Pakistan Publishes Position Paper on Regulation of Digital Asset Markets

Good news for crypto enthusiasts in Pakistan. The SECP, or the Securities and Exchange Commission of Pakistan published a position paper this week, on November 6, outlining some potential regulatory measures to be imposed upon the digital assets market in Pakistan at the initiation of a ‘new era of digital finance’. The paper states that crypto assets require ‘innovative regulatory measures and approaches by the regulators’, and aims to seek propositions to regulate this new market of virtual assets.

The position paper solely focuses on non-government or non central-bank-issued cryptocurrencies and not on CBDCs (central bank digital currencies). The development comes mere weeks after Pakistan’s High Court challenged the country’s ongoing crytpo ban.

Crypto Regulation Coming In Pakistan?

The paper recognizes how important it is to have regulatory measures in place for the virtual assets market, evaluates the frameworks applied by regulators towards digital assets in various countries across the globe – including the USA and Hong Kong, and discusses the adoption of digital assets in Pakistan and regimes for the operation and regulation of the new cryptocurrencies market. Finally, the paper invites inventive proposals defining the way forward with the design and development of a sturdy regulatory directive for virtual currencies at par with the rest of the world. 

SECP acknowledges how due to different regulators treating the digital assets markets in varied ways across the world – some of them more successful than the others – misuse of virtual currencies is rampant on a global scale. The paper states how important formulating a regulatory framework regarding cryptocurrencies is:

“With all the major regulators worldwide rapidly realizing the potential of digital assets as well as the uncertainty revolving around them, it has become incumbent upon them to start assessing the risk associated with digital assets as well as the innovation it can bring to financial sector and hence design regulatory frameworks to protect investors and make larger financial inclusion a possibility.”

The position paper lists some reasons as to why a set policy and regulatory response to cryptocurrencies is required within Pakistan; the reasons being: 

1. Digital assets hold the potential to greatly influence the entire financial sector of the country.
2. The current regulatory framework does not account for virtual currencies. 
3. Cryptocurrencies might create the conditions for regulatory arbitrage, while also posing sizable risks.
4. There will be an increased level of interest, investments and overall participation in digital assets within the country. 

Through the position paper, SECP expresses its intent to study and assess the effects of the various new technologies associated with cryptocurrencies- namely the distributed ledger system, and encourage market participants to get involved with the regulator. SECP also seeks to endorse advantageous and creative ways to raise capital while making sure to provide the investors and the market as a whole with the maximum possible security. 

Regulatory Approaches

The position paper notes two approaches that can be taken to regulate digital assets in the Pakistani market, the first being the enforcement of the preexisting regulations on the cryptocurrencies. However, the paper states, this might prove to be inconvenient since cryptocurrencies don’t conform to most of the rules of tangible asset trading; that’s why the position paper bases itself on the second approach SECP has come up with: the ‘let-things-happen’ approach or the ‘do-not-harm’ approach. This approach strongly backs the need for innovation and opposes overregulation.

With this ‘do-not-harm’ approach, SECP aims to do the following:

1. Support financial inclusion and the technological advances.
2. Achieve a balance between innovation, the risks related to cryptocurrencies, and the security of the financial system.
3. Provide maximum protection to the investors and the consumers.
4. Lessen regulatory arbitrage opportunities.
5. Put a stop to the circumvention of exchange control rules and regulations; illegal financial flows, money laundering, and the funding of any form of terrorism.

Before coming up with regulatory measures, SECP intends to consider factors such as the categorization of different assets (asset backed virtual currency or distributed ledger tech based digital assets). For the primary token offering, the position paper suggests  enlisting Initial Exchange Operators (IEOs), who would perform the due diligence to allow public offering through the capital market, by issuing security tokens. An issuer would first need to submit an application with a white paper to an IEO and seek approval. If the IEO and SECP approve, the offering of tokens to the general public can take place. The position paper points out that a new set of rules has to be designed for this whole procedure of registering IEOs, and an IEO would have to meet the eligibility criteria to be enlisted. 

As for secondary trading, the paper talks of three options they can consider: allowing IEOs to operate as DEX (decentralized exchange) platforms, separately registering DAT (digital assets trading) operators to provide trade settlement and custodian services, or facilitating secondary trading through the Pakistan Stock Exchange itself, with the traditional mechanism of settlement and custody.

However, as the position paper points out, these procedures give rise to several questions, like which of the methods for primary offerings and secondary trading would be the most efficient, what kind of risks would be involved, whether intermediaries are required or not, and how settlement and custody would differ from the traditional assets. The position paper welcomes any discussions/ suggestions/ inputs regarding these questions, or the way forward for cryptocurrency regulations in Pakistan in general. 

You can find the position paper here.