Pakistan did not set out to become a major crypto market; it simply became one. By the mid-2020s, crypto in Pakistan had crossed a threshold that made continued ambiguity untenable. What had once been treated as a peripheral activity—discouraged, unofficial, and largely invisible to domestic institutions—had grown into a parallel financial system of meaningful scale. Multiple adoption indices consistently placed Pakistan among the world’s highest-adopting countries for grassroots crypto usage. Even conservative estimates suggested 15–20 million active users, while upper-bound assessments placed the number closer to 30–40 million wallets and accounts, reflecting extensive peer-to-peer and offshore activity. Wallet and account counts inevitably overstate unique individuals; even after discounting for duplication, participation still falls at population scale rather than at the margins.
The financial magnitude was equally difficult to ignore. Estimates of crypto assets held by Pakistani residents clustered between $20 billion and $30 billion, a sum comparable to, and in some measures exceeding, participation in domestic equity markets. Gross annual transaction volumes — including exchange turnover, peer-to-peer routing, and internal transfers — were widely believed to run into the hundreds of billions of dollars, reflecting transaction velocity rather than net economic value and remaining largely opaque to domestic reporting systems. At that scale, crypto ceased to be a behavioural curiosity, with resident holdings—at upper-bound estimates—approaching the same order of magnitude as annual remittance inflows and rivaling the effective participation base of domestic equity markets.
This growth occurred in the absence of a comprehensive legal framework. Crypto was neither recognised as legal tender nor explicitly criminalised. Financial institutions were cautioned against direct exposure, but retail participation expanded through offshore exchanges, informal on-ramps, and social trust networks. For years, this arrangement allowed risk to accumulate outside formal balance sheets while insulating institutions from accountability. That insulation eventually failed. The turning point was not ideology but visibility. Consumer losses became politically salient. Cross-border flows escaped measurement. Compliance pressure intensified as global standards on virtual assets hardened. The cost of not knowing began to exceed the cost of engagement. At that point, crypto shifted from being a market phenomenon to a state problem. This dossier treats crypto not as an asset class or innovation cycle, but as a parallel monetary layer—one large enough to alter incentives, visibility, and the state’s margin for error.
The institutional response that followed was incremental and defensive. The government constituted the Pakistan Crypto Council to coordinate policy across monetary, fiscal, regulatory, and law-enforcement domains. Shortly thereafter, the Pakistan Virtual Assets Regulatory Authority was established under a presidential ordinance to license and supervise virtual asset service providers, including exchanges, custodians, and token issuers. These bodies did not signal endorsement of crypto as money. They signalled the end of plausible deniability — formalising jurisdiction without resolving institutional overlap. Early regulatory actions reflected this posture. Licensing was phased. Approvals were conditional. Global exchanges such as Binance and HTX were granted preliminary clearances to begin compliance and local structuring — signalling jurisdictional reach rather than institutional trust. No sovereign assets were tokenised. No guarantees were extended. Oversight focused first on visibility, governance, and learning.
This matters because Pakistan’s crypto moment is not occurring in a vacuum. It is unfolding against a backdrop of persistent balance-of-payments fragility, inflation volatility, constrained capital mobility, and shallow domestic markets. Crypto’s scale reflects these constraints as much as it reflects technological adoption. The question facing policymakers is therefore not whether crypto exists, but how its existence reshapes incentives, risks, and institutional credibility. This dossier proceeds from that premise. It does not treat crypto as innovation theatre or moral hazard. It treats it as a shadow monetary system that has grown large enough to force a response. The sections that follow examine why that system emerged, why it persisted, how ambiguity redistributed risk, why regulation took the form it did, and why attempts at deeper integration now function less as strategy and more as stress tests of state capacity. Crypto did not announce itself. It accumulated quietly. This document begins at the point where accumulation becomes unavoidable.
Crypto as a Monetary Phenomenon, Not a Technology Story
Crypto’s rise in Pakistan is often described as abrupt, driven by speculative cycles or imported market enthusiasm. The data points elsewhere. Adoption accelerated rapidly after 2020, but the conditions that made it possible had accumulated over decades. Repeated inflationary episodes, successive currency devaluations, capital-account restrictions, shallow domestic capital markets, and episodic access to external financing steadily weakened the assumption that the formal monetary system would reliably preserve value. In such environments, parallel monetary arrangements do not replace the state. They coexist with it.
