Cryptocurrencies are attaining mainstream acceptance, with Bitcoin’s price reaching record levels as investors, such as Elon Musk, are pouring funds into it. The Morgan Stanley, one of the biggest US bank, is offering its wealth management clients access to bitcoin funds. Recently, the Khyber Pakhtunkhwa government is planning to build two hydroelectric-powered pilot “mining farms” to capitalize on a bullish global cryptocurrency market.
Despite the “ban” on investing in cryptocurrencies, Bitcoin (and crypto-mania) has now fully penetrated in Pakistan. Both mining and trading in cryptocurrencies currently exists in a legal grey area in Pakistan. In 2018, the State Bank of Pakistan declared cryptocurrencies illegal and the regulator had not authorized anyone to deal in them in the country. The ban by the State Bank of Pakistan (SBP) now has little relevance and no credibility. It has even become redundant as the Khyber Pakhtunkhwa government has announced plans to build cryptocurrency mining farms.
What is Digital Currency?
Digital currency is a form of currency that is available only in digital or electronic form, and not in physical form. It is also called digital money, electronic money, electronic currency, or cyber cash.
- Digital currencies are currencies that are only accessible with computers or mobile phones, as they only exist in electronic form.
- Since digital currencies require no intermediary, they are often the cheapest method to trade currencies.
- All cryptocurrencies are digital currencies, but not all digital currencies are crypto.
- Digital currencies are stable and are traded with the markets, whereas cryptocurrencies are traded via consumer sentiment and psychological triggers in price movement.
Understanding Digital Currency
Digital currencies are intangible and can only be owned and transacted in by using computers or electronic wallets connected to the Internet or the designated networks. In contrast, physical currencies, like banknotes and minted coins, are tangible and transactions are possible only by their holders who have their physical ownership.
Like any standard fiat currency, digital currencies can be used to purchase goods as well as to pay for services, though they can also find restricted use among certain online communities, like gaming sites, gambling portals, or social networks. Digital currencies have all intrinsic properties like physical currency, and they allow for instantaneous transactions that can be seamlessly executed for making payments across borders when connected to supported devices and networks.
For instance, it is possible for an American to make payments in digital currency to a distant counterparty residing in Singapore, provided that they both are connected to the same network required for transacting in the digital currency.
Digital currencies offer numerous advantages. As payments in digital currencies are made directly between the transacting parties without the need of any intermediaries, the transactions are usually instantaneous and low-cost. This fares better compared to traditional payment methods that involve banks or clearing houses. Digital currency-based electronic transactions also bring in the necessary record keeping and transparency in dealings.
Difference between Digital, Virtual, and Crypto Currencies
Since they exist in a lot of variants, digital currencies can be considered a superset of virtual currencies and cryptocurrencies.
If issued by a central bank of a country in a regulated form, it is called the “Central Bank Digital Currency (CBDC).” While the CBDC only exists in conceptual form, England, Sweden, and Uruguay are a few of the nations that have considered plans to launch a digital version of their native fiat currencies. Along with the regulated CBDC, a digital currency can also exist in an unregulated form. In the latter case, it qualifies for being called a virtual currency and may be under the control of the currency developer(s), the founding organization, or the defined network protocol, instead of being controlled by a centralized regulator. Examples of such virtual currencies include cryptocurrencies, and coupon- or rewards-linked monetary systems.
A cryptocurrency is another form of digital currency which uses cryptography to secure and verify transactions and to manage and control the creation of new currency units. Bitcoin and Ethereum are the most popular cryptocurrencies.
Essentially, both virtual currencies and cryptocurrencies are considered forms of digital currencies.
| Digital Currencies | Virtual Currencies | Cryptocurrencies |
| Regulated or unregulated currency that is available only in a digital or electronic form. | An unregulated digital currency that is controlled by its developer(s), the founding organization, or the defined network protocol. | A virtual currency that uses cryptography to secure and verify transactions as well as to manage and control the creation of new currency units. |
Understanding cryptocurrency
Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using a technology called block chain. Block-chain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.
Cryptocurrency Mining
Cryptocurrency mining is a term that refers to the process of gathering cryptocurrency as a reward for work that you complete. In a more technical sense, cryptocurrency mining is a transactional process that involves the use of computers and cryptographic processes to solve complex functions and record data to a blockchain. In fact, there are entire networks of devices that are involved in crypto-Mining and that keep shared records via those blockchains. In a more technical sense, cryptocurrency mining is a transactional process that involves the use of computers and cryptographic processes to solve complex functions and record data to a blockchain. Crypto miners verify the legitimacy of transactions in order to reap the rewards of their work in the form of cryptocurrencies. To understand how most cryptocurrency mining works in a more technical sense, you first need to understand the technologies and processes behind it. This includes understanding what blockchain is and how it works.
Traditional cryptocurrencies such as Bitcoin use a decentralized ledger known as blockchain. A blockchain is a series of chained data blocks that contain key pieces of data, including cryptographic hashes. These blocks, which are integral to a blockchain, are groups of data transactions that get added to the end of the ledger. This added a layer of transparency.
While everyone might want to take advantage of crypto mining but cannot. Cryptocurrency mining nowadays requires a lot of resources both in terms of computing power and electricity. It requires a lot of computing power to generate new guesses continually. Once successful, then not only the user can generate new Bitcoin, but can also update the blockchain by adding information to the end of the ledger.
