The Reserve Bank of India and the Central Bank of UAE have signed a memorandum of understanding (MOU) on collaboration and innovation in financial services, with a focus on central bank digital currency (CBDC) interoperability. The parties will develop a proof-of-concept and pilot program for a CBDC bridge to facilitate remittances and trade, which would reduce costs and increase efficiency of transactions, as well as strengthen economic ties between the two countries.
India and UAE banking officials had discussions in February regarding a rupee-dirham payment system using correspondent banks, which has been under development for a year. The countries currently use US dollars to settle payments. The UAE remains a major source of remittances to India, accounting for 17-18% of the total of around $87 billion, as of July 2022.
India has a domestic digital rupee pilot project with 50,000 users and 5,000 participating merchants, and has been testing its CBDC’s offline functionality. The RBI has also reported that it completed around 800,000 transactions worth $134 million with its wholesale CBDCs.
The UAE launched a nine-part financial transformation program and announced its intention to launch a CBDC for domestic and cross-border use in February. Emirati banks had already participated in the mBridge pilot project, along with banks in Hong Kong, China and Thailand, to use CBDC for cross-border transfers. Additionally, the UAE expects cryptocurrency to “play a major role for UAE trade going forward,” according to the UAE minister of state for foreign trade, Thani Al-Zeyoudi, who spoke at the World Economic Forum in January.
Overall, the MOU between the RBI and Central Bank of UAE will facilitate the development of a CBDC bridge that will enable easier and more cost-effective remittances and trade between India and the UAE. Both countries have been exploring the potential of CBDCs for some time, with India having already launched a domestic digital rupee pilot project and the UAE launching a financial transformation program and mBridge pilot project.
A surge in fund transfers is expected to expedite the global crypto ATM market to hit $1.185 billion by 2028, according to Vantage Market Research, a company providing B2B research services.
The study expects the crypto ATM market to record a compound annual growth rate (CAGR) of 58.7% during the forecast period. This market was worth $74.2 million in 2021.
Per the report:
“The increasing fund transfers specifically in emerging economies are expected to fuel the growth of the crypto ATM market during the forecast period.”
According to the World Bank, remittances to low-and middle-income nations were projected to surge by 7.3% in 2021.
Remittances offer a crucial lifeline when it comes to spending on vital items like education, health, and food, especially given that economic hardship has increased.
Therefore, escalating fund transfers, especially in emerging economies, are considered a stepping stone towards more growth in the crypto ATM market. Per the study:
“Crypto ATMs are now seen installed in most of the countries across the globe as businesses are putting a strong emphasis on meeting the changing needs of their customers.”
The dominance of North America in this sector is expected to continue soaring based on the presence of key market players like Coin Flip, Bitcoin Depot, and Coin Cloud and the rollout of crypto ATMs in public areas.
Other prominent players in this industry include Covault, Cryptomat, Coin ATM Radar, Coin source, Bitaccess Inc., Orderbob, and Coin me.
In August 2021, Atlanta-based leading enterprise technology provider NCR Corporation announced the acquisition of crypto ATM provider LibertyX.
The acquisition intended to integrate the LibertyX mobile application so that NCR Corporation customers such as banks, retailers, and restaurants would be able to pay, purchase or withdraw cryptocurrencies directly from its Bitcoin (BTC) ATM network.
A surge in fund transfers is expected to expedite the global crypto ATM market to hit $1.185 billion by 2028, according to Vantage Market Research, a company providing B2B research services.
The study expects the crypto ATM market to record a compound annual growth rate (CAGR) of 58.7% during the forecast period. This market was worth $74.2 million in 2021.
Per the report:
“The increasing fund transfers specifically in emerging economies are expected to fuel the growth of the crypto ATM market during the forecast period.”
According to the World Bank, remittances to low-and middle-income nations were projected to surge by 7.3% in 2021.
Remittances offer a crucial lifeline when it comes to spending on vital items like education, health, and food, especially given that economic hardship has increased.
Therefore, escalating fund transfers, especially in emerging economies, are considered a stepping stone towards more growth in the crypto ATM market. Per the study:
“Crypto ATMs are now seen installed in most of the countries across the globe as businesses are putting a strong emphasis on meeting the changing needs of their customers.”
The dominance of North America in this sector is expected to continue soaring based on the presence of key market players like Coin Flip, Bitcoin Depot, and Coin Cloud and the rollout of crypto ATMs in public areas.
Other prominent players in this industry include Covault, Cryptomat, Coin ATM Radar, Coin source, Bitaccess Inc., Orderbob, and Coin me.
In August 2021, Atlanta-based leading enterprise technology provider NCR Corporation announced the acquisition of crypto ATM provider LibertyX.
The acquisition intended to integrate the LibertyX mobile application so that NCR Corporation customers such as banks, retailers, and restaurants would be able to pay, purchase or withdraw cryptocurrencies directly from its Bitcoin (BTC) ATM network.
Another domino is lined up to fall down the route to Bitcoinization. Yesterday, the Pacific island nation of Tonga shared a play-by-play approach to adopting Bitcoin (BTC) as legal tender.
In a series of Tweets, Lord Fusitu’a, a former Member of Parliament for Tonga, released an ETA for Bitcoin becoming legal tender in Tonga. Copying the El Salvadorean playbook, the move could onboard more than 100,000 Tongans onto the Bitcoin network.
In his five-point plan, the Chairman of the Global Organization of Parliamentarians Against Corruption (GOPAC) describes the adoption path:
1. Sept/Oct Bill goes to Parliament. Passed.
2. Sent to Palace Office for submission to His Majesty for Royal Assent.
3.<A month – HM as advised by Privy Council assents to Bill.
4. 2-3 Weeks Gazetted by Govt activation date set.
4. On activation date #BTC becomes legal tender. https://t.co/TNjQjeEbjN
— Lord Fusitu’a (@LordFusitua) January 12, 2022
In a follow-up comment, Fusitu’a said the bill is “modeled on and is almost identical to the El Salvador Flag of El Salvador bill.”
The announcement sowed the seeds for questions, predictions and outright jubilation from Bitcoin Twitter before the Tongan set the record straight. He enthusiastically replied that the timeline for BTC becoming legal tender could happen as early as November or December this year, replying “Boom! That’s us, brother!” in a tweet.
In 2021, it was widely speculated that Tonga could become one of the next countries to adopt BTC as legal tender. Speculation reached a fever peak following a podcast Lord Fusitu’a undertook with Bedford-based Bitcoiner Peter McCormack.
During the conversation, the then Member of Parliament shared the remittance case for adopting BTC as legal tender. He said adoption would provoke:
“A disposable income increase by 30%. With that extra 30%, some (people) are going to be saving it rather than putting it into the economy and stacking sats.”
Tonga is a remote island nation that relies upon remittances from countries including Australia, New Zealand and the United States. The International Finance Corporation estimates that Tonga receives more income from remittances than any other country in the world, contributing up to 30% of household income.
Furthermore, while the Tongan population numbers just six figures, the Tongan diaspora is vast. The International Organization for Migration estimates the Tongan population living abroad at 126,000, with up to 18,000 Tongans in Australia.
The remittance use case was one of the primary drivers for El Salvador adopting BTC as legal tender. According to the World Bank, Tonga’s remittance as a percentage of GDP is substantially higher than El Salvador, at 39% vs. 24%, respectively.
Related:El Salvador: How it started vs. how it went with the Bitcoin Law in 2021
Remittance aside, the Lord brought up domestic advantages for adopting the open-source protocol. He agreed that Tonga could create a BTC circular economy and that it’s “one of the few instances in which being a sparsely populated small island kingdom archipelago is an advantage.”