Pakistan’s monetary history is characterised less by stability than by interruption. Consumer inflation has been volatile, with multi-year periods in which headline inflation exceeded 20 percent, punctuated by abrupt adjustments tied to fiscal consolidation, energy price resets, or exchange-rate realignments. The rupee has depreciated sharply in nominal terms over the past decade, losing more than half its value against the US dollar since the mid-2010s. These shifts were not gradual. They were episodic, often policy-driven, and frequently coincided with balance-of-payments stress. Such patterns condition behaviour. Households and firms do not treat the domestic currency as a neutral store of value. It is a transactional medium, not a savings anchor. This distinction matters. Where currencies are trusted, diversification is optional. Where currencies are volatile, diversification becomes defensive. Crypto entered this environment as a new form of optionality. It offered a means to hold value outside the rupee, to move funds across borders without reliance on correspondent banking relationships, and to access global liquidity without administrative permission. Unlike earlier parallel instruments, it scaled digitally and rapidly. Entry costs were low. Participation required no physical infrastructure and no institutional endorsement. This combination proved decisive.
By the early 2020s, Pakistan had emerged as one of the largest countries globally for retail crypto participation. Independent adoption indices consistently placed it within the top tier worldwide, alongside much larger economies. Participation scaled rapidly through offshore and peer-to-peer channels, reaching levels large enough to be macro-relevant even where precise measurement remained elusive. Resident crypto holdings now rival segments of the formal financial system, while participation dwarfs domestic equity market breadth. At this scale, crypto ceases to be a fringe asset class. It becomes a macro-relevant monetary behaviour. Importantly, it does so in an economy where fewer than half a million individuals participate actively in the stock market, where government securities dominate financial intermediation, and where access to foreign currency remains tightly managed. Crypto did not compete with equities or mutual funds. It competed with uncertainty.
This functional role distinguishes Pakistan’s experience from that of advanced economies. In developed markets, crypto adoption has oscillated between speculative asset, portfolio hedge, and technological experiment. In Pakistan, it functioned more like a parallel monetary rail. It absorbed demand for value preservation, remittance flexibility, and informal capital mobility that the formal system could not reliably satisfy. This behaviour fits a longer historical pattern. Informal remittance networks expanded when banking channels were costly or unreliable. Dollarisation intensified during periods of macro stress despite legal and regulatory discouragement. Informal credit markets substituted for constrained banking outreach, particularly in rural and peri-urban areas. Each of these systems persisted not because they were optimal, but because they reduced friction under stress. Crypto belongs to this lineage. It is not ideological. It is adaptive.
What distinguishes crypto from earlier parallel instruments is scale and visibility. Informal systems were socially embedded but locally bounded. Crypto is digitally networked and globally integrated. It connects domestic behaviour directly to global liquidity conditions. This integration magnifies both opportunity and risk. The timing of adoption reinforces this interpretation. Crypto participation surged during periods of domestic stress and global liquidity expansion. It did not rise because macro conditions were benign, but because they were strained. When foreign exchange reserves tightened, when capital controls hardened, and when inflation accelerated, crypto usage expanded. Volatility did not deter participation; it was tolerated as the price of optionality. This tolerance reflects rational calculation rather than exuberance. For many users, the alternative was not stability but erosion. Holding rupees carried inflation risk. Holding dollars was restricted. Accessing foreign assets through formal channels was slow, expensive, or impossible. Crypto offered a different risk profile, but one that felt external to domestic policy shocks.
Crucially, this perception of externality mattered more than technical decentralisation. Whether crypto was truly insulated from global policy shifts was less important than the belief that it was insulated from local administrative intervention. In a system where access to foreign currency can be tightened overnight and regulatory signals can shift abruptly, perceived distance from domestic discretion carries value. Adoption patterns also reveal breadth. Crypto usage spread beyond urban elites into informal networks, remittance corridors, and small-scale trading communities. Knowledge transferred horizontally rather than institutionally. Platforms were introduced through social trust channels rather than through banks or licensed intermediaries. This diffusion mirrors earlier informal financial innovations more closely than it does formal fintech rollouts. Once routinised, behaviour hardened. Price crashes, exchange failures, and regulatory warnings altered tactics but did not reverse adoption. Activity shifted between platforms and instruments, but the underlying demand persisted. This resilience suggests crypto was meeting needs unmet elsewhere. Volatility was accepted because alternatives were perceived as equally fragile.
From a monetary systems perspective, this matters because it alters the state’s operating environment. When large segments of the population use parallel monetary instruments, formal policy levers lose some traction. Visibility declines. Control becomes probabilistic rather than absolute. This does not imply the collapse of monetary sovereignty, but it does render it more contingent. Crypto did not create this condition. It exposed it. It made visible the gap between formal monetary design and lived monetary behaviour. Treating crypto as a technology trend obscures this reality. Treating it as a monetary phenomenon brings it into focus. This framing is not a defence of crypto, nor is it an indictment of the state. It is a description of adaptive behaviour under constraint. Any serious analysis must begin here, before questions of regulation, integration, or experimentation are addressed. Crypto is not the starting point of the story. It is the signal that something deeper has been unresolved for a long time. Understanding crypto as adaptive behaviour, rather than speculative excess, is essential to explaining why parallel ledgers persist rather than fade.
Structural Drivers: Why Parallel Ledgers Persist
Parallel monetary systems do not emerge randomly. They persist where formal systems fail to meet specific economic functions at scale. In Pakistan’s case, the persistence of informal and semi-formal financial arrangements reflects a combination of structural constraints that have proven resistant to reform. Crypto did not introduce these constraints; it exploited them. The first driver is the shallowness of domestic capital markets. Pakistan’s financial system remains heavily bank-centric, with government borrowing absorbing a large share of available liquidity. Private credit penetration remains low relative to GDP, and equity market participation is narrow, numbering in the hundreds of thousands in a population exceeding 240 million. This concentration limits risk-sharing, restricts wealth formation outside real assets, and reinforces dependence on a small set of intermediaries. For households and small firms, access to diversified financial instruments remains constrained.
The second driver is persistent balance-of-payments fragility. Pakistan has experienced repeated external financing crises over the past three decades, often resolved through short-term inflows, bilateral deposits, or multilateral programmes. Foreign exchange reserves have fluctuated sharply, at times covering only weeks of imports. These episodes are not abstract macro events; they translate directly into import restrictions, exchange controls, delayed payments, and administrative rationing. Economic actors internalise this volatility. They learn that access to foreign currency is conditional and reversible. A third driver is capital control asymmetry. While Pakistan maintains a formally open current account for trade and remittances, capital mobility is tightly managed. Outbound investment is restricted. Portfolio diversification abroad is limited for individuals and firms. Even legitimate cross-border transactions often involve friction, documentation, and delay. This creates a segmentation between domestic savings and global opportunities. Crypto collapsed that segmentation. It allowed capital to move digitally where institutions could not—or would not—facilitate it. Fourth, inflation has not only been high; it has been uneven. Periods of relative price stability have been punctuated by sudden accelerations driven by currency depreciation, energy pricing reforms, and fiscal consolidation. These accelerations disproportionately affect households with limited access to hedging instruments. Real estate and gold have historically served as inflation hedges, but both require scale, liquidity, and physical custody. Crypto offered a hedge with lower entry barriers and higher liquidity, even if accompanied by volatility.
The persistence of parallel ledgers also reflects trust asymmetry between institutions and processes. Surveys consistently show low confidence in public institutions, including fiscal authorities and service delivery mechanisms. Financial trust is often interpersonal rather than institutional. Informal systems leverage this trust. Hawala networks operate on reputation. Informal credit relies on social enforcement. Crypto extended this logic digitally. Trust was placed not in domestic institutions, but in global protocols, platform liquidity, and social proof. Remittances illustrate this dynamic clearly. Pakistan is among the world’s largest recipients of worker remittances, with annual inflows exceeding $25 billion in recent years. Formal channels dominate in volume, but informal and semi-formal routes remain significant, particularly during periods of currency misalignment or administrative tightening. Crypto-based transfers emerged as a supplementary rail, particularly for smaller, frequent transactions. They reduced settlement time and bypassed documentation friction, even if conversion back into local currency remained informal.
