Key Takeaways:

• Pakistani authorities reverse an eight-year-old ban on banking support.
• Regulators set out strict conditions, including the separation of firm and user funds.
• Individual holdings are still a grey area, with crypto holders still waiting for clarity on taxation.

The State Bank of Pakistan (SBP) has issued a circular directing domestic banks on the rules for allowing crypto firms to open corporate accounts. This update is a departure from the previous restrictive stance of 2018, where banks were explicitly told to refrain from giving banking support to crypto projects.

The new update comes less than a month after Pakistani lawmakers gave statutory power to its crypto regulator, the Pakistan Virtual Assets Regulation Authority (PVARA).

SBP sets out risk mitigation rules

The SBP’s circular outlines a ring-fenced institutional model, where it has placed several pillars around the banking support.

The first (and most obvious) is that banks may only serve crypto firms that are licensed to operate within Pakistan. This means a proper registration with the Securities and Exchange Commission of Pakistan (SECP).

The accounts will not be entertained through cash deposits, nor will cash withdrawals be allowed. All movement of capital must occur through traceable channels to comply with Anti-Money Laundering (AML) regulations.

Firms are also required to keep operational capital separated from user funds. This is to ensure that client money remains safe in drastic events such as company insolvency. The banks are also directed to make sure that any and all accounts opened for the crypto firms are treated as client money accounts (CMAs). Banks are prohibited from offering interest on CMA funds or even using these as collateral for any loans to crypto firms.

Learn More: Crypto Basics

Banks must also do enhanced due diligence

SBP also directs banks not to treat crypto firms like standard corporate clients. Considering the different nature of products, services, and a completely different target market, banks are directed to use a digital asset risk assessment.

Banks are required to update their customer risk profiling to account for the high speed and the pseudo-anonymous nature of digital assets. The financial institutions are also directed to have real-time monitoring to detect any suspicious transactions. These must be reported to the relevant authorities.

While the new requirements seem strict, these are designed to ensure that the crypto firms and their customers are contained within an environment where capital flight (bypassing banking channels, tax evasion, etc.) does not occur.

Related: South Korea Plans to Apply Existing Finance Laws to Stablecoins and Asset Tokens

Retail use is still a blind spot

While the institutional framework is a leap forward, the regulators are still silent on the retail and individual levels. For the estimated millions of Pakistanis holding digital assets, the last mile of the transaction remains obscured.

There are no official permissions for banks to facilitate direct on-ramping or off-ramping for retail customers (the process of converting fiat to crypto and vice versa). Additionally, the tax authority, the Federal Board of Revenue (FBR), has not issued a clear tax code for individual crypto gains.

This leaves individuals in a legal gray area who are still struggling to legitimize their crypto activities.