SHC also urged to impose penalties over "unauthorized operations"
The State Bank of Pakistan and the federal government have decided to ban the use of all cryptocurrencies, according to a report submitted to the Sindh High Court (SHC) on Wednesday.
The SHC has been hearing a case about digital currencies.
For the first time, the central bank has taken a clear position on the cryptocurrencies and urged the SHC to not only ban cryptocurrencies but also impose penalties against crypto exchanges.
The status of cryptocurrencies in Pakistan has been in limbo in the absence of laws and rules to regulate the use of these digital currencies for trade.
On October 20, the Sindh High Court told the federal government to regulate cryptocurrencies within three months. The court directed the government to form a committee headed by the federal secretary of finance to determine the legal status of cryptocurrencies.
The court had instructed the authorities to come up with a report on the use of cryptocurrencies. The report was submitted to the Sindh High Court on Wednesday.
The report said that cryptocurrency is illegal and could not be used for trade.
The report names at least eleven countries including China and Saudi Arabia that have banned cryptocurrencies.
The report also refers to the recent investigation by the FIA against crypto exchanges such as Binance and OctaFx and the risk these exchanges posed for the investors.
The Sindh High Court has ordered that the report be sent to the finance and law ministries for a final decision on the legal status of the cryptocurrencies.
The law and finance ministries will determine if a ban against cryptocurrencies would be within the ambit of the Constitution. The would also work out a legal framework.
A two-member bench headed by Justice Karim Khan Agha heard the case.
SBP Deputy Governor Seema Kamil submitted the 38-page report recommending that cryptocurrencies be declared illegal.
The report says that cryptocurrency is a virtual business that could be used to finance acts of terrorism and to launder money.
An important question was raised during the hearing: What would be the status of cryptocurrencies in the intervening months before a final decision is made.
The court said that the Federal Investigation Agency (FIA) and other agencies would continue to act according to their rules.
It urged the court to ban the “unauthorized operations” of cryptocurrency exchanges and impose penalties against them “as some other countries have done.”
Petitioner Waqar Zaka pleaded with the court that cryptocurrencies be declared legal as a large number of Pakistanis were interested in them.
The court will next hear the case on April 12.
The report submitted to the Sindh High Court indicates a clear position taken by the central bank for the first time.
In April 2021, SBP Governor Raza Baqir had said the central bank is studying cryptocurrencies and their potential for bringing transactions happening off the books into a regulatory framework.
In an interview with CNN’s Julia Chatterley, he said, “We are studying that [Central Bank Digital Currency] very carefully.”
He said that it will not only boost the central bank’s efforts for financial inclusion but also allow it to make progress in its fight towards anti-money laundering and countering terrorism financing.
However, before this key statement, the central bank had prohibited the transactions in digital currencies and declared them ‘illegal tender’.
In a circular issued to banks in 2018, SBP warned the banks that virtual currencies like Bitcoins, Lite Coin, Pakcoin, etc. are not legal tender issued or guaranteed by the Government of Pakistan.
The circular also said the SBP has not allowed any individual or entity to issue, sell, purchase and exchange virtual currencies.
The central bank directed the banks to refrain from trading, holding and investing in such currencies, and to report any such transactions to the Financial Monitoring Unit of the central bank.
Cryptocurrencies have attracted thousands of investors from Pakistan and they have reportedly invested $20 billion in digital currencies, according to Federation of Pakistan Chambers of Commerce and Industry President Nasir Hayat Magoon.
In December 2021, thousands of online investors in Pakistan lost Rs1 billion to a crypto scam in an attempt to make a quick buck.
The scam sparked an FIA investigation against Binance, whose wallet had been used to transfer funds to scammers.