February 15, 2022 (MLN): In the case of Pakistan, the potential risks associated with cryptocurrency far outweigh the benefits when evaluated against the core objectives of a central bank and as a regulator of the payment and financial system, SBP’s governor Dr Reza Baqir said while addressing MASIC Annual Investment Forum 2022 in Riyadh.
The governor was of the view that virtual currencies posed a risk to financial and monetary stability due to acute price fluctuations and their distributed and decentralized nature.
“As many of you would be aware, we are not alone in reaching this conclusion. Many large emerging markets, including China, India, Russia, among others have reached similar conclusions,” he added.
He also indicated that virtual currencies were prone to be used for illegal economic activities and in the case of Pakistan, there is a risk of a widening grey economy, capital flight.
Speaking about the recent scam in Pakistan in the name of the cryptocurrency, he mentioned that there are some serious consumer protection issues arising from these private digital currencies which have resulted in people losing money due to an inadequate legal and regulatory framework and the inability of authorities to take actions in multiple jurisdictions in Pakistan.
“One reason may be that in many of the advanced economies there is little practical threat that their currency, in many cases one of the major currencies of the world in which trade and finance are denominated, would be replaced by a new virtual currency,” he said.
Since by definition such currencies cannot be monitored, regulators are at a loss to determine the impact on the balance of payments, representing another key risk.
Governor SBP also indicated how after the previous global financial crisis, a new technology called Distributed Ledger Technology (DLT) has come up which is disintermediating financial services and enabling people to make payments without the need of a central ledger or financial institution.
“We are seeing many variants of DLT; permission and permissionless ledgers which resulted in a notable increase in private digital coins and currencies.” According to estimates, 17,000 different cryptocurrencies in the world right now which have gained some influence.
Some of the innovations that have been brought by DLT such as peer-to-peer lending and crowdfunding have made transactions easy.
it is also expected that cross-border transfer of remittances will become easier and less costly with this technology and most alluringly these technologies have the potential to democratize finance and give more power and control to the people on their finances in general.
This goal of democratizing finance and putting the customer first is a good goal but we have not yet seen any robust use case and real economic benefit especially to underdeveloped countries like Pakistan, he added.
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