Pakistan’s roadmap to crypto legalization—IV

The legalization of cryptocurrency in Pakistan is gaining momentum, requiring a strong regulatory framework to mitigate financial crimes.

The previous articles in this series have laid the basis by discussing the fundamental mechanisms of cryptocurrency, the oversight body and licensing requirement, and consumer protection measures.

The implementation of Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations is considered a significant pillar in ensuring compliance with international standards and securing the financial ecosystem against illicit activities.

Pakistan’s roadmap to crypto legalization–III

The concept of blockchain and distributed ledger technology (DLT) serves as the backbone of cryptocurrency transactions.

The fundamental principle behind blockchain is decentralization, allowing transactions to be recorded in a public ledger that is immutable and transparent. The nature of wallets, addresses, and hashes is integral to understanding how transactions take place.

The distinction between custodial and non-custodial wallets is significant in implementing AML regulations since custodial wallets are managed by exchanges or third parties, while non-custodial wallets give users complete control over their private keys.

The classification of crypto assets, including Bitcoin (BTC), Ethereum (ETH), ERC-20 tokens, stablecoins, decentralized finance (DeFi) assets, and non-fungible tokens (NFTs), requires a clear regulatory approach.

The Financial Action Task Force (FATF) has emphasized that virtual assets (VAs) and virtual asset service providers (VASPs) must adhere to risk-based compliance requirements to prevent their misuse for financial crimes.

The introduction of FATF Recommendation 15 has mandated the inclusion of VASPs under AML-CFT regimes globally, including Pakistan.

Pakistan’s roadmap to crypto legalization–II

The FATF Travel Rule requires VASPs to collect and share originator and beneficiary information for transactions exceeding a certain threshold. The challenge of assessing money laundering (ML) and terrorist financing (TF) risks in cryptocurrency lies in its pseudo-anonymous nature, cross-border exposure, and lack of centralized control.

The usage of mixers and tumblers to obfuscate transactions further complicates AML enforcement. The compliance in various jurisdictions has shown that non-compliance with the Travel Rule results in significant vulnerabilities in the financial system, thereby requiring Pakistan to ensure strict adherence to these guidelines.

Pakistan’s regulatory framework must address these challenges by implementing a comprehensive national crypto risk assessment. The identification of illicit financial flows through blockchain forensics, licensing requirements for exchanges, and integration of those with the Financial Monitoring Units (FMUs).

The AML framework should mandate due diligence measures, reporting obligations, and strict compliance mechanisms. The regulatory authorities must also ensure the implementation of Know Your Customer (KYC) and Enhanced Due Diligence (EDD) protocols to effectively monitor crypto-related activities.

Pakistan’s roadmap to crypto legalization-I

The classification of fraud risks in cryptocurrency includes Ponzi schemes, rug pulls, phishing attacks, and exchange hacks. The rapid movement of funds across multiple exchanges within short time frames can be indicative of layering and splintering tactics used in money laundering.

The multi-asset laundering approach requires a multi-asset compliance defence, ensuring that both traditional financial institutions and crypto-related entities work together to mitigate illicit activities. The importance of financial intelligence units (FIUs) in sharing and analyzing crypto transaction data cannot be ignored.

The vulnerabilities of terrorist financing and sanctions evasion through cryptocurrency require an enhanced monitoring framework. Additionally, to identify and prevent unauthorized transactions, sanctions screening for VASPs, transaction monitoring systems, and blockchain analytics must be enforced.

The use of DeFi platforms and un-hosted wallets in peer-to-peer transactions further increases the risk of financial crimes, requiring Pakistan to adopt a risk-based supervisory approach. The ability to track and monitor suspicious activity in decentralized systems must be strengthened through advanced AI-driven compliance mechanisms.

The implementation strategy for AML-CFT regulations must focus on risk assessment, due diligence, blockchain monitoring, and enforcement mechanisms. The requirement for VASPs to maintain identity verification protocols, report large transactions and conduct enhanced due diligence (EDD) for high-risk customers aligns with global best practices.

The national AML framework must also include provisions for suspicious transaction reporting (STR) and compliance audits. The use of regulatory technology (RegTech) solutions can aid in automating AML processes and improving compliance efficiency.

The integration of blockchain intelligence tools for tracing illicit transactions is essential to enhancing Pakistan’s financial security. The need for public-private partnerships, regulatory mechanisms, and collaboration with international financial intelligence units is an important element in this process.

The country must align its regulatory approach with global AML-CFT standards, ensuring that cryptocurrency is not exploited for illicit purposes. The proactive engagement of the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan, and law enforcement agencies is important in combating financial crime.

The implementation and enforcement of a regulatory regime for VASPs is essential for Pakistan’s compliance with international AML-CFT standards. The establishment of a licencing and supervisory framework for VASPs will enhance accountability, ensuring that crypto service providers operate within legal parameters.

The application of risk-based assessments will allow regulators to monitor VASPs based on their exposure to financial crimes, implementing tiered compliance requirements for different levels of risk. The enforcement of strong penalties for non-compliance will deter illicit activities while promoting regulatory integrity.

The status of jurisdictional implementation of the Travel Rule highlights a significant gap in compliance across multiple countries, including Pakistan. The challenges in enforcing the Travel Rule stem from technological limitations, lack of interoperability between exchanges, and reluctance from certain VASPs to disclose transaction data.

The establishment of clear reporting mechanisms and collaboration with international regulatory bodies will be necessary to ensure Pakistan meets FATF requirements.

The use of secure APIs for automated transaction reporting can improve compliance and reduce manual intervention, ensuring seamless integration with the broader financial system.

The recommendations for regulatory authorities in Pakistan include the establishment of a clear legal framework for cryptocurrency, mandatory registration and licensing of VASPs, and the implementation of travel rule compliance measures.

The enforcement of transaction monitoring, blockchain forensics, and penalties for non-compliance will strengthen Pakistan’s position in combating the illicit flow of funds. The implementation of cybersecurity measures to prevent hacks and fraud must be incorporated within the regulatory framework.

The role of education and awareness campaigns in promoting regulatory compliance is another essential mandate.

The training of law enforcement officers, compliance professionals, and financial institutions on crypto-related financial crimes must be prioritised. The awareness of red flags associated with money laundering and terrorist financing in cryptocurrency transactions can enhance the ability of stakeholders to detect suspicious activities early.

Pakistan has significant potential to leverage blockchain technology for financial inclusion. Therefore, by setting up regulated crypto exchanges and investment platforms, the country can drive economic growth while ensuring compliance with AML/CFT standards.

Furthermore, integrating blockchain-based identity verification systems can streamline KYC processes and strengthen mechanisms to prevent fraud, creating a more secure and inclusive financial ecosystem.

The legal recognition of cryptocurrency must be accompanied by comprehensive AML-CFT regulations. The alignment with FATF guidelines, stringent compliance measures, and the adoption of technological solutions will safeguard Pakistan’s financial system against emerging threats. The successful implementation of these regulations will pave the way for a secure and regulated crypto economy in the country.

Moreover, continuous adaptation of regulatory policies in response to evolving crypto trends and threats is necessary for maintaining financial stability and investor confidence.

The collaboration between financial regulators, industry experts, and technology providers will be instrumental in ensuring a safe and compliant cryptocurrency ecosystem in Pakistan.

Copyright Business Recorder, 2025