When the islands’ internet infrastructure was brought into question, the Tongan claimed internet and smartphone penetration rates exceeded 90%. The World Bank’s most recent figures — albeit from five years ago in 2017 — show Tonga at 50% internet penetration.
Bringing the islands online may take some time, but Fusitu’a is adamant about his country’s BTC future:
An economy that uses bitcoin for payment at every stage of the supply chain. From the seed to the table. Pay for cassava roots and cattle in bitcoin from the farming supplier all the way to the waitress serving it to you at Kardo’s steak bar and every step in between in #BTC https://t.co/oR48NGzTGm
Another one bites the dust. David Marcus stepped down as the head of Novi, Meta/ Facebook’s fintech division. The company’s first order of business was to create a cryptocurrency, but regulators around the world were not keen on the idea. After a few missteps and name changes, they finally released a wallet called Novi to little fanfare. The coin, now named Diem, is still in development and unreleased.
Related Reading | What Zuckerberg’s Meta Means for the Metaverse
David Marcus Says Goodbye
This is not the first time this happens, other top executives have abandoned Meta’s ship over the years.CNBC recapitulates:
5 BTC + 300 Free Spins for new players & 15 BTC + 35.000 Free Spins every month, only at mBitcasino. Play Now!
“Marcus’s departure follows that of other key executives who led Facebook’s ill-fated efforts in blockchain. Fellow project founder Morgan Beller left the company in September 2020 to go into venture capital. Kevin Weil, another one of the project founders, left in March to join Planet, a San Francisco company.”
Ex-Upwork CEO Stephane Kasriel will replace David Marcus, who in aFacebook post announcinghis departure said:
“The one thing I’m the proudest of during my time here is the amazing kickass team we’ve assembled over the last three years. This is the most resilient, passionate, determined and talented group of humans I’ve ever worked with. I find comfort and confidence in knowing that they will continue to execute our important mission well under Stephane Kasriel’s leadership, and I can’t wait to witness this from the outside.”
Mark Zuckerberg responded to David Marcus:
“I’ve learned so much working with you and I’m so grateful for everything you’ve done for this place. We wouldn’t have taken such a big swing at Diem without your leadership and I’m grateful you’ve made Meta a place where we make those big bets. You’ve built a great team, and while I’ll miss working with you, I’m looking forward to working with Stephane to lead the team going forward.”
“I am so honored for the opportunity to lead the awesome Novi team, and look forward to continuing to build products and services that allow more access for people and businesses to the financial system and digital economy.”
FACEBOOK price chart on BMFBOVESPA | Source: TradingView.com
What’s The Deal With Libra/Calibra/Novi/Diem?
After many iterations, Diem is now a stablecoin prototype. For its part Novi, the wallet, is only available in the United States and Guatemala. Facebook/Meta is running a pilot program to test the technology and gather data. They’re trying to steal the remittances market in Guatemala, which constitutes 14% of the county’s GDP. Using the Novi wallet, it’s almost free.
Nowadays, Facebook/Meta is using the Paxos stablecoin USDP as their standard. About this, David Marcussaid via Twitter. “USDP is a well-designed stablecoin that’s been operating successfully for over three years and has important regulatory and consumer protection attributes. I do want to be clear that our support for Diem hasn’t changed and we intend to launch Novi with Diem once it receives regulatory approval and goes live. We care about interoperability and we want to do it right.”
Related Reading | Facebook Officials Claim Novi Received Approval From Major U.S. States
However, will Diem ever receive regulatory approval? For Facebook/Meta, that’s the Trillion-Dollar question. The company’s reputation regarding its handling of personal data is hampering the whole operation. And, well, governments around the world don’t seem to want a company like Facebook in charge of the money. And, well, the project’s been all over the place from the very beginning. No offense to David Marcus, who claims to be Diem’s “Co-creator & Board member.”
The project’s slogan is “To build a trusted and innovative financial network that empowers people and businesses around the world.” And, well, that’s Bitcoin. Why don’t they just plug in to the winning open network? Because Meta wants to be in control of the money supply. And that’s what government’s around the world are trying to prevent.
Featured Image: mohamed_hassan on Pixabay | Charts by TradingView
The Stellar Development Foundation (SDF) has announced that it will facilitate a new remittance channel between Europe and Africa using the USD Coin (USDC) stablecoin.
On Monday, the SDF announced that global payments technology company Flutterwave will use the USD Coin (USDC) stablecoin on the Stellar network to simplify remittances between Africa and Europe.
Flutterwave will work alongside Stellar’s principal European Union payments partner, Paris-based money transfer operator, Tempo Payments.
Olugbenga Agboola, CEO at Flutterwave, commented that it is more expensive to send money to sub-Saharan Africa than to any other region in the world. He added that the new partnership will help to expand the network and “bring all-important, cost-effective money transfer services to African business owners.”
Flutterwave claims to have processed more than 140 million transactions worth over $9 billion to date, serving over 290,000 businesses, including Uber, Booking.com and Facebook. The firm already has an infrastructure in more than 33 African countries, including Nigeria, Rwanda, Uganda, Kenya and South Africa.
The SDF has been targeting Africa for roughly one year, with the foundation teaming up with East African payments firm ClickPesa in November 2020. ClickPesa provides on- and off-ramps to the banking systems of Tanzania, Kenya and Rwanda.
Stellar and its partners face stiff competition as there are already several payments companies operating in Africa, including WorldRemit, Azimo, Transferwise, Payoneer and Xoom.
Africa has become a key market for payments companies because much of the population remains unbanked. However, remittances have fallen during pandemic-induced lockdowns, with Africa.com reporting a 28% drop in remittances to Nigeria last year.
The outlet also predicted that more transfers will be made in cryptocurrencies by 2025, adding that digital assets are likely to penetrate Africa’s remittance market despite the exclusionary policies of local governments.
Related:Crypto in Africa: Opportunities and challenges, explained
In February, Stellar announced that it had integrated Circle’s USDC stablecoin. USD Coin has seen monumental growth in 2021, with its market cap surging 733% since the beginning of the year to tag $32.5 billion.
Stellar’s native token, XLM, has gained 2.2% over the past 24 hours to trade at $0.386, according to CoinGecko. However, XLM is still down 56% from its January 2018 all-time high of $0.875.
Cryptocurrency adoption has been growing for a number of reasons. In emerging markets, research suggests crypto remittances are a factor, although some argue that the idea of using cryptocurrencies for these transactions is nothing more than a purist’s dream.
The CEO of cryptocurrency derivatives trading platform BitMEX, Alexander Höptner, predicted earlier this month that by the end of next year, at least five countries will have accepted Bitcoin (BTC) as a legal tender, as crypto assets can be faster and cheaper for remittances.
He believes that all five will be developing countries and that they would adopt cryptocurrencies because of the growing need for cheaper and faster cross-border transactions, increasing inflation and growing political issues.
Various other commentators have suggested that Bitcoin and other cryptocurrencies are a solution to the high costs associated with remittance payments, as a cryptocurrency transaction can be much cheaper than a remittance payment while settling in a shorter amount of time.
El Salvador was the first country in the world to adopt Bitcoin as legal tender with the country’s Bitcoin Law officially coming into effect on September 7. The government launched a cryptocurrency wallet called Chivo that uses the Lightning Network, a layer-two scaling solution, to transact. The country has also purchased 700 BTC over time.
Global remittances reached over $689 billion in 2018, and commissions were so high a $49 billion industry grew around them. To crypto proponents, El Salvador is a perfect example of how cryptocurrencies can positively change the world, but to others, volatility and a general lack of trust in the market make cryptocurrency adoption impractical and unadvisable.
Are cryptocurrencies banking the unbanked?
