Do not ban crypto

Reports on January 12 indicated that the “State Bank of Pakistan and the federal government have decided to ban the use of all cryptocurrencies.” This decision seems to have been made in a report submitted to the Sindh High Court, which had a few months ago asked the federal government to regulate cryptocurrencies in the country. While it remains unclear as to what the regulatory framework will be, it is concerning to see that policymakers are once again reneging on their duty to pursue smart regulation that promote innovation and entrepreneurship. 

Pakistan has one of the highest rates of crypto adoption in the world, and while exact numbers of how many citizens have invested in crypto assets are not available, it is safe to argue that there are more individual crypto investors than stock market investors in the country. There are many reasons for this, key among them being the ease with which a citizen can open a crypto wallet, the allure of exponential returns, and the way in which the global crypto industry has leveraged democratized flows of information to generate a movement of believers. It is therefore no surprise that almost every conversation related to money around the world has some mention of crypto, blockchain, and Web 3 technologies.

 At their core, these technological changes are ushering in a new internet, one that promises to be more decentralized and democratic. This promise of breaking the control of monopolistic gatekeepers ought to be viewed with skepticism – after all, Facebook has renamed itself Meta and indicated a desire to invest billions of dollars in this new internet. However, the truth of the matter is that a new internet economy is emerging around the world and tech-savvy individuals are playing a fundamental role in building the technology, applications, and services catering to this new internet.

This is where public blockchains and crypto assets come in, as they are the foundational layer of the emerging Web 3 ecosystem. Blockchains remove the need for there to be a trusted third-party guaranteeing the sanctity of information – you do not need a central bank to issue reports on the validity of transactions on the Bitcoin or Ethereum blockchain. To make this possible, blockchains rely on modern cryptography, which is why tokens issued on public blockchains are often referred to as cryptocurrencies or cryptoassets. These tokens help secure, validate, and record transactions on public blockchains. How do they do that? By helping resolve the double-spending problem: given that data on blockchains is stored in a distributed manner, you need a source of truth to validate transactions. Without this single source of truth, it would be easy to falsify records, and if this were to happen, trust in the entire blockchain would collapse.

These crypto assets are also tradeable, much like shares in a public limited company are. The valuation of these assets acts as a signal to developers and market participants about the growth and viability of the blockchain project. Details about these projects are publicly available, including whitepapers articulating what the project is all about and its technological framework. These flows are also traceable: the FBI leveraged publicly available data to recover over $4 million in ransom paid by a U.S. pipeline operator.

 However, like public stock markets, crypto markets are prone to manipulation and scams. Pump-and-dump schemes and irrational exuberance is not unique to the crypto market: one of the earliest recorded instances of this is the Tulip bubble. This is the reason why countries around the world, ranging from India to Singapore and the United States, are pursuing regulations that balance between risk mitigation and innovation. To do so, countries have brought together academia, technologists, investors, and policymakers to have in-depth discussions about what the future of the internet is all about and how sovereign nation states should approach this topic from a public interest perspective. 

The Sindh High Court’s orders should have been preempted by policymakers in Pakistan. Because this was not done, an arbitrary deadline on regulations was set by the courts and in the absence of clear regulations, almost $100 million of hard-earned savings were stolen through scams, as reported in the media. But it is still not too late for the government to pursue an inclusive, collaborative policymaking approach that seeks to guard against downside risks, including those related to money-laundering and terrorism flows, while also promoting innovation and entrepreneurship in this space. The latter cannot happen if the state decides to ban crypto assets. In fact, doing so would be a crime against innovative citizens who have educated themselves about the future of the internet and made a bet on it to earn a living and generate wealth for themselves and their families. A ban would also undermine the central bank’s desire to develop a central bank digital currency: after all, you need the market to develop technical talent and knowhow about blockchain technology and crypto assets, and if there is a ban in place, the development of this talent base will be stunted.

 Detractors may argue that this is just gambling and speculation, but such points were made in the early era of the internet as well. After all, many of us remember people mocking youngsters spending time on IRC and MSN Messenger and asking the question: what is the need for all this? Those youngsters are today’s technology entrepreneurs, bringing in over $300 million in investment to the country, making it into one of the world’s largest freelancing markets, helping diversify exports by providing information technology services to the world, and generating thousands of new economy jobs. Web 3 innovation is the next phase of the internet revolution, and it is the state’s duty to create an enabling environment for this sector. Without this, the innovation potential of talent that can create new jobs, grow exports, and generate wealth for society will fall by the wayside.