Reason of popularity
Cryptocurrencies appeal to their supporters for a variety of reasons. Here are some of the most popular:
- Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable
- Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation
- Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems
- Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money
Investment in Cryptocurrencies
According to CoinMarketCap.com, a market research website, more than 10,000 different cryptocurrencies are traded publicly. As of July 16, 2021, the total value of all cryptocurrencies on was more than $1.3 trillion. The most popular digital currency, was pegged at about $599.6 billion.
Cryptocurrencies may go up in value, but many investors see them as mere speculations and not as real investments. The reason? Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone has to pay more for the currency than you did.
No investment is without risk, but investing in bitcoin carries different risks and responsibilities compared to traditional investments of stocks, bonds and funds. Many investors piled into bitcoin after it broke the $20,000 barrier in December 2020 and continued its bull run into April, when the spot price surged above $64,000. But in the months after, the price began a long decline, with the spot price falling below $32,000 by early June. Longtime investors in cryptocurrency had seen this before. Bitcoin reached its previous record high in December 2017, when the spot price came near $20,000, and one year later the spot price was below $3,400.So when investing in bitcoin, understand that the value can drop quickly — and may take years to regain previous highs.
Safety Precautions
Unlike buying stocks, bonds or mutual funds, purchasing bitcoin have a greater responsibility to make sure it stays out of the hands of criminals. It is equally important to keep the private key of digital wallet safe and secure. Many cryptocurrency experts advice transferring bitcoin into an offline storage device i.e. cold wallet, rather than keeping on a hot wallet. As bitcoin gains in value, so do the number of scams targeting bitcoin investors. Similarly, there are phishing scams hazards in the in which the holders receives emails that appear to be from a cryptocurrency exchange but are actually attempts to get to reveal passwords. These emails can appear legitimate, with correct logos and branding. Experts recommend not clicking on any links in these emails, and to contact the exchange directly if getting suspicious communications.
Volatility
Cryptocurrencies, such as Bitcoin, are seems to be as the currency of the future. However, any type of currency needs stability so that merchants and consumers can determine what a fair price. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, while Bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later. By December 2020, it was trading at record levels again. This price volatility creates a conundrum. If bitcoins might be worth a lot more in the future, people are less likely to spend and circulate them today, making them less viable as a currency.
Trading Cryptocurrency
While some cryptocurrencies, including Bitcoin, are available for purchase with U.S. dollars, others require that you pay with bitcoins or another cryptocurrency. To buy cryptocurrencies, the buyer needs a “wallet,” an online app that can hold the currency. Generally, an account is opened on an exchange, and then user can transfer real money to buy cryptocurrencies such as Bitcoin or Ethereum. Coinbase is one most popular cryptocurrency trading exchange which allows user to create both a wallet and buy and sell Bitcoin and other cryptocurrencies. Also, a growing number of online brokers offer cryptocurrencies, such as eToro, Tradestation and Sofi Active Investing. Robinhood offers free cryptocurrency trade.
What Pakistan can do?
It is high time for Pakistan to formulate a regulatory framework for this asset class. In absence of a proper legal structure, the demand for crypto shifts towards unregulated/underground operators. The general public have no choice but forced to use unregulated platforms where they have little investor protection. This encourages growth in money laundering. It also robs government from collecting potential tax income from these transactions. Furthermore it prevents potential investment into Pakistan from large, regulated financial companies that are operating in the crypto economy. Pakistan can tap this capital for inbound investments. In February, one of the country’s leading universities, the Lahore University of Management Sciences (LUMS), received a grant worth $4.1 million (now worth $10million) to study the technology from Stacks, a block-chain network that connects Bitcoin to apps and smart contracts.
Pakistan can attract block-chain companies who have lower risk thresholds compared to traditional financial services companies. These companies will ensure that in order to comply with local regulations, they put in place proper KYC/AML rules. It will also enhance tax net just like investing in other asset classes such as stocks, commodities and bonds. Despite the challenges, Pakistan’s crypto boom shows no signs of stopping. Pakistan-based social media groups explaining how to trade and mine cryptocurrency abound, some with tens of thousands of followers on Facebook. On YouTube, cryptocurrency videos in Urdu have been viewed hundreds of thousands of times. Online cryptocurrency exchanges, most based outside Pakistan, like Localbitcoins.com, have hundreds of Pakistani traders listed, some with thousands of transactions.
FATF involvement
Pakistan is on the FATF’s grey list of countries it monitors for failing to check terror financing and money laundering. Pakistan has seen a boom in trading and mining cryptocurrency, with interest proliferating in thousands of views of related videos on social media and transactions on online exchanges. While cryptocurrency is not illegal in Pakistan, the global money laundering watchdog, the Financial Action Task Force (FATF), has called on the government to better regulate the industry. In response, the federal government has set up a committee to study cryptocurrency regulation, which includes observers from the FATF, federal ministers, and heads of the country’s intelligence agencies.
Governor State Bank of Pakistan, Mr. Reza Baqir, said in April the authority was studying cryptocurrencies and their potential for bringing transactions happening off the books into a regulatory framework. While giving interview to CNN he said that “We hope to be able to make some announcement on that in the coming months”.
[box type=”note” align=”” class=”” width=””]The author, Nazir Ahmed Shaikh, is a freelance columnist. He is an academician by profession and writes articles on diversified topics. Mr. Shaikh could be reached at nazir_shaikh86@hotmail.com.[/box]