Abdullah Kamran

This month, markets have witnessed significant milestones, with one of the most notable being Bitcoin surpassing the $100,000 mark. This surge in value can be attributed to the return of US President-elect Donald Trump, whose pro-cryptocurrency stance and nomination of a crypto-friendly head for the US securities regulator have played pivotal roles in sparking a bullish run in the digital currency market. Bitcoin’s price has surged by over 50% since Trump’s victory in the November presidential elections and has seen an impressive rise of 140% since the start of the year. While such rapid growth signals the allure of Bitcoin, it also raises concerns about the inherent volatility of cryptocurrencies, which could lead to swift declines just as quickly as the gains.

The volatility of Bitcoin and cryptocurrencies in general is one of the key factors that have caused regulators across the world to approach the digital currency market with caution. In Pakistan, the government’s response has been notably strict, having banned both the trading and mining of cryptocurrencies back in 2018. This restrictive stance has left local traders and investors largely on the sidelines, observing the global crypto phenomenon rather than actively participating in it. Yet, as the cryptocurrency market continues to grow, with Bitcoin breaking new barriers, questions about the wisdom of Pakistan’s approach to this rapidly evolving sector are becoming increasingly pertinent.

Pakistan’s regulatory attitude aligns closely with that of China, the largest economy in the Global South. In China, cryptocurrency transactions and mining have been outright banned. However, the country is also taking a more proactive approach by developing its own Central Bank Digital Currency (CBDC), which is intended to offer the benefits of digital finance while remaining under strict government control. India, in contrast, still permits cryptocurrencies, but the government has cracked down on large crypto exchanges. Most reports indicate that regulators in India are leaning toward stricter measures against the industry, potentially including an outright ban.

In the developed world, while there is still considerable skepticism toward cryptocurrencies, regulators have, so far, been more lenient. Some countries, like the United States, have been more open to the adoption of cryptocurrencies, given their potential for innovation and economic disruption. However, they too are becoming more vigilant about their regulation, balancing the benefits against the risks. The question that arises, then, is why are regulators so wary of cryptocurrencies, and what are the key concerns that have led to such widespread backlash across the world?

To answer this, it is essential to first understand what cryptocurrencies, such as Bitcoin, actually are. Unlike traditional fiat currencies, which are issued and regulated by central banks, cryptocurrencies are decentralized. This means that no central authority controls them, and they are immune to government interference or manipulation. Instead, cryptocurrencies operate through a decentralized network of computers and are secured by cryptography, which makes them almost impossible to counterfeit or double-spend. This system allows for peer-to-peer transactions without the need for third-party intermediaries like banks, potentially reducing transaction costs and speeding up payments. In theory, this could be particularly beneficial for countries like Pakistan, where cross-border remittances play a crucial role in the economy.

Additionally, the absence of a central governing body in cryptocurrency networks makes them appealing to those seeking to circumvent government regulation, including sanctions. This could be particularly attractive for countries in the Global South that are frequently subjected to international sanctions, as cryptocurrencies offer a way to bypass traditional financial systems controlled by Western powers. However, it is this very feature—lack of regulation—that has raised significant concerns among governments and financial authorities around the world.

One of the most alarming aspects of cryptocurrencies is their potential use in illicit activities. Cryptocurrencies have been linked to money laundering, tax evasion, and the financing of criminal and terrorist activities, as they can facilitate anonymous transactions that are difficult to trace. The anonymity that cryptocurrencies provide, while offering privacy to users, also makes it challenging for law enforcement agencies to track illicit transactions, raising the risk of misuse by bad actors. This is a significant concern for countries looking to curb money laundering and illegal financing, especially in a world where regulatory oversight is becoming increasingly stringent.

Furthermore, while cryptocurrencies can provide numerous benefits in terms of accessibility and efficiency, they also pose a serious threat to the traditional fiat-based financial system. As more people adopt digital currencies, questions arise about the impact on national economies, financial stability, and the billions of people who still depend on fiat currencies for their everyday needs. The increasing popularity of cryptocurrencies could potentially destabilize the traditional banking system, as consumers and businesses might prefer the speed, lower costs, and perceived security of cryptocurrencies over conventional banking services. This could have far-reaching consequences for the global economy, especially in countries with fragile financial systems.

Another major concern surrounding cryptocurrencies is their environmental impact. Crypto mining, the process through which new coins are created and transactions are verified, is an energy-intensive process that requires vast amounts of electricity. Bitcoin, for example, is known for its massive energy consumption, which has led to criticisms of its sustainability. Mining operations, often based in regions with cheap electricity, have been accused of contributing to environmental degradation and excessive carbon emissions. The growing popularity of cryptocurrencies only exacerbates these concerns, as more miners enter the market, further driving up energy consumption.

Given these concerns, many governments around the world have taken a cautious approach to cryptocurrencies. However, outright bans, like the one implemented in Pakistan, may not be the most effective solution. Simply excluding new technologies, particularly those with the potential to drive innovation, could leave countries at a disadvantage. Banning cryptocurrencies altogether risks cutting off access to important technological advancements and financial opportunities. As seen in China, a more balanced approach may be preferable—one that allows for the development of digital currencies under government oversight, mitigating the risks while still embracing the benefits of the technology. China’s focus on Central Bank Digital Currencies (CBDCs) is an example of how governments can harness the benefits of digital finance while maintaining control and regulatory oversight.

Pakistan’s blanket ban on cryptocurrencies risks leaving the country on the sidelines of a global technological revolution. As the world moves towards digital finance and decentralized currencies, Pakistan could miss out on the benefits of these innovations, particularly in sectors like microprocessor development, software engineering, and blockchain technology. Cryptocurrencies and blockchain have the potential to revolutionize various industries, from finance to supply chain management, and excluding Pakistan from this space could hinder the country’s progress in technology development.

Rather than resorting to outright bans, Pakistan should consider regulating cryptocurrencies in a way that addresses the concerns associated with their use while fostering innovation. The government could establish clear guidelines for cryptocurrency transactions, implement robust anti-money laundering measures, and promote the development of blockchain technology. Additionally, adopting a regulatory framework for cryptocurrency exchanges and trading could provide a safer environment for investors, while still protecting the broader financial system.

In conclusion, while cryptocurrencies like Bitcoin present significant risks—ranging from volatility to misuse in illicit activities—their potential for innovation and economic growth cannot be ignored. Pakistan’s current approach, which includes banning crypto mining and trading, may be counterproductive in the long run, preventing the country from participating in the evolving digital economy. A more balanced regulatory framework that addresses the risks while encouraging technological innovation would be a more constructive approach to navigating the complex world of cryptocurrencies.