Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Development of cryptocurrency in Pakistan represents a complex connection of innovation, regulation, and financial governance. The evolution of Pakistan’s approach to virtual assets mirrors a global struggle to balance technological advancement with the imperatives of financial stability, consumer protection, and anti–money laundering compliance.
The journey began in an atmosphere of uncertainty when the State Bank of Pakistan (SBP) issued its first cautionary circular in 2018, prohibiting financial institutions from dealing in virtual currencies. That action reflected both prudence and apprehension. It followed the Financial Action Task Force’s (FATF) recommendations, which require member states to control unregulated movement of digital assets.
Crypto adoption in Pakistan increased gradually despite regulatory resistance. The citizens turned to international exchanges, peer-to-peer networks, and informal digital brokers to access virtual assets as a hedge against currency devaluation and limited financial inclusion. The country soon ranked among the top ten in global crypto adoption indexes, making a purely restrictive stance unsustainable. The government and regulatory bodies have since recognized the inevitability of digital finance, and discussion has shifted toward managed legalization through a framework that aligns with FATF’s risk-based approach.
Development of a regulated cryptocurrency market in Pakistan requires the state to understand the structure and risk profile of virtual assets. A virtual asset, under the FATF definition, refers to any digital representation of value that can be transferred, traded, or used for payment. The entities facilitating these transactions, known as Virtual Asset Service Providers (VASPs), include exchanges, wallet providers, and intermediaries offering transfer or safekeeping services.
Pakistan’s regulators, mainly SBP and Securities and Exchange Commission of Pakistan (SECP), have begun examining licensing mechanisms for VASPs, drawing from models implemented in the European Union and Gulf Cooperation Council. SECP’s 2020 consultation paper outlined potential regulatory sandboxes for fintech and digital assets, signaling a policy shift from prohibition to supervision.
However, VASPs remain a high-risk sector under the FATF framework because they manage anonymous, borderless, and real-time financial flows that can bypass traditional banking oversight. For Pakistan, a country emerging from enhanced FATF monitoring, regulatory diligence over these entities is essential to maintaining compliance and global financial credibility.
The legal challenges surrounding cryptocurrency legalization in Pakistan are inseparable from its role in illicit financial flows. Management of unlawful funds has historically relied on layers of false businesses, shell entities, and cross-border smuggling of cash.
The digital economy now enables similar flows through distributed ledgers and peer-to-peer transactions that lack centralized control. Cryptocurrencies provide the infrastructure for transnational movement of value with minimal friction, making them attractive not only to legitimate innovators but also to actors engaged in money laundering, terror financing, and sanction evasions.
Distributed ledger technology, by its design, decentralizes trust. Each node maintains a copy of the ledger, and every transaction is recorded immutably through cryptographic verification. Though this structure enhances transparency in theory, in practice, it creates complexity for enforcement agencies, particularly when layered with privacy-enhancing technologies and cross-jurisdictional VASP operations.
Financial Intelligence Unit of Pakistan and Federal Investigation Agency (FIA) face acute challenges in tracing beneficial ownership behind virtual transactions. The regulatory structure, therefore, is not to suppress the technology but to embed accountability through licensing, reporting, and forensic capacity building.
The anonymity of virtual assets sits at the core of their legal and enforcement complexity. Most cryptocurrencies, including Bitcoin, are pseudonymous rather than fully anonymous. Each transaction is publicly recorded on the blockchain, but the wallet addresses are not directly linked to real-world identities. Attribution becomes possible only through operational intelligence or linkage to a regulated exchange where customer identification has occurred.
The advanced blockchain analysis firms, often engaged by law enforcement globally, employ pattern recognition, clustering, and artificial intelligence to trace transaction paths, uncover network behavior, and identify probable ownership. Pakistan’s regulators can benefit from collaboration with such analytic providers to enhance domestic capability. However, as tracing technology becomes more sophisticated, methods of maintaining anonymity also continue to evolve. The illicit economy continuously adapts through mixers, tumblers, privacy coins, and unregistered P2P networks that collectively obscure transaction trails.
The methods of obtaining virtual assets anonymously are numerous and increasingly sophisticated. Mining, though resource-intensive, allows for the creation of new coins without identification, but is often impractical at scale due to energy constraints. Crypto ATMs and kiosks convert cash to digital assets while circumventing conventional banking oversight, though surveillance technologies now limit their use. The local peer-to-peer exchanges enable direct transactions between individuals, bypassing institutional scrutiny.
Anonymous online brokers and foreign, unregistered P2P exchangers offer additional layers of detachment, often operating beyond the jurisdiction of Pakistani law or FATF-aligned states. Currency mixing and tumbling services further enhance anonymity by pooling and redistributing funds through randomized, multi-step transfers that serve to sever the link between sender and recipient. Though these mechanisms claim to promote privacy, they are frequently exploited to launder illicit funds or finance proscribed by entities. Pakistan’s regulatory framework must therefore recognize these tools as high-risk vectors and impose mandatory reporting obligations for VASPs engaging with anonymizing technologies.