With the Chivo wallet, Bitcoin could effectively help offer financial services to El Salvador’s un- and underbanked population. The country’s president Nayib Bukele revealed in September 2021 that 2.1 million Salvadorans are actively using the wallet, despite the pushback against the new law that saw protests even burn a Bitcoin ATM machine.
2.1 million Salvadorans are ACTIVELY USING @chivowallet (not downloads).
Chivo is not a bank, but in less than 3 weeks, it now has more users than any bank in El Salvador and is moving fast to have more users that ALL BANKS IN EL SALVADOR combined.
This is wild!#Bitcoin
— Nayib Bukele (@nayibbukele) September 25, 2021
Per his words, Chivo isn’t a bank, but in three weeks gained more users than any bank in the country. That adoption may, however, be related to a $30 in BTC airdrop El Salvador sent to every adult citizen with the government’s wallet app.
Speaking to Cointelegraph, Eric Berman, senior legal editor of U.S. finance at Thomson Reuters Practical Law, said remittances using cryptocurrencies are a “purist’s pipe dream.” While Höptner pointed out that remittances made up 23% of El Salvador’s gross domestic product in 2020, Berman countered that only a fraction of the nation’s businesses has taken a Bitcoin payment and that the government’s cryptocurrency app has been plagued by technical issues.
Berman further added that “most of El Salvador’s $6 billion in annual remittances still comes via money transfers,” as many are wary of the cryptocurrency’s volatility. Because of the volatility’s impracticality, he said, Bitcoin hasn’t been widely adopted as a payment method among merchants, adding:
“This impracticability is magnified exponentially for the disenfranchised and unbanked. No one wants to send mom $100 only to have it be worth $80 by the time it gets to her.”
Berman added that “rather than the populist uprising that BTC purists have been touting for years,” Bitcoin’s adoption has instead been growing thanks to “some perhaps long overdue happy noises from U.S. and global regulators.”
Indeed, the United States Securities and Exchange Commission (SEC) head Gary Gensler has confirmed the regulator won’t ban crypto. In fact, the SEC approved the first Bitcoin futures-linked exchange-traded fund (ETF) in the United States, ProShares’ Bitcoin Strategy ETF, this week.
Bitcoin’s growing adoption and price, Berman suggested, are the result of “institutional enthusiasm that is quite the antithesis of the grassroots movement for the disenfranchised and unbanked that spawned BTC over a decade ago.”
Oleksandr Lutskevych, the founder and CEO of cryptocurrency exchange CEX.IO, seemingly disagrees with Berman’s assessment, saying El Salvador’s adoption highlights Bitcoin as “replacing the traditional, centralized rails used for remittances.”
To Lutskevych, Bitcoin’s infrastructure is being adopted to also promote the transfer of stablecoins on top of its network, ensuring the cryptocurrency’s volatility won’t affect remittances. El Salvador’s move, he said, promotes financial inclusion by helping cut down remittance costs.
Adoption out of “pure necessity”
In emerging markets, crypto proponents suggest adoption may be a result of “pure necessity,” as the transaction fees paid on most blockchain networks dwarf the fees paid to some remittance vendors.
According to Lutskevych, it’s “abundantly clear in the rationale behind Bukele’s campaign that made BTC legal tender” that the nature of the move was to drive BTC adoption forward through remittances. Lutskevych went on to add further:
“One of the primary reasons why the country passed such legislation was to lower remittance costs, promote financial inclusion and boost GDP by leveraging BTC and its transfer infrastructure to promote financial inclusion.”
Per his words, the adoption of new technology is often the result of “pure necessity,” and that may be the case with Bitcoin and cryptocurrencies in developing nations whose populations are heavily affected by remittance costs, which according to Markus Franke, a partner at cross-border crypto payments firm Celo Labs, averages 6.38% and can often go over 10% of the amount being sent.
Driving his point forward, Lutskevych added that the Chainalysis Global Crypto Adoption Index for 2021 shows that out of the top 20 countries by cryptocurrency adoption, two-thirds are “developing countries with a high percentage of GDP coming from remittances.”
He added that developing countries are now recognizing the value of “BTC’s scalable transfer infrastructure, combined with Bitcoin’s sound money properties and decentralization.”
Lutskevych also noted that Bitcoin’s Lightning Network capacity is up over 25% since El Salvador’s Bitcoin Law came into effect, while the number of payment channels routing payments on the network also moved up significantly and began a “parabolic trend right around the time of the law becoming effective.”
To him, growing peer-to-peer (P2P) trading volumes in countries like Nigeria suggest cryptocurrencies like BTC are playing a role in “getting foreign money into the country.”
Franke added to the line of thought, saying cryptocurrencies can be programmed, allowing for more complex financial operations without third parties. These features, Franke said, have seen remittance giants take an interest in cryptocurrencies.
As an example, he pointed to MoneyGram launching USDC settlement using the Stellar blockchain, and added that the Asian Development Bank has revealed services like Ripple, Mobile Money and bKash helped “deliver faster settlement, greater operational efficiencies and more competitive foreign exchange rates during the COVID-19 pandemic.”
Amr Shady, CEO of business-to-business payment and financing platform Tribal Credit, told Cointelegraph that Mexico could be another example of a country adopting cryptocurrencies for remittances, as estimates have shown they could reduce costs by 50% to 90%.
It all comes down to numbers
If, indeed, five countries do adopt Bitcoin or any other cryptocurrency as legal tender, adoption seems likely going to keep on growing. Emerging markets rely on remittances and the use of stablecoins appears to be a viable solution to the volatility of crypto assets like BTC.
Projects like Facebook’s Novi are already using stablecoins to facilitate cross-border transactions, with the project’s marketing efforts having a heavy focus on remittances. Central bank digital currencies (CBDCs) may offer similar cheap transactions that will help users move money across borders at a low cost.
This paper is an attempt to highlight Bitcoin’s ever-increasing importance to Pakistan’s socioeconomic future. For purposes of our discussion, Bitcoin refers to the decentralized digital asset with a market capitalization of approximately $900 billion and growing as well as its blockchain-powered monetary network that enables peer-to-peer transactions without relying on a trusted intermediary.
Before we proceed, let us be clear on what this paper will not set out to achieve. Although we are very bullish on bitcoin as an asset class over the long term, our commentary will not include any price forecasts. We will not be conducting a technical review of the blockchain technology in this study. Notwithstanding their importance, these topics have been studied in detail by experts more qualified than our team. Furthermore, a deep dive into a pricing and technical discussion will detract us from the main message: Why should Pakistan adopt bitcoin now?
Cryptocurrency adoption has started to gather momentum in the country. Chainalysis’ 2021 Global Crypto Adoption Index has Pakistan ranked in third place globally. Earlier this year, the province of Khyber Pakhtunkhwa announced plans to build pilot cryptocurrency mining farms. At the federal level, a committee has been formed to study cryptocurrency regulation. These are promising developments. However, there is so much more left to accomplish and a small window of opportunity presents itself to act.
Pakistan has several ways to benefit from the Bitcoin ecosystem. Our team believes bitcoin is primed to outperform traditional assets moving forward. Before the price of bitcoin goes beyond the country’s affordability threshold, we propose the State Bank of Pakistan start by converting up to 5% of their sovereign gold reserves (approximately $180 million) into this asset. The upside scenario can have a positive material impact on the state of the country’s asset reserve balance.
