DeFi protocol frontend in Pakistan

A standing prohibition by the State Bank of Pakistan (SBP) for regulated financial institutions to deal in or facilitate virtual assets.

SBP BPRD Circular No. 03 of 2018: Issued on April 06, 2018, this circular explicitly prohibits all banks, Microfinance Banks (MFBs), and Payment System Operators (PSOs)/Payment Service Providers (PSPs) from:

Dealing in Virtual Currencies/Coins/Tokens (VCs/VCOs/VCTs).

Facilitating any transaction involving VCs/VCOs/VCTs.

Maintaining accounts of individuals/entities involved in VCs/VCOs/VCTs.

Implication: This circular effectively creates a de facto ban on any regulated financial institution in Pakistan from engaging with or facilitating cryptocurrency activities. This means that:

Cryptocurrency exchanges, custody providers, and payment processors cannot legally operate with bank accounts in Pakistan or integrate with the traditional financial system.

Any individual or entity involved in crypto transactions faces significant challenges in dealing with their funds through regulated financial channels.

Exchanges: No license. Cannot lawfully connect to the banking system.

Custody Providers: No license. Cannot lawfully connect to the banking system.

Payment Processors (Crypto-related): If processing fiat for crypto, no license and prohibited for regulated entities. If purely crypto-to-crypto, it operates outside the formal financial system but still in a legally ambiguous and high-risk environment.

Ongoing discussions and proposed legislative efforts, primarily driven by the need to comply with Financial Action Task Force (FATF) recommendations, to eventually introduce a regulatory framework.

FATF Recommendation 15: Which requires countries to regulate and supervise Virtual Asset Service Providers (VASPs) for Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) purposes. Pakistan's compliance with FATF recommendations is critical for its international financial standing.

VASPs would likely need to maintain a minimum paid-up capital to ensure financial stability and solvency. The exact amounts would vary based on the type and scope of services (e.g., higher for exchanges vs. simple transfer services).

AML/KYC (Anti-Money Laundering / Know Your Customer): This will be the cornerstone of any future regulation, driven by FATF compliance.

Customer Due Diligence (CDD): Robust procedures for identifying and verifying customer identities (KYC).

Enhanced Due Diligence (EDD): For higher-risk customers or transactions.

Transaction Monitoring: Systems to detect unusual or suspicious transaction patterns.

Anti-Money Laundering Act, 2010 (AMLA 2010): This is the overarching legislation that criminalizes money laundering and provides the legal basis for AML/CFT measures in Pakistan. It mandates reporting obligations for financial institutions and designated non-financial businesses and professions (DNFBPs).

SBP CDD / KYC Regulations, 2022 (BPRD Circular No. 04 of 2022): This is a critical development. The State Bank of Pakistan, through its Banking Policy & Regulations Department (BPRD), issued comprehensive Customer Due Diligence (CDD) / Know Your Customer (KYC) Regulations, 2022. These regulations explicitly define and include "Virtual Asset Service Providers" (VASPs) as a type of entity that must comply with AML/CFT requirements, effectively bringing them under the regulatory ambit.

Key Aspect: These regulations define a VASP, consistent with FATF definitions, and mandate that they adhere to all the CDD/KYC obligations applicable to other financial institutions.

Identification and Verification of Customer Identity:

Individuals: Obtain and verify full legal name, date of birth, national identity document (e.g., CNIC for Pakistani nationals, passport for foreigners), current address, contact details, and occupation/source of funds. Verification must be performed using reliable, independent source documents, data, or information.

Legal Persons/Entities: Obtain and verify legal name, principal place of business, registration number, articles of association, memorandum of understanding, board resolution, and identification of key management personnel.

Beneficial Ownership: Identify and take reasonable measures to verify the identity of the beneficial owner(s) of the customer, including for legal persons, trusts, and other legal arrangements.

Purpose and Nature of Relationship: Understand the purpose and intended nature of the business relationship or the specific transaction.