Similarly, technological reforms complicate these legal issues further. Blockchain traceability has proven both a tool and a limitation for regulators. On one hand, every transaction on a public blockchain is recorded permanently, creating a trail that can be analyzed forensically. On the other hand, new privacy layers such as CoinJoin protocols, zero-knowledge proofs, and decentralized mixing services conceal linkages within the chain.
The TOR network, once believed to ensure perfect anonymity, has been repeatedly compromised through relay hijacking, metadata leaks, and surveillance infiltration, demonstrating that no digital anonymity is absolute. However, persistence of such tools highlights the challenge regulators face. Pakistan’s enforcement agencies must invest in blockchain forensics, develop interagency coordination with the Financial Monitoring Unit (FMU), and strengthen cross-border cooperation through mutual legal assistance treaties. These measures are critical to ensure that crypto legalization does not reopen vulnerabilities previously identified under FATF evaluations.
The rise of anonymity-enhanced cryptocurrencies (AECs) such as Monero, Zcash, and Dash represents the next frontier in the debate over traceability. These digital currencies deploy advanced cryptography to conceal transaction details and participant identities through technologies like ring signatures, stealth addresses, and Ring Confidential Transactions (RingCT). In these systems, multiple decoy signatures are combined to obscure the true sender, although one-time addresses prevent linkage to recipients, and transaction amounts are encrypted. Such techniques make forensic attribution nearly impossible using conventional blockchain analysis.
Similarly, privacy advocates argue that AECs restore financial confidentiality, whereas regulators view them as threats to transparency and AML compliance. State Bank of Pakistan, like many central banks, must therefore consider whether to permit AECs within a regulated framework or to impose prohibitions consistent with FATF Recommendation 15, which calls for mitigation of anonymity risks in virtual asset transactions.
Conversation on anonymity also extends into the sphere of central bank digital currencies (CBDCs), which are being studied globally and now by Pakistan’s monetary authorities. The European Central Bank’s proof-of-concept for an “anonymous digital euro” offers instructive insights. The model employs a two-tier structure where commercial intermediaries manage user wallets, while central banks issue and redeem digital currency.
Anonymity is provided through “anonymity vouchers” that permit small-value transactions without triggering AML scrutiny, whereas high-value transfers remain subject to full verification. Such mechanisms maintain a balance between privacy and oversight, demonstrating that digital currencies can be designed to respect personal confidentiality without compromising national security objectives. For Pakistan, which has initiated studies on a potential digital rupee, a similar model could preserve public trust while ensuring that AML and counter-terrorism financing controls remain intact. Implementing tiered thresholds, anonymity vouchers, and controlled redemption mechanisms could enable Pakistan to introduce CBDCs responsibly, aligning it with international best practices.
The tension between privacy and transparency remains at the heart of digital finance regulation. An effective policy framework for Pakistan must acknowledge that anonymity in virtual asset transactions is not inherently illicit but must be limited by law to prevent abuse. The regulatory structure should establish a licensing regime for VASPs that incorporates mandatory Know Your Customer (KYC) procedures, suspicious transaction reporting, and interoperability with international blockchain analysis tools.
SECP and SBP should coordinate a unified supervisory mechanism that monitors cross-border transfers and enforces sanctions compliance. Public awareness and capacity-building among law enforcement agencies are equally critical to prevent misuse of technical tools by untrained personnel. A collaborative approach involving public institutions, fintech firms, and private forensic contractors will create the resilience needed to manage both innovation and risk. The future of cryptocurrency in Pakistan depends on building regulatory confidence without stifling technological progress. The state’s challenge lies in introducing rules that neither over-criminalize digital innovation nor allow a parallel financial ecosystem to undermine macroeconomic stability.
The transition toward legalization should proceed through phased integration, beginning with licensing and oversight of VASPs, followed by introduction of blockchain-based payment solutions under central supervision. Clear legal definitions of virtual assets, transparent taxation policies, and consumer protection protocols will further reinforce legitimacy. Pakistan must also adopt international best practices by aligning its laws with FATF Recommendation 15, implementing travel rule requirements, and strengthening cooperation with regional financial intelligence networks to detect cross-border digital laundering.
The policymaker needs to view crypto anonymity through a pragmatic rather than punitive lens. The global experience demonstrates that complete anonymity is neither achievable nor desirable in financial systems. Instead, controlled privacy secured by encryption, but controlled by legal accountability, should be the objective.
Pakistan’s regulators should encourage technological innovation in distributed ledger systems but mandate technical traceability features that permit lawful access upon judicial authorization. In the longer term, exploration of a central bank digital rupee with selective privacy thresholds, supported by blockchain auditing tools, can offer a sovereign alternative to uncontrolled cryptocurrencies. By combining legal rigor with technological sophistication, Pakistan can emerge as a responsible leader in digital finance regulation.
The way forward is neither prohibition nor blind liberalization but a regulated, rational framework that ensures virtual assets serve legitimate economic goals while denying sanctuary to illicit finance. The maturity of Pakistan’s policy choices in this domain will determine not only its financial sovereignty but also its credibility as a compliant, forward-looking member of the global financial community.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions