On-shore VASP in Pakistan

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:

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.

Proposed Drafts: Various draft bills and frameworks have been reported in the media, suggesting that a future regime might include:

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.

Identification and Verification of Customer Identity:

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.

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.

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).

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.

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).

"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.

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.

Custodial License Requirements:

Segregation of Client Assets Rules:

There are no mandates for insurance or bonding requirements for digital asset custodians.

Cold Storage Mandates:

Qualified Custodian Definitions:

Update (2022-2023): While there have been ongoing discussions and government committees formed to evaluate the possibility of regulating cryptocurrencies, no formal change to the SBP's stance or new legislation has been enacted. Reports in local media suggest that committees involving the Ministry of Finance, Law Ministry, and the SBP have explored various options, including maintaining a ban or developing a regulatory framework, often influenced by FATF recommendations.

No. Pakistan has not adopted the FATF Travel Rule. This is primarily because the State Bank of Pakistan (SBP), the central bank and primary financial regulator, along with the Ministry of Finance and other relevant bodies, have taken a position against cryptocurrencies and virtual assets.

Which VASPs are Covered:

Anti-Money Laundering Act, 2010 (AMLA): This is the primary legislation for AML/CFT in Pakistan. If virtual asset transactions are used for money laundering, terrorist financing, or other illegal activities, individuals/entities would be prosecuted under this Act. Penalties can include:

Prevention of Electronic Crimes Act, 2016 (PECA): Depending on the nature of the activity, if electronic means are used for illicit VA transactions, other cybercrime laws might also apply.

If the capital asset (crypto) is held for one year or less, the gain is taxed at the individual's normal income tax slab rates.

Income Tax Return (ITR): Any gains or income derived from cryptocurrency activities (whether capital gains, business income, or income from other sources) must be declared in the annual income tax return.

Wealth Statement (Form A/B): All assets, including significant holdings of cryptocurrencies (if considered an asset), should ideally be disclosed in the annual wealth statement, along with their cost and fair market value. This is critical for reconciling income and assets.

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.