VASPs must adopt a risk-based approach to CDD. This means applying enhanced CDD measures for higher-risk customers, products, services, transactions, or geographic areas.

Factors determining risk include customer type, jurisdiction, type of virtual asset, transaction value/volume, and delivery channels.

Lower risk scenarios may allow for simplified CDD, but never complete exemption.

Regularly scrutinize transactions undertaken throughout the course of the relationship to ensure they are consistent with the VASP's knowledge of the customer, their business, and risk profile, including, where necessary, the source of funds.

Keep customer identification data and beneficial ownership information up-to-date.

Politically Exposed Persons (PEPs): Implement enhanced CDD measures for PEPs, including obtaining senior management approval for establishing business relationships, taking reasonable measures to establish the source of wealth and funds, and conducting ongoing enhanced monitoring.

Sanctions Screening: Screen customers and transactions against national and international sanctions lists (e.g., UN Security Council sanctions lists).

"Travel Rule" (FATF Recommendation 16): While the SBP CDD/KYC Regulations 2022 implicitly align with FATF standards, explicit guidance on the "Travel Rule" for VASPs (requiring the collection and transmission of originator and beneficiary information for crypto transfers above a certain threshold) may still be developing or need further specific directives. However, as Pakistan adheres to FATF standards, VASPs should anticipate and prepare for full implementation of this rule.

Trigger: Any transaction (attempted or completed) that appears unusual, lacks a clear economic or lawful purpose, is inconsistent with the customer's known profile, or raises suspicion of money laundering or terrorist financing.

Reporting Mechanism: Reports are filed electronically through the FMU's secure reporting portal.

"No Tipping Off": VASPs and their employees are prohibited from disclosing to the customer or any third party that a STR has been or will be filed.

Customer Records: All records obtained through CDD procedures, including identity documents, account files, business correspondence, and analysis of transactions.

Transaction Records: Records of all transactions, including the amount, currency, date, and details of the parties involved (both originator and beneficiary, where applicable).

Entity Targeted: Binance Pakistan (and implicitly, individuals running scam schemes facilitated through Binance). Violation Type: Alleged involvement in multi-million dollar cryptocurrency scam, money laundering, illegal financial transactions, non-compliance with local regulations. The FIA issued a formal notice to Binance's Global Head of Growth for its alleged role in facilitating fraudulent transactions that led to significant financial losses for Pakistani citizens. Penalty Amount: No direct fine was publicly levied against Binance by Pakistani authorities. The "penalty" was primarily investigative pressure, a formal inquiry, and a demand for cooperation, which could have led to further action or reputational damage. The FIA initiated criminal proceedings against individuals involved in the scam. Outcome: The FIA launched an inquiry and issued a formal notice to Binance, demanding details and cooperation. Binance subsequently stated its commitment to cooperate with the FIA and local authorities. The FIA also identified and initiated action against 11 individuals alleged to be masterminds of a multi-million dollar fraud scheme involving Binance. The action highlighted the government's serious concerns about unregulated crypto activities. While Binance itself wasn't fined, the action put significant pressure on the exchange and warned the public.

SBP Circular (January 2018): The State Bank of Pakistan issued Circular No. 03 of 2018, titled "Prohibition of Dealing in Virtual Currencies/Tokens (VCs/ICTs)." This circular explicitly stated that VCs/ICTs are not legal tender in Pakistan and prohibited all banks, financial institutions, and payment system providers from dealing in, processing, or facilitating transactions involving VCs/ICTs.

The State Bank of Pakistan Circular No. 03 of 2018's prohibition remains in effect, but the Pakistan Virtual Assets Regulatory Authority is actively considering its withdrawal, indicating the policy is no longer settled or dominant.

Pakistan has enacted the Virtual Assets Act, 2026, which requires all Virtual Asset Service Providers, including cryptocurrency custodians, to obtain a license from the Pakistan Virtual Assets Regulatory Authority (PVARA).