Using the internet and a smartphone, here lies an opportunity for the average Pakistani investor to plug into the world’s best performing asset over the past decade. These unmatched returns will provide prosperity across investing households, boost the local economy in the form of additional demand and generate tax on capital gains. We suggest the State Bank of Pakistan and securities regulator open up access to this asset class for all Pakistani investors. Movement between the Bitcoin ecosystem and traditional financial institutions needs to be a low-cost and frictionless endeavor. A fully regulated national cryptocurrency exchange should be introduced with incentives to entice domestic participation. A bitcoin ETF trading on the Pakistan Stock Exchange will offer an attractive investment for local stock market investors desperate for diversified exposure.
Blockchain and smart contract software developers are on their way to becoming prized assets in this new decade of cryptocurrency. In a post–COVID-19 world, remote work is quickly becoming the new normal. We may not be too far from a future state where the best candidates for the role are recruited, regardless of their physical location. Government investment toward skills upgrade and setting up basic cryptocurrency infrastructure will be returned to the economy in the form of budding entrepreneurs, developers and product managers. All productive citizens would boost the local economy from their earnings and contribute to the tax base. In summary, the cryptocurrency economy has the potential to raise masses out of poverty by providing employment.
The “great mining migration” has presented Pakistan with a time-sensitive investment opportunity. Firstly, the recent reduction in the network’s hash rate makes it economically attractive to begin mining operations immediately. Next, the shutdown of Chinese miners has resulted in secondhand mining equipment flooding the market at considerably reduced prices. Finally, Pakistan now possesses surplus electric generation capacity relative to demand. It is our suggestion that the federal government take advantage of this superb timing. Bitcoin mining farms should be set up near power plants to minimize any transmission losses. If bitcoin prices continue to rise as per our expectations, this is another avenue for the federal government to generate massive revenues.
The State Bank of Pakistan has prioritized the rollout of Raast, a new instant payment system. All evidence points to a flourishing local remittance ecosystem. However, international payment remittance remains a clunky process with high fees and lengthy settlement periods. Bitcoin’s monetary network provides a comprehensive solution to this problem. Specifically, Bitcoin’s Layer 2 protocol (Lighting Network) enables transfer of micropayments on a real-time basis with minimal fees. We suggest the federal committee overseeing cryptocurrency to invite fintech players such as Strike to understand the benefits of this solution. Pakistan should begin work on seamlessly connecting Raast to the Bitcoin ecosystem.
The Bitcoin ecosystem is not without risks. China and the International Monetary Fund (IMF) have both leveled criticism against the technology. Furthermore, the Financial Action Task Force has called on the government to better regulate the cryptocurrency industry. It is imperative to involve these important stakeholders in all top-level cryptocurrency discussions.
Pakistan has multiple avenues available to participate in the Bitcoin revolution. The benefits are far reaching and greatly outweigh the costs. There is an urgency to formulate a national cryptocurrency strategy and become an early adopter of this ecosystem. The time to act is now.
— — — — — — — — — —
I. What Is Bitcoin?
The advent of the internet-enabled society to digitize information. In the same vein, bitcoin’s revolutionary technology (the blockchain) enables society to digitize value.
Prior to bitcoin, most cryptocurrencies were exposed to a risk known as double spending. This is the risk that a cryptocurrency can be spent twice. It is a potential problem unique to “digital currencies” because digital information can be reproduced relatively easily by savvy individuals who understand the blockchain network and the computing power necessary to manipulate it (Frankfield, 2020).
Bitcoin was the first cryptocurrency to solve the double spending problem without relying on a central authority to oversee transactions.
Here is an investment letter from Miller Value Income Strategy that provides as simple an explanation of the technology (Bill Miller IV, 2021):
“Bitcoin is a decentralized network of value storage. Its core technological breakthrough lies in users’ ability to transfer value to other network participants without any central administrator or authority. This means that users can shift large quantities of value to each other around the globe almost instantly, 24 hours/day, 365 days/year, using only another participant’s ‘public key’ and little administrative hassle. ‘Miners’ verify transactions in exchange for new coins, though the reward for each mined ‘block’ decreases every 210,000 blocks, or approximately every four years. Unlike the dominant systems of account now in use (currencies), the supply of measuring units is predetermined and will never exceed 21,000,000. While aggregate participation in the network is effectively unlimited, there will never be more than 21 million spots (‘bitcoins’) on the ledger, which means that more network participation makes each spot on the ledger more valuable. Each bitcoin is divisible into 100 million units, or Satoshis.”
The decentralized nature of this technology allows users to conduct peer-to-peer monetary transactions without the need to involve a central authority (i.e., banks, currency exchanges, trust companies, etc.). Bitcoin has rules and incentives built into the protocol that are agreed to and enforced by the miners using a consensus mechanism process. Improvements to the technology can be proposed but can only be adopted if 95% consensus is reached among miners (Alex Galea, 2018). As an example, Taproot, the first Bitcoin upgrade in almost four years, has recently been approved by miners and will take effect in November 2021. However, this ecosystem does not have any rulers. There exists no one person or group that controls Bitcoin. This form of organization where there is no controlling centralized actor is known as distributed governance.
Furthermore, Bitcoin is a permissionless system. As there exists no central authority with ultimate control of the network, any individual or group has the right to transact in this ecosystem using a simple internet connection. A user can neither be banned nor suspended from using the network. No central authority has the right to determine whether a transaction can be conducted on the blockchain.
Another important feature of Bitcoin technology is its immutability. Once a transaction settles on the blockchain, it cannot be edited, reversed or replaced. This ledger of all transactions going back to the very first one from January 2009 can be viewed by anyone on the blockchain. The value of transferred bitcoin, public key addresses of both sender and receiver, along with the date and time of the transaction are all recorded on the blockchain. The high level of confidence in the truth of each transaction brings about a standard of data integrity and transparency that has not been available in the past.
Although bitcoin transaction data is transparent on the blockchain, the parties (i.e., buyer and seller) in each transaction remain anonymous. These buyers and sellers are identified on the blockchain through their unique public keys (a long string of alphanumeric characters). However, all other user-identifying information is not required to transact in this ecosystem. As a result, Bitcoin extends a level of privacy to its users that is not common in the centralized finance world.
Last but not least, bitcoin is referred to as hard currency, in large part, due to its scarcity. The protocol is preprogrammed such that there will exist a total of 21 million bitcoin. So far, roughly 18.8 million bitcoin have been mined and make up the current monetary supply. Furthermore, every four years or so, a halving event takes place. This creates a situation where the number of bitcoin entering the ecosystem reduces by 50% thereby accelerating scarcity. Unlike fiat currency value that is directly tied to the actions of its central bank, bitcoin follows through on its protocol independent of the economic situation around it. This predictability of the protocol is a strength as it ensures the current supply will not be debased due to central bank actions such as excessive money printing.
II. Current State: Cryptocurrency Ecosystem In Pakistan
The cryptocurrency boom is upon us. The unprecedented price volatility in this asset class coupled with a relatively low barrier to entry has resulted in a breeding ground for scores of risk takers willing to try their hand at short-term trading. Chainalysis’ 2021 Global Crypto Adoption Index has Pakistan ranked in third place globally, up from 15th place a year before. Specifically, the on-chain retail value transferred metric used to measure the activity of nonprofessional, individual cryptocurrency users ranks Pakistan in the top-10 globally. This ranking underscores the grassroots revolution taking place in the country as more and more Pakistanis enter the cryptocurrency ecosystem.
A. Khyber Pakhtunkhwa
In December 2020, Khyber Pakhtunkhwa provincial assembly unanimously passed the resolution to legalize cryptocurrency and cryptomining (The Express Tribune, 2020).
Soon after, in March 2021, the province of Khyber Pakhtunkhwa announced plans to build pilot cryptocurrency mining farms using hydroelectric power. The provincial government also set up an Advisory Committee on Digital Assets composed of stakeholders and experts with a goal to review various technical matters and associated revenue potential by attracting cryptocurrency-related investments. Zia Ullah Khan Bangash, then advisor to the provincial government on science and technology, sounded upbeat on the future of crypto in the province.
