A dinosaur movement against crypto – Journal

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It’s been far too long since we’ve seen makers still stuck in the 1980s come up with something completely disconnected from the changing world. Two months had passed since the TikTok ban was lifted and baby boomers were likely on the hunt for new prey they found easy in cryptocurrencies as the High Court formed committee of Sindh and made up of members of the State Bank (SBP) and other regulators recommended a complete ban on cryptocurrencies.

While such a move by the regulators comes as no surprise to anyone, it is nonetheless a bit strange because earlier in 2020, the Securities and Exchange Commission of Pakistan was mulling over a framework for digital asset tokenization and regulation. What exactly triggered this 180 degree change in their position then?

Blockchain is too complex and rapidly developing an industry that needs a more nuanced understanding, instead of simplistic recommendations, to deal with what policymakers seem rather ill-equipped to do.

Let’s see. To begin with, the Supreme Regulator noted in the panel constituted by the High Court of Sindh that assets are a provincial subject and hence outside its scope. The committee noted that cryptocurrencies cannot be classified as legal tender or a financial asset under the current legal and regulatory regime.

Meanwhile, the SBP’s position was that the risks of cryptocurrencies far outweighed the benefits for Pakistan. He adds that the only use of cryptocurrency in Pakistan appears to be speculative in nature, where people are incentivized to invest in such coins for short-term capital gains. Fair enough, we can say that the idea here is to protect investors, which is appreciable.

But is speculation specific to cryptocurrencies alone? Are not stocks, bonds or the foreign exchange market also subject to this risk? In the case of stocks, the exchange has been very clear about its rules on risk disclosure, of which speculative trading is one. Almost all investment activities involve speculative risk to some degree because a client has no idea whether an investment will be a runaway success or an outright failure, says the model risk disclosure document on the company’s website. Pakistan Stock Exchange.

He continues: The day trading strategy is a common example of speculative trading in which clients buy and sell the same security/derivative in the same day so that all obligations are cleared and closed and no obligation to settle does not subsist. The client who engages in a day-trading strategy must be more vigilant and informed than clients who invest for a longer period, because the market may not move during the day as the day-trader had initially expected. , which would result in a loss for them. Regarding capital gains, perhaps local financial market professionals have become so accustomed to certificates of value that they fail to grasp the idea of ​​the underlying shift towards a preference for growth now. .

Of course, there’s no denying that crypto assets are particularly volatile, which the committee attributes to the fact that they’re not backed by any government or real asset. While this critique has some merit, the growing emergence of decentralized finance (DeFi) protocols and other blockchain use cases mitigate this issue. This can be seen from how DeFi startups with use cases ranging from lending to insurance raised over $2 billion during 9MCY21, compared to just $329 million in 2020, according to CBInsights.

But all this seems secondary. The main objection of the SBP seems to be that crypto assets can lead to the flight of valuable currencies as well as the transfer of illicit funds from the country. After reassuring us of the solid position of the external account for this short growth spurt seen in 2021, the central bank has recently activated its panic mode, imposing restrictions on imported cars, changing prudential regulations and other forms of control. capital. True, the committee discussed the possibility of allowing the exchange of a distributed national ledger, but then mentioned that there was no way to distinguish between coins minted locally or internationally.

None of this is to say that there aren’t inherent risks associated with cryptocurrencies, which the report also warns of, including that of fraud. But with advances in know-your-customer and compliance tools, the number of fraudulent transactions as a percentage of total value has steadily declined over the past two years, as data from Chainalysis supports. Even beyond that, blockchain is too complex and rapidly developing an industry that needs a more nuanced understanding, instead of simplistic recommendations, to deal with what policymakers seem rather ill-equipped to do. Hoping against all hope that regulators realize that technology will move faster than their minds can grasp and that the way to deal with it is not to try to stop technological progress, but perhaps to be open to new developments. And increase their consumption of almonds.

Posted in Dawn, The Business and Finance Weekly, January 17, 2022

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