State Bank warns against trade in virtual currencies

KARACHI: The State Bank of Pakistan (SBP) on Friday warned the general public as well as banks against trade in virtual currencies, informing them that no legal protection was available against risks involved in the unlicensed business.

Virtual currencies, coins and tokens (such as Bitcoin, Litecoin, Pakcoin, OneCoin, DasCoin, Pay Diamond etc) are neither recognised as a legal tender nor the SBP has authorised or licensed any individual or entity for the issuance, sale, purchase, exchange or investment in any such virtual currencies, coins and tokens in Pakistan, according to the SBP.

While the SBP spokesperson said no data was available about prevalence of virtual currencies in Pakistan, President of the Forex Association of Pakistan Malik Bostan told Dawn that four websites operating from Pakistan were reportedly trading in virtual currencies. He said the exact volume of trade in virtual currency in the country was not known, but many people believed it could be around tens of billions of rupees.

Virtual currency, also known as virtual money, is a type of unregulated digital or electronic money, which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community.

The SBP said virtual currencies such as coins and tokens provided high degree of anonymity and could be potentially used for facilitating illegal activities. It advised banks, development finance institutions, microfinance banks and payment system operators and payment service providers not to facilitate transactions of their customers and account holders in virtual currencies or Initial Coin Offerings (ICOs) and tokens.

Due to the ambiguous nature of virtual currencies, no legal protection or recourse was available to anyone in the event of a loss incurred due to any or all of the risks like high price volatility as investments tied to virtual currencies are highly unstable and are primarily based on speculations, said the SBP.

No legal protection was available against the risk regarding failure or closure of virtual currency exchanges or businesses due to any reason, including action by law enforcement agencies, hacking or security compromises of crypto currency exchanges and wallet businesses, as a number of instances had been recorded across the world where a huge amount of money had been lost due to the exchange or wallet operations being hacked and compromised, the SBP explained.

In Pakistan, fraudsters are also offering pyramid-style investment schemes and coins and promising high returns (similar to Ponzi schemes) to the people, the SBP said, warning that this could cause a significant loss to the general public.

The State Bank advised people that domestic and international payment and money transfer services in Pakistan were regulated by the SBP under the applicable laws. In this regard, no entity was currently licensed or authorised by SBP to offer money remittance services and products in Pakistan using virtual currencies, coins, or tokens. Persons using virtual currencies, coins or tokens for the purpose of transferring value outside the country were subject to prosecution as per the applicable laws.

“The general public in their own interest is advised to be cautious of and refrain from indulging in activities relating to mining, trading, exchanging, transferring value, promoting and investing of virtual currencies to avoid any potential financial loss and legal implications,” said the SBP.

Action sought against illegal business
Finance experts welcomed the SBP move that they said would help in spreading awareness among the masses but they questioned the actions taken by the banking and money market regulator to practically stop this activity.

“It’s a good thing, I would say,” said a capital and money market expert Mohammed Sohail.

“If there is a statement or a warning for people then there must be some information about such activities [prevailing in the country]. But, you see, the State Bank needs to do more than warning the general public. Unfortunately, we have not seen any action on the part of the regulator when it comes to illegal forex or illegal brokerage houses. These illegal businesses actually facilitate and work as channel between the people and virtual currencies market.”

As the first step towards discouraging such activities, he said, the State Bank should move against the illegal businesses in capital and money market that could largely help discouraging people from looking towards virtual currencies as an open option for transaction or investment.