“People have already been approaching us for investment, and we want them to come to Khyber Pakhtunkhwa, earn some money and have the province earn from that as well.
“It’s really just our government that is not participating right now, people all over Pakistan are already working on this, either mining or trading in cryptocurrencies and they are earning an income from it,” Bangash said. “We are hoping to bring this to a government level so things can be controlled and online fraud or other scams can be prevented” (Farooq, March 2021).
However, in a sudden reversal of events, it was announced on May 28, 2021, that the Khyber Pakhtunkhwa government has dissolved the Advisory Committee on Digital Assets citing that decisions on digital currency can only be taken by the federal government. No news has been announced on the cryptocurrency mining farms and associated investments in the province (Ahmed, 2021).
B. Federal
We are of the opinion that the position of the federal authorities, including the State Bank of Pakistan (SBP) on cryptocurrency is not explicit.
Although cryptocurrency itself is not illegal in Pakistan, the on-and-off ramp connecting the ecosystem to traditional financial institutions does not come without headaches. A SBP circular, issued in April 2018, advised “all banks and payment system operators to refrain from processing, trading and promoting in virtual currencies token and not facilitate their account holders to transact in VC and tokens” (Khurshid, 2020). As a result, Pakistani residents are not able to use their bank accounts or online wallets to directly transfer funds to their cryptocurrency exchange accounts.
In order to get around this restriction, most Pakistani cryptocurrency traders and investors use peer-to-peer (P2P) transactions as a method to fund and withdraw from their exchange account. Popular cryptocurrency trading apps provide a listing of verified, country-specific brokers on their platforms. A user looking to fund their cryptocurrency account would send a standard bank transfer to a verified broker’s bank account. The broker would then deposit the agreed-upon cryptocurrency to the user’s exchange account using their public keys address. A withdrawal of funds from the trading app requires a transfer of cryptocurrency from the user to the broker’s exchange account. The broker would then deposit the fiat currency to the user’s bank account using a standard bank transfer. The brokers charge a premium to the market exchange rate for the services provided. The popularity of this P2P process in Pakistan is reflected in the country’s top-10 rank in Chainalysis’ latest P2P Exchange Trade Volume survey. In essence, the P2P process levies an additional cost on Pakistanis transacting in the cryptocurrency ecosystem.
According to recent news reports, a federal committee has been formed to study cryptocurrency regulation. The members are observers from the Financial Action Task Force (FATF), federal ministers, and heads of the country’s intelligence agencies (Farooq, July 2021). This is welcome news and a necessary ingredient in bringing the cryptocurrency revolution to the mainstream economy.
State Bank of Pakistan has also expressed an interest in studying central bank digital currencies (CBDC). In a recent interview with CNN, Governor Reza Baqir cited “financial inclusion, tracking money laundering and counterterrorism measures as possible benefits of digital currencies.” To be clear, CBDC is a digital currency, however, it is under the control of the central bank. This centralized nature makes it distinct from a cryptocurrency such as bitcoin.
The SBP has already started work on Raast, a nationwide instant payment system that will enable end-to-end digital payments among individuals, businesses and government entities within seconds (Ikram, 2021).
This first step in laying down a comprehensive financial rails network is an impressive feat. Our team believes the success of this initiative can lead to on-and-off ramp connections from traditional finance to the cryptocurrency ecosystem.
C. Stacks Education Grant
Earlier in 2021, LUMS, one of Pakistan’s leading universities, was the beneficiary of a research grant earmarked to design Pakistan’s first-ever academic program for blockchain, distributed ledger technology (DLT) and associated platforms.
The grant was in the amount of 5 million STX tokens (a digital currency with an equivalent value of $2.5 million at the time of the announcement). Hiro, the organization behind the grant, builds developer tools for Stacks, the network that enables apps and smart contracts for Bitcoin.
Stacks Pakistan, the local Stacks chapter launched in late 2020, is focusing on awareness, community building and advocacy. The chapter has launched the “Stacks Developers Guild Programme,” or SDG, in seven cities across Pakistan. Through a network of ambassadors, SDG leaders are playing a pivotal role in spreading awareness across universities in Lahore, Karachi, Islamabad, Quetta, Peshawar, Faisalabad and Abbottabad (LUMS, 2021).
III. Bitcoin As A Sovereign Reserve
Economists watched with fascination as the country of El Salvador readied itself to become the global pioneer in accepting bitcoin as legal tender. The Legislative Assembly voted to accept bitcoin as one of two official currencies in the country.
The adoption of bitcoin in the mainstream economy is an interesting case study and not without risks. We feel it is still too early for Pakistan to go the route of accepting bitcoin as an official currency. However, the SBP and Ministry of Finance should pay attention to El Salvador’s rollout. The recently created federal committee should capture the learnings from this public policy experiment, understand the risks and, perhaps, initiate contact with relevant El Salvadoran government officials to remain close to this situation.
An easier way to dip their toes in the cryptocurrency ecosystem would be to consider adding bitcoin to the country’s sovereign reserves. As of July 2021, Pakistan holds $3.795 billion worth of gold reserves (CEIC, 2021).
Gold has been a preferred sovereign reserve asset for most countries going back centuries. There exist two major reasons for this favoritism. First is gold’s globally perceived strength as a store of value. In the event of a fiat currency devaluation or an outright collapse of the local economy, central banks can take refuge in the uncorrelated value of their gold reserves. Finally, gold has a long track record as a valuable global commodity. There are ready buyers available at market prices in the event immediate liquidation is required. For this reason, gold is considered a means of exchange.
Chart 1.1. Gold Price Performance, 10-year time frame.
In order to be classified as a store of value, the asset (or currency) should be worth the same or more in the future. At first glance, the price of gold denominated in USD over a 10-year period seems to have held its value. However, if you account for the 21% cumulative U.S. inflation rate over this time period, the price performance of gold has been abysmal. This data points to gold’s failure as a store of value as it has generated negative real returns (US Inflation Calculator, 2021).
Chart 1.2. Bitcoin Price Performance, 10-year time frame.
Conversely, bitcoin has been the best performing asset class over the past decade. Bitcoin generated a compounded annual growth rate of 230% over this time period. As far as store of value goes, you will be hard-pressed to find an asset class better suited than bitcoin.
It is a mathematical impossibility for bitcoin to replicate these returns over the next 10 years. However, our team believes it is primed to outperform traditional asset classes moving forward. The fixed supply of 21 million coins coupled with accelerating scarcity sit at the core of this investment thesis. Moreover, the institutional demand of bitcoin bodes well for future price appreciation and helps to create a price floor. Publicly traded companies in the United States such as Tesla, Square and MicroStrategy have purchased bitcoin as a corporate treasury reserve asset favoring it over the U.S. dollar. Bitcoin exchange traded funds have been approved in Canada and trade on the Toronto Stock Exchange (TSX), thereby creating further retail demand. Even MassMutual has purchased $100 million in bitcoin for its general investment fund.
Chart 1.3. Pakistan’s Gold Reserves, 10-year time frame
Pakistan’s gold reserves weigh roughly 64 tons. The storage and transfer costs for this quantity come with costs. Fortified locations with armed security personnel would not be uncommon. If the gold is stored in bank vaults outside the borders of the country, a management fee is likely paid for this service. In this second scenario, the country’s gold would be in the control of foreign actors. This is not without risks as these foreign powers hold influence on the sale and transfer of these sovereign reserves (World Gold Council, 2021).
