Moody''s Investors Service said the State Bank of Pakistan (SBP) prohibited banks from dealing in virtual currencies, which is credit positive because it shields Pakistan''s banks and other financial service entities from the significant risks that virtual or crypto currencies pose.
Moody''s Investors Service in its research note entitled "State Bank of Pakistan prohibits banks from dealing in virtual currencies, a credit positive" states that on April 6, the SBP issued a circular prohibiting the country''s banks, payment system operators and service providers from dealing in virtual currencies or facilitating customers'' transactions in them.
The prohibition is credit positive because it shields Pakistan''s banks and other financial service entities from the significant risks that virtual or crypto currencies pose. The SBP has not offered any authorization or license to individuals or entities to engage in any activity (issuance, sale, purchase, exchange or investment) in virtual currencies.
In its announcement, the regulator prohibits banks, microfinance banks, development financial institutions, payment system operators and service providers from dealing in virtual currencies as well as dealing with entities involved in such activities.
According to the Moody''s note, Pakistani banks are generally inactive in the area of virtual currencies. There is no international consensus yet on how to best address the regulatory challenges associated with virtual currencies, and the SBP''s actions are in line with those taken by other regulators worldwide.
The SBP advises banks not to facilitate in any way their customers transacting in virtual currencies. The prohibition applies to the full spectrum of financial services they offer, including the use of bank transfers, credit cards or consumer loans that customers can use to invest in virtual currencies.
Additionally, the regulator warned the general public, in line with other authorities such as the European Banking Authority, against the use of virtual currencies and cited the following risks that can lead to major financial losses with no legal protection or recourse: significant price volatility tied to speculative activity; threat of failure or closure of crypto currency exchanges owing to various reasons including law enforcement actions; and susceptibility of crypto currency exchanges to hacking/security compromises. The central bank acknowledged the increased risk for illegal activities through the high degree of anonymity that virtual currencies offer, which makes tracking and documenting these transactions difficult.
Domestic and international payments and money transfers are regulated by the SBP, which has not authorized or licensed an entity to offer these kinds of transactions (e.g. remittances) using virtual currencies.
The regulator also warned that there could be legal repercussions in cases where crypto currencies are used to transfer funds outside Pakistan.
Pakistani authorities are generally taking actions to prevent terrorism financing and money-laundering offences. Moody''s noted that the Financial Action Task Force (FATF), an intergovernmental organization combating money laundering and terrorist financing, will include Pakistan on its watch list of countries with deficiencies in anti-money laundering/terrorism financing measures this June.
Also, Habib Bank (B3 stable, caa14 ), Pakistan''s largest commercial bank, paid a $225 million settlement to US authorities last September in connection with weaknesses in the compliance program at its New York branch.
Nevertheless, the regulator is not against the technology behind virtual currencies (ie, blockchain technology), and has taken measures to enhance its supervisory capacity to allow for the use of new technologies in the future. The authorities welcome the entry of financial technology companies in the market, especially in the payments system sector, as part of Pakistan''s National Financial Inclusion Strategy, which aims to bring more people in the formal financial sector, maintained the note.
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