This persistence is reinforced by demographic structure. Pakistan has a young population with high mobile penetration and growing digital literacy. Smartphone adoption exceeds 80 percent in urban areas and continues to expand in semi-urban regions. Digital platforms diffuse rapidly through peer networks. Financial behaviour spreads horizontally rather than through institutional onboarding. Once crypto usage crossed a threshold of familiarity, it propagated through social learning rather than formal marketing. Parallel ledgers also persist because enforcement costs are high. Informal systems are decentralised, adaptive, and difficult to police without broad collateral damage. Attempts to suppress them historically produced substitution rather than compliance. Restricting cash increased reliance on informal credit. Tightening foreign exchange controls expanded parallel currency markets. Crypto follows the same pattern. Suppression shifts activity across platforms and instruments rather than eliminating it.
Another structural driver is taxation asymmetry. Pakistan’s tax base is narrow, with a small proportion of the population contributing direct taxes. Large segments of economic activity operate informally. Crypto fitted naturally into this landscape. Gains and losses occurred outside visible tax infrastructure. This was not unique to crypto; it mirrored broader informality. However, crypto’s digital nature made the scale larger and the opacity more consequential. Once crypto scaled beyond behavioural margins, its fiscal invisibility — rather than its price volatility — became the state’s binding concern. Importantly, parallel ledgers persist not because the state is absent, but because the state’s reach is uneven. Regulation is often reactive, fragmented, and shaped by crisis rather than by design. Economic actors respond rationally to this environment. They diversify across systems, jurisdictions, and instruments. Crypto became one such instrument. The resilience of parallel ledgers also reflects path dependence. Once behaviour becomes routinised, exit costs rise. Users invest time in learning platforms, building networks, and understanding risk. Switching back to formal channels is not automatic, even when conditions improve. Trust, once shifted, does not revert easily.
This persistence has implications for policy. Parallel systems reduce the effectiveness of blunt interventions. They complicate measurement. They weaken the transmission of monetary policy by introducing leakages. At the same time, they provide shock absorbers for households and firms under stress. This dual character explains the state’s ambivalence. Parallel ledgers are both problem and coping mechanism. Crypto’s endurance in Pakistan therefore reflects structural conditions rather than episodic enthusiasm. It survives price crashes, regulatory warnings, and platform failures because it is anchored in unmet demand. As long as capital remains constrained, inflation volatile, and access uneven, parallel ledgers will persist in some form. The analytical mistake is to treat crypto as an anomaly to be corrected rather than as a signal of underlying constraints. Suppression without reform shifts activity but does not resolve demand. Integration without sequencing risks amplifying fragility. Understanding why parallel ledgers persist is therefore prerequisite to any serious engagement with crypto—regulatory or otherwise. This structural reality sets the stage for the next phase of the story: how prolonged ambiguity became policy, how risk was redistributed downward, and how invisibility eventually forced the state to respond. These conditions did not require policy failure to emerge; they required only prolonged constraint—setting the stage for a long period of institutional avoidance.
The Grey Zone Years: Strategic Ambiguity as Policy
For much of the past decade, Pakistan’s approach to crypto was defined less by law than by absence. There was no comprehensive statute governing digital assets, no licensing regime for exchanges, and no formal recognition of crypto as either legal tender or prohibited instrument. Instead, a posture of strategic ambiguity prevailed. Public warnings were issued. Financial institutions were discouraged from direct exposure. Yet retail participation continued, largely unchecked, through offshore platforms, peer-to-peer markets, and informal on-ramps. This ambiguity was not accidental. It reflected a calculated trade-off. By neither legalising nor criminalising crypto outright, the state avoided assuming responsibility for a rapidly evolving and poorly understood system. Risks were externalised to users. Institutions remained insulated from volatility and compliance exposure. The formal financial system could plausibly claim distance from activities occurring beyond its perimeter. For a time, this arrangement appeared workable. Crypto usage expanded quietly. Losses, when they occurred, were absorbed privately. The absence of formal recognition limited political accountability. However, as participation widened and volumes increased, the costs of ambiguity rose sharply.
The first pressure point was consumer harm. Exchange failures, frozen withdrawals, and sudden platform exits exposed users to losses with little recourse. Because platforms operated offshore and without domestic licensing, enforcement options were limited. Complaints accumulated without a clear institutional home. This asymmetry—where risks were borne domestically but accountability lay abroad—became increasingly untenable. The second pressure point was measurement. As crypto flows expanded, they complicated macroeconomic assessment. Cross-border transfers executed through digital assets bypassed traditional reporting channels. Balance-of-payments data became less complete. Capital movement occurred without visibility. For an economy already sensitive to external financing conditions, this loss of transparency carried material consequences. The third pressure point was compliance. International standards on anti-money-laundering and counter-terrorist-financing increasingly encompassed virtual assets. Expectations shifted from discouragement to demonstrable oversight. Ambiguity, once tolerated, began to attract scrutiny. The absence of a framework was no longer neutral; it was interpreted as a gap.
These pressures converged to expose the limits of the grey zone. Strategic ambiguity redistributed risk downward while deferring institutional learning. It preserved optionality in the short term but accumulated fragility over time. Crucially, ambiguity shaped behaviour. Users internalised the absence of protection and adapted accordingly. They diversified across platforms, avoided long-term custody, and relied on informal trust networks for guidance. Intermediaries, in turn, operated with minimal disclosure obligations and wide discretion. This environment rewarded opacity rather than transparency. Trust became social rather than institutional. From an institutional standpoint, this was a worst-case equilibrium. The state lacked visibility but remained exposed to reputational fallout. Users bore risk without protection. Formal financial institutions were shielded but disconnected from evolving behaviour. Learning occurred unevenly and reactively.
It is important to note that ambiguity was not equivalent to ignorance. Authorities were aware of crypto’s growth and its implications. However, early engagement was constrained by capacity, mandate, and sequencing concerns. Crypto cut across monetary policy, capital controls, securities regulation, taxation, and law enforcement. No single institution owned the problem. Coordination costs were high. In such circumstances, deferral becomes default. This deferral had consequences. By the time engagement intensified, crypto was no longer small. It had become embedded in household and small-business behaviour. Routinisation had occurred. Attempts to reassert control were therefore operating against an entrenched baseline rather than an emerging trend. Ambiguity also shaped public perception. The absence of clear prohibition reinforced a sense of permissibility. Platforms advertised aggressively. Peer-to-peer markets flourished. Crypto was not seen as illicit; it was seen as unofficial. This distinction mattered. Behaviour normalised not through endorsement, but through tolerance. Over time, the grey zone narrowed. Losses became visible. Enforcement expectations hardened. Fiscal authorities became alert to revenue leakage. Central bank concerns about monetary transmission intensified. What had once been a marginal issue became a coordination problem.
The transition away from ambiguity was therefore reactive rather than proactive. It was driven less by strategic vision than by accumulation of risk. The state did not pivot because crypto promised opportunity. It pivoted because continued non-engagement threatened control. This history matters because it shapes the tone and objectives of subsequent regulation. Frameworks developed under pressure tend to prioritise containment over integration. They are risk-averse by design. They seek to close gaps rather than to cultivate markets. This is not a criticism; it is an institutional reality. The grey zone years also left a legacy of mistrust. Users accustomed to operating without protection are sceptical of late-arriving oversight. Intermediaries accustomed to discretion resist constraint. Institutions entering the space face a credibility deficit. Trust, once displaced, is not easily reclaimed. From a policy perspective, the lesson is not that ambiguity was a mistake. In early stages, deferral may have been rational given uncertainty and capacity constraints. The lesson is that ambiguity carries compounding costs. The longer it persists, the harder it becomes to unwind without disruption.
By the