Bitcoin has significant advantages over gold when it comes to storage. As bitcoin is a digital asset, it does not require the same level of physical security needed to protect gold reserves. Cold storage and multisignature wallets are examples of bitcoin storage options. In both cases, the costs associated with storage are immaterial. Additionally, the control over the bitcoin rests entirely with the owner of the coins. No central authority can influence the purchase, sale or transfer of these assets. MicroStrategy has created the Bitcoin Corporate Playbook that not only provides guidance on safely storing bitcoin but also how to purchase significant amounts without materially impacting market price (MicroStrategy, n.d.).
Finally, bitcoin is a relatively new asset class with a growing spot and futures market. The bitcoin market has a market capitalization of approximately $950 billion with a three-month average daily traded volume of $32.98 billion (Yahoo Finance, 2021). The market trades round the clock with no days off on weekends or statutory holidays. There exists ample liquidity in the market for Pakistan to consider initiating a small yet calculated position. Furthermore, the daily traded volume points to a ready market of buyers in the event liquidation of position is required. The purchase and sale of this asset is seamless through the use of established global market exchanges. For the amounts in question, bitcoin provides a means of exchange no different than gold.
El Salvador is the first country to make public its adoption of bitcoin as a sovereign asset. We believe more countries will follow suit as they begin to understand the benefits of this digital asset. The current price of bitcoin still falls within Pakistan’s affordability threshold. This may not be the case for too long as adoption increases over time. Therefore, it is vital Pakistan be a first mover among nation states. We propose the State Bank of Pakistan start by converting up to 5% of their gold reserves (i.e., approximately $180 million) to finance their first bitcoin purchase. As it is, these growing gold reserves sit idle and unproductive. Bitcoin satisfies the store of value and means of exchange requirement and offers diversification to the sovereign reserve asset portfolio. We feel this allocation is low enough to not cause panic during price volatility. However, the upside scenario can have a positive material impact on the state of the country’s asset reserve balance.
IV. Poverty Alleviation
The prime minister of Pakistan has highlighted reduction of poverty and the uplift of poor people’s living standards as a major goal of his administration. Launched in 2019, the federally sponsored Ehsaas initiative is the country’s flagship social protection program. Financial inclusion, access to digital services and economic empowerment are key areas of focus within this program.
These are noble goals, but they do cost money. The budget for the Ehsaas Emergency Cash Program was approximately $1.2 billion (PKR 203 billion) (Dawn, 2020). This one social program represents approximately 3% of the $36 billion (PKR 6.2 trillion) total revenues collected by the country in 2020 (Trading Economics, n.d.). Total government spending is significantly higher than revenues collected resulting in a growing yet necessary government debt to make up the difference. Over time, a developing nation like Pakistan will find it difficult to fund large social programs without continual assistance from the IMF and other foreign lenders.
A small investment in the Bitcoin ecosystem can yield far-reaching benefits. As we previously pointed out, appreciating bitcoin sovereign reserves can help finance some of these programs. Bitcoin may soon reach global acceptance as a pristine store of value. In this case, any nation holding a material value of this asset would be looked upon as an attractive borrower in the eyes of international lending institutions.
Perhaps the bigger play for the country lies in building out the cryptocurrency economy at the grassroots level. This initiative requires time and effort but will lead to sustainable benefits in the long run. Blockchain and smart contract software developers are on their way to becoming prized assets in this new decade of cryptocurrency. Pakistani youth need to be in a position to seize these employment opportunities. Stacks’ launch in Pakistan could not have been timed better. An excellent platform to onboard the next generation of Clarity coders from all strata of society (Clarity is the programming language used to write smart contracts for the Stacks 2.0 blockchain). This momentum should be carried forward to Solidity programming as well that is used on the Ethereum blockchain.
In a post–COVID-19 world, remote work is the new normal. Corporate America is fast becoming comfortable with employees operating from their homes located across state boundaries. The winds of change could likely push these boundaries across international borders and major oceans. The success of Remotebase, a Pakistani startup connecting Pakistani engineering teams with global companies, is proof of this concept. We may not be too far from a future state where the best candidates for the role are recruited, regardless of their physical location. Pakistan needs to identify and train its talent to be ready for these future employment opportunities.
In summary, the cryptocurrency economy has the ability to raise masses out of poverty. Government investment toward this skills upgrade and setting up basic infrastructure will be returned to the economy in the form of budding entrepreneurs, developers and product managers. All productive citizens will boost the local economy from their earnings and contribute to the tax base. In absence of this ecosystem, how else can Pakistan provide mass employment opportunities for its citizens? The time to act is now.
V. Wealth Generation
Retail Pakistani investors have a myriad of investment options available. Real estate is clearly the favored asset of choice. Within real estate, there exist residential, commercial and agricultural categories. Many investors also take advantage of high-yielding, fixed deposits and government bonds on offer in the country. Further down the list is the Pakistan Stock Exchange where less than 0.02% of the country’s population are considered active investors.
Although investment options are plentiful, the challenge is that they are all domestic in nature. As a result, investors’ overall return expectations are largely linked to the local economy’s future performance. Few investors possess the capital required to invest in real estate outside the country. An even smaller number have access to U.S. and global equities due to local capital controls along with strict KYC/AML/ATF compliance procedures of foreign financial institutions. As a result, most Pakistanis miss out on standout investment returns that are uncorrelated to the local economy.
Bitcoin fixes this unfair treatment. Using the internet and a smartphone, here lies an opportunity for the average Pakistani investor to plug into the world’s best performing asset over the past decade. The ability to participate in the returns generated from this global asset of choice will be a huge win for the country. First off, these unmatched returns will be able to provide prosperity across a large segment of the population. Secondly, this influx of cash will provide a boost to the local economy in the form of additional demand from these newly prosperous households. Finally, the capital gains earned by investors will generate additional tax revenue for the government that can be used for expanded social programs.
Detractors of bitcoin point to its volatile price performance since inception. There is no doubt that bitcoin is a volatile asset class with regular price fluctuations. However, looking at volatility alone gives you half the picture. A better way to account for these price swings would be to look at bitcoin’s Sharpe Ratio relative to other asset classes. The Sharpe Ratio measures the average return earned in excess of the risk-free rate per unit of volatility. As Chart 2 indicates, bitcoin’s Sharpe Ratio is consistently higher relative to other asset classes.
Chart 2. Bitcoin Risk Adjusted Returns versus Other Assets.
We suggest the State Bank of Pakistan and securities regulators open up access to this asset class for all Pakistani investors. The ramps connecting the Bitcoin ecosystem and traditional financial institutions should be low cost and frictionless. A fully regulated national cryptocurrency exchange should be introduced with incentives to entice domestic participation. For investors not keen on purchasing bitcoin directly through an exchange, other options should be made available. For example, the introduction of a bitcoin ETF trading on the Pakistan Stock Exchange would be an attractive investment for local stock market investors desperate for diversified exposure. Finally, existing mutual funds, pension plans and insurance companies should be provided the freedom to convert a small portion of their treasuries to bitcoin. A significant percentage of the country’s population has investment exposure to these large institutions. These citizens indirectly stand to benefit from the eventual appreciation of this asset.
VI. Bitcoin Mining
China’s recent cryptocurrency crackdown has been front and center in the news. A recent statement from the People’s Bank of China, the country’s central bank, warned institutions not to provide other services related to virtual currency (Sigalos, July 2021). State-backed financial associations have warned their members to stay clear of any financing activities related to popular cryptocurrencies. They stated that any activity related to the exchange of fiat money for cryptocurrencies, providing intermediary services to facilitate trading, or conducting token-based derivatives trading, could be charged as a criminal offense in China (Feng, 2021). Furthermore, news reports from July 2021 confirmed China has shut down bitcoin miners operating in the country. This is a significant event in the Bitcoin ecosystem. Past estimates have shown as high as 65% of global bitcoin mining happened in China (Sigalos, June 2021).
Chart 3. Bitcoin Network Computing Power, one-year time frame.
Chart 3 shows the impact of the Chinese mining crackdown on the total computing power supporting the Bitcoin blockchain. As miners based in China were shut down, the total hash rate powering the network fell to a one-year low. A decline in hash rate means the network is less resilient in countering attacks against the blockchain. However, it does create a boon for the remaining miners in the ecosystem as it becomes relatively easier to settle transactions and earn bitcoin rewards.
The now-defunct Chinese miners are in the process of either relocating their operations to another jurisdiction or selling their mining equipment in the secondary market at reduced prices (Reuters, 2021). At some point, this lost hashing power will return to the Bitcoin network.
How does Pakistan figure into this conversation you may ask? First, let us briefly understand the major cost drivers behind a bitcoin mining operation. First off, an internet connection is required to connect the mining operation to the network. This should be simple enough to find in the country and not pose a material burden. Next, a large miner would deploy up-front capital to purchase mining hardware, such as the Bitmain Antminer S19 or S19 Pro, which can cost $6,000–$10,000 per unit, generating approximately 100 terahashes per second (TH/s) of computing power (Cannon, 2021). Finally, and perhaps most importantly, the cost of electricity to power the mining operation is a significant recurring cost.
The shutdown of Chinese miners has resulted in secondhand mining equipment flooding the market at considerably reduced prices. This excess supply should help ease the initial capital expenditure requirement to set up the mining farm. This timing works well for anyone looking to build out a new mining operation.
The electricity cost is where things start to get interesting. Pakistan finds itself in a historically rare situation. For the first time in decades, the country has more electricity generating capacity than the local demand (Reuters, 2021). The Indicative Generation Capacity Expansion Plan (IGCEP 2021–2030) published by the National Electric Power Regulatory Authority (NEPRA) corroborates this statement. As per the report, the total installed generation capacity in the country reached 34,501 MW as of May 2021. Peak demand in the country during 2019–2020 was 22,696 MW (recorded during September 2019), while the lowest demand was 5,635 MW (recorded during January 2020) (National Transmission and Dispatch Company, 2021).
OK, availability of excess electricity and supply over demand is a good start. What about the cost to generate this additional electricity? Pakistan’s power purchase agreements with its independent power producers are mostly take or pay contracts. This contractually binds the government to make capacity payments for the excess electric generation capacity, whether it is used or not. In essence, we can classify this already incurred electricity payment as a sunk cost and ignore it in our mining cost-benefit analysis.
It is our suggestion that the federal government take advantage of this situation. Excess electricity supply coupled with an expense that is already budgeted is too good to pass up. Moreover, the recent reduction in the network’s hash rate makes it economically attractive to begin mining operations immediately. Bitcoin mining farms should be set up near power plants to minimize any transmission losses. Used mining equipment provides a cost-effective means of getting started. Finally, the government can choose to maximize the mining farm output in winter months when local demand is relatively low. If bitcoin prices continue to rise as per our expectations, this would be another avenue for the federal government to generate massive revenues. According to a recent news article in Dawn, “If Pakistan uses this energy for bitcoin mining using the latest S19 Pro Antminer (assuming 10,000MW of excess energy available at a cost of $0.12 per kW/hour), it can generate $35 billion worth of Bitcoin per year at current valuations. Simply put, this means we can pay off our external debt in two years” (Khwaja, 2021).
VII. Remittances
The State Bank of Pakistan has prioritized the rollout of Raast. These financial rails will enable low-cost, real-time payment and settlement across government institutions, banks, merchants and individuals. Additionally, this initiative will make it possible for millions of unbanked citizens to enter the digital financial economy, simply by using a smartphone. This infrastructure will serve as a backbone of the local digital economy with the capability for fintech firms to build Layer 2 applications. All evidence points to a flourishing local remittance ecosystem.
The next major challenge lies in tackling the network of international remittances coming into the country. In fiscal year 2020–2021, the amount sent home by overseas Pakistanis reached a historic high of $29.4 billion (Siddiqui, 2021). These valuable funds are used by the government to boost its foreign reserves, repay debt to international lenders and cover its import bill. Clearly, this source of funds is of dire importance to the effective functioning of the local economy.
However, international payment remittance is a high friction process. International wire transfers are expensive and not suited for small remittance amounts. Service providers such as Western Union and MoneyGram do not provide real-time settlement. They introduce further obstacles as recipients need to physically travel to an authorized dealer location to pick up the funds. All in all, a clunky process.
PayPal, a global leader in online payments, allows people in more than 190 countries to send and receive money and acts as an international bank account. The fact that this payment service is not available to Pakistani residents is a travesty. The following news report aptly sums up the situation:
“In 2019, a Payoneer index reported that Pakistan has the fourth largest freelancer community in the world. In 2020, the same fintech company reported that Pakistan is the world’s eighth fastest-growing freelancing economy. Currently, there are around one million freelancers in Pakistan and yet the Pakistani freelancers have no reliable payment options … The unavailability of PayPal is hitherto the biggest plight of the Pakistani freelancer community. Almost all online job platforms have a PayPal option … the ease of user interface, timeliness and compatibility offered by PayPal makes it stand out among its competitors. Most good clients refuse to work with Pakistani sellers because they only trust PayPal for online transactions. This nullifies the proposition of a ‘domestic alternative’. PayPal’s absence is significantly felt, especially in the online working community” (Bhatti, 2021).
Bitcoin’s monetary network provides a comprehensive solution to this problem. The core blockchain network enables transfer of value across two users, regardless of their geographical location. A worldwide network of financial rails already exists within the Bitcoin ecosystem. Using a smartphone and an internet connection, a user can easily plug into this global network. The decentralized nature of this ecosystem allows participation without seeking permission. No central authority has the power to de-platform a user from this ecosystem, let alone the fifth most-populated nation in the world.
The Lightning Network is a Layer 2 payment protocol that sits on top of the core Bitcoin blockchain. This innovation allows the network to become scalable. Micropayments can be transferred on this layer on a real-time basis with minimal fees. Subsequently, the initial and final balances from Layer 2 are settled on the core blockchain. Strike, a fintech company pioneering the use of payments over the Lightning Network, is already operating in El Salvador. By allowing users to plug into the Bitcoin network, it seamlessly allows both inward international remittances along with a local payment infrastructure. Even though the Bitcoin monetary network is used, the remitter and receiver of funds never have to own any bitcoin. Volatility of bitcoin prices is not a concern due to real-time conversion of currency taking place.
We suggest the federal committee overseeing cryptocurrency should invite fintech players such as Strike to understand the benefits of this solution. Pakistan should begin work on seamlessly connecting Raast to the Bitcoin ecosystem. As previously mentioned, one way to achieve this is to introduce a State Bank–backed national cryptocurrency exchange that is connected to Raast. KYC, tax filing status and proof of funds of users can be verified upon the onboarding process. We are of the opinion that Pakistani cryptocurrency users will flock to a local solution as long as there exists a seamless ramp to enter and exit the ecosystem. Furthermore, a local exchange allows ease of oversight to regulators and tax authorities.
VIII. Risks
As with any investment, the Bitcoin ecosystem is not without risk. Our team reviews country-specific risks for Pakistan as it plans to embark on its cryptocurrency journey.
A. China
Chinese authorities have laid bare their obvious displeasure with the cryptocurrency ecosystem. China is one of the largest lenders to Pakistan and also a very strong geopolitical ally. The China–Pakistan Economic Corridor is an integral source of foreign direct investment, infrastructure development and employment in the country. Understandably, the recent action taking place against cryptocurrencies in China should be carefully considered by local policymakers.
