Think back to 2017, it is possible that your smart street cousin was busy closing his Bahria town file to invest in expensive Nvidia graphics cards and comparing the cost of each unit of solar panels with electric generators. Your confusion may have been temporary as by the end of the year the price of bitcoin exceeded the US $ 13,000 / - and the numbers forced further recognition of the "cryptocurrency mine".

This uncontrolled gold rush looks to have come to a standstill in April 0f 2018 when the State Bank of Pakistan (SBP) unveils a ban on all types of financial institutions operating in the country from processing or processing cryptocurrencies. 

While there has been no meaningful communication with official banking services even before the revolution began, various forms of crypto exchanges and mining operations have now been postponed to an alarming side of the economy (special group discussions advising on swaps and cash out options).

SBP policy decisions have since encouraged the adoption of a blockchain in financial services, but the limit for accepting cryptocurrency as a legal tender has remained. The SBP subsequently introduced a law on licensing non-banking companies such as "Electronic Money Institutions" to promote affordable payments. 

While there is some confusion in the media at the time, this "e-money" is just a digital symbol of fiat money deposited in a bank - very different from cryptocurrency. With the ongoing efforts to exclude Pakistan from the FATF gray list, from the perspective of the central bank, there is good wisdom in preventing cryptocurrency-adventures

Read more, Believe It or Not: Bitcoin has become a Good Long-Term Investment

As early as November 2020, the Securities and Exchange Commission of Pakistan (SECP) released a paper examining the possibility of regulating digital/visual tokens. The SECP paper - initially recognizing the need for “new regulatory measures” - is a welcome development. Although Pakistan's fintech landscape is still in its infancy, the SECP paper raises the issue around tokens to a reduced level i.e. their fragmentation as collateral instead of finance - the challenges they still face in developed areas.

Despite the extreme, the question is, does the token play the role of investment (security) or payment methods (money)? The latter is not possible due to the SBP limit mentioned earlier and the SECP later clarified that it is in line with the previous bank.

One of the most important areas of digital asset management surrounds the distinction between “security tokens” and “use tokens” - as approved by the SECP in the position paper. For the sake of simplicity, we will assume that security tokens will be regarded as security in the general sense, which means being a unit (i) of ownership in a company; (ii) income-generating assets; or (iii) the acquisition pool. As a result, there should be little controversy as to whether the public trading of such tokens is regulated by the SECP - as is the case with stocks, modaraba certificates, REITs, or debt instruments.

Help tokens on the other hand of their kind are built into the blockchain of a particular use case. To explain the concept of utility tokens, the United States Securities and Exchange Commission of the United States (USSEC) uses an example of a book club. Perhaps in the case of Pakistan, the growing healthcare industry could be a better picture. 

Think of an exercise owner who creates a blockchain-powered system to issue tokens to members to support the acquisition of equipment. Members who purchase tokens will be able to use such tokens to purchase different gym membership packages. The limited function of such a token of assistance - in a closed-loop - would not be "safety" or warranty regulation by the SECP.

This may not be the case with all help tokens. Let us assume that the gym is growing into a profitable franchise and such tokens later: (i) free trade is made with non-members; (ii) marketed in terms of market capacity; and (iii) acquired and resold by the public for profit in lieu of exercise. Such tokens are beginning to look like security.

The potential for use of cases creates fears that future regulatory paradigm changes are needed. This is considered to be a shock to some analysts who think back to the advent of the internet which has created similar fears. Instead, they see a steady improvement in telephone and media laws. It should also be noted that even at ICOs in the United States, the USSEC uses its traditional Howey test to determine whether a digital token is equal to the "security" required by regulation. 

The trial - based on a US Supreme Court decision of 1946 - has three requirements: (i) investment; (ii) in the ordinary business; and (iii) expecting benefits from the efforts of others. The features of this process - already tested against digital assets - are familiar with financial products floating in Pakistan's major markets.

In order to capture digital assets under their jurisdiction, integrating Howy's test into the regulations issued under the Security Act, 2015 (the Act) can be an easy part. The law empowers the SECP to extend the definition of “security” through notice. 

However, digital assets will then inherit the regulatory infrastructure prescribed under the Basic and Second Securities Trade Act. We can briefly acknowledge that there is much debate about whether digital commodity trading - done on a restricted network used - actually requires the role of intermediate mediators such as deposits, clearing companies, and custodians.

In testing the new proposals, the SECP cited a history of protection of consumers who sell food habits as one of the main concerns. With reports of price fraud on foreign exchange-exchanges, one of the key areas of focus in this state should be consumer protection. This can be important in ensuring a sustainable investment.