Pakistan’s latest crypto embrace has created ripples across the financial landscape. A US president-approved digital currency has become an unpredictable disruptor in Pakistan whose fragile economy struggles to absorb external shocks. The latest worry is over the possible dollar shortage from a new and troubling leak in an already fragile system. An estimated $600 million has slipped out of the country through illegal cryptocurrency transactions this year, according to the Exchange Companies Association of Pakistan (ECAP). If the trend continues, there is fear that it may destabilise an external position that policymakers have fought hard to steady. But capital flight itself shows the success of digital assets like cryptocurrencies that were created as a rebel against the status quo.
Digital assets are attractive among people due to their independence and flexibility. The exchange companies point to a sharp drop in dollar sales to banks, from $4 billion in the first ten months of last year to $3 billion this year, and argue that cryptocurrencies are draining precious reserves. But people abandoning the formal system do not have mal intent. They are doing so because the formal system has repeatedly failed them. The past couple of years have shown how domestic politics and external shocks battered the economy. Individuals now seek protection against volatility and are turning to digital assets that offer an escape from arbitrary controls and eroding purchasing power. Also, the superpower US also has a ‘crypto president’, which lends some credibility to these vastly ignored digital assets.
Where does Pakistan stand in all of this? So far, several experts have adopted an anti-crypto stance. This is in stark contrast to the official line where the government is pushing crypto adoption. That crypto will soar for at least the next couple of years is plausible. But for Pakistan, joining the race is not risk-free. It has to strike a balance and educate people about both crypto adoption and investment. Over the last few months, the government has moved quite fast when it came to crypto. New policies were passed and institutions launched to formalise digital assets. But when compared to the world, our pace has been slow with many naysayers risking the high-scale adoption of these assets. The negative aspect and the leniency it provides to bad actors to move funds cannot be ignored. But in all fairness, Pakistan also has to think about the lack of investment options that individuals have here. With the rupee battered, withdrawals restricted and rules tightened at every turn, people will definitely turn to options that not only keep their savings but also give them a hefty return. One good thing is that we have lessons to learn. Pakistan should realise that no country has succeeded in stopping digital capital flows through prohibition. Those that have made peace with the technology, by licensing exchanges, taxing gains and monitoring transactions, have brought activity into the open and enjoyed its gains. Those that have not have merely ensured that users bypass formal channels altogether.