Commentators have speculated on the possible reasons behind the crackdown in China. It would be useful to separate facts from sensational journalism to better understand China’s concerns.
B. International Monetary Fund
The IMF is also a large lender to the country. Pakistan has received 13 structural adjustment programs from the IMF since 1988 (Dawn, 2019). The organization has been critical about the role of cryptocurrencies as legal tender in a nation. Unsurprisingly, this assessment was put forward by the IMF soon after El Salvador announced its plans to adopt bitcoin as a national currency (Adrian, 2021).
Although our team does not recommend adopting bitcoin as legal tender, the criticism from another important lender should be examined carefully. One way to mitigate this risk would be to invite IMF representatives to be included when formulating the cryptocurrency strategy in the country.
C. Financial Action Task Force
Pakistan has been tirelessly working these past few years toward exiting the FATF gray list. It was recently reported that the FATF has called on the government to better regulate the cryptocurrency industry.
The government’s first response in setting up the federal committee to oversee cryptocurrency regulation is a promising one. Moreover, they have included the FATF as a member of the committee. Money laundering and terrorist financing issues will likely be top of mind for the FATF.
A flourishing and formal cryptocurrency economy in Pakistan is not possible without tackling the FATF’s concerns. Regulations to bring exchanges, dealers and users together is a win-win for all stakeholders involved. This will help bring the industry out of the shadows and lay down the foundations needed for sustainable development.
D. Capital Outflows
Market observers have speculated on several reasons behind China’s actions relating to cryptocurrencies. One of them is centered around the ease of capital flight from China through the use of cryptocurrencies.
This flight of capital is a significant risk for Pakistan as well. Admittedly, it is not entirely possible to stem the flow of capital in the cryptocurrency ecosystem. However, regulations built around the entry and exit points of the ecosystem play a role in mitigating this risk.
Furthermore, Pakistani residents will face stiff scrutiny when attempting to withdraw funds from the cryptocurrency ecosystem in any foreign jurisdiction. There exists a major incentive for domestic users to work within the regulatory framework and pay the required taxes on investment gains. That incentive being immediate transfer of cryptocurrency funds to their local bank accounts.
This is a guest post by Frontier Capitalism. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
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While the development appears to be great for mass adoption, there is risk to the country making bitcoin legal tender.
Yesterday was a truly historic moment for both El Salvador and Bitcoin. A sovereign nation has adopted bitcoin as legal tender and recognized it as a money not treated or taxed as a capital asset. The entire path from the announcement in Miami to here has been somewhat haphazard, unclear at times, and met with a difficult to measure but undeniable push back from some of the people of El Salvador. But that was obviously going to be the case from the start. Bitcoin has never been put in a situation of this magnitude in its entire lifetime, and it’s still growing and evolving.
When the Chivo Wallet app went live in app stores, every citizen of El Salvador was able to claim a free $30 of BTC that they could use to buy things under the new law. This was the largest airdrop of bitcoin ever done. Every citizen has the option to spend or HODL those sats; every business has the choice to try and incentivize people to spend their bitcoin by offering discounts or deals. This could be a massive opportunity for savvy individuals and businesses to plan for the future by building a stockpile of BTC and reinvest in themselves and their businesses as bitcoin appreciates in price over time.
As things settle down and people become used to interacting with bitcoin, the door is now also opened for remittances to be sent from abroad to El Salvador across the Bitcoin network. The potential savings could be both a massive boost to El Salvador’s GDP as well as a way to put more of the money sent home by family members across the world into people’s pockets instead of being shaved off in fees by businesses like Western Union.
However, this entire remittance dynamic depends completely on a pool of fiat currency down in El Salvador (currently the Trust established by the government). I’m sure many Bitcoiners will love to argue this point, but the reality is many Salvadorians who receive remittances over Bitcoin rails will want to receive it in the form of USD. Many people outside of the Bitcoin community in the country have expressed a large degree of uncertainty and confusion over the roll out of the law, exactly how things will work in practice, and how to use bitcoin. Some have even expressed doubt in the government’s motives and ability to pull this all off.
Let’s think for a minute how a service like Strike works. User A is natively using the Lightning Network and User B has their bank account linked to Strike. If A wants to send B $50, they simply send $50 worth of bitcoin which is received by Strike and converted on their end to credit User B with $50. That requires a sale of bitcoin for fiat. User B cannot be credited $50 after having been sent bitcoin unless someone on that side of the transfer is willing to buy that bitcoin and provide the $50 that User B wants. This is the same type of model implemented in El Salvador with Chivo, except the government is currently the default buyer so User B can receive fiat.
The stability of the guarantee to convert BTC to fiat for anyone who wants USD instead is entirely dependent on the El Salvadoran government having the USD to buy BTC that everyone is now mandated to accept. They established a $150 million Trust to guarantee this convertibility promise that is a linchpin of mandating people to accept bitcoin.
What happens when that Trust runs out of money? To put things into perspective, El Salvador received $623 million in remittances in June 2021.
A single month of the USD remittance flows into the country was more than four times the size of the entire Trust established to guarantee conversion from BTC to USD for citizens that do not want to be exposed to the volatility of bitcoin. What happens when that Trust runs out of money?
The government of El Salvador would have to suspend the guaranteed promise to convert BTC received in payment to fiat — and hopefully the mandate to accept it as well in such a situation — or source more money to fund the Trust with or facilitate matching other buyers of bitcoin with their citizens to maintain the conversion. Having to suspend the conversion guarantee and acceptance mandate would probably be a huge blow of confidence to the entire endeavor. Sourcing more money themselves would likely involve sourcing loans internationally and, as a country, having the IMF effectively shun them with a massive debt-to-GDP ratio, that is highly unlikely to happen. This would realistically leave only the option of finding other buyers internationally to meet the conversion guarantee.
This is where the big problem lies. It would be as simple as sanctioning El Salvador to prevent the government from being able to tap international pools of USD liquidity to continue guaranteeing their citizens can seamlessly convert BTC to USD when accepting it. This would put El Salvador in a very tenuous situation. They would otherwise have to suspend the guarantee and simply hope the organic demand for BTC in El Salvador is enough to continue in a viable way or find other ways to bring USD into the country.
Under international sanctions in my assessment, the only way to do so would be to source physical cash USD. I can think of no realistic way that could be done at scale except to criminally smuggle it into the country, which, given the reality of organized crime in the region, would eventually fall under the domain of MS-13. I won’t go into the gritty details of how dangerous a criminal enterprise they are, but when it comes to illegal smuggling operations in Central America, your only practical option is to deal with the organized criminal groups established in the region.
Any of these potential routes of failure would offer the legacy media and financial institutions a gigantic well of ammunition to attack the roll out of this legislation in El Salvador. You can already see the warm up to it with media outlets criticizing President Nayib Bukele’s unconstitutional dismissal of the Supreme Court and the change of term limitations which would allow Bukele to run for office again. Every way that this goes wrong or has a hiccup will be used to add to these media attacks and narratives, and, in reality, there is very real potential for problems that are much larger than the little hiccups as I outlined above.
The passing of this legislation is a truly historical moment, and one that offers massive potential to do good for the citizens of El Salvador. But it also has massive potential to fail in those goals, and that is not only something that could do harm to Salvadorians but also Bitcoin itself. As a last word, it’s important to remember in the frenzy of optimism and chants of “everything is good for Bitcoin” that that is not a literal truth. Everything in life has positives and negatives, including Bitcoin.
This is a guest post by Shinobi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
