammad Abu Bakar, Sharia adviser and compliance offices with Jakarta-based Blossom finance recently published a paper supporting the qualification of Bitcoin as Halal within the context of Islamic Finance. The paper argues that in the context Bitcoin is either recognised as a legal currency by government, or accepted as a means of payment by a variety of merchants, it qualifies as ‘Islamic customary money’.
The paper further argues that because the Blockchain technology cryptocurrencies are built on immutably proves ownership, Bitcoin is more in line with Islamic Finance than traditional banking, which involves fractional reserve banking and is, therefore, considered usury.
OneGram, a Dubai-based start-up, has also taken a novel approach to addressing the controversy by launching a gold-backed cryptocurrency. Commodities such as gold, are considered by Islamic Finance to have ‘inherent value’ and therefore actually sit easier within the rules of Sharia than Fiat currencies. Malaysian cryptocurrency company HelloGold have taken the same approach.
Why Cryptocurrencies Aren’t Compatible with Islamic Finance
At the April 2018 Sharia Council of India meeting, senior clerics also likened investing in Bitcoin, other cryptocurrencies and ICOs as ‘like gambling’. The output of the meeting was summed up by Salman Hasan Khan Qadri of organisers Jamat Raza-e-Mustafa, who commented:
“As the government is not supporting Bitcoins as a legal tender, uncertainty is involved for those who are dealing with it. There is high chance that people might suffer huge losses in it. Bitcoins is not even physical currency or coins. Purchasing them is risky and similar to indulging in gambling and hence, the clerics have termed it as un-Islamic. We will ask people to stay away from dealing in it.’’
The current conclusion has to be that as yet there is no obvious consensus between scholars of Islamic Finance if cryptocurrencies are Sharia. The fact that there are so many different cryptocurrencies and ICO tokens is a further complication. A regulatory environment leading to wide spread acceptance of cryptocurrencies and digital tokens as stores of value and mediums of value exchange, as well as reduced volatility in prices, would go a long way to answering the main concerns around Islamic compatibility.
For now, cryptocurrencies have hit a roadblock in Pakistan but advocates will retain hope that this may change in the future. Lower volatility is key as this will lead to more merchants being willing to accept payments in cryptocurrencies and lessen the concerns that holding digital tokens equates to gambling. It’s unlikely the recent SBP ruling means that the story of cryptocurrencies in Pakistan has reached its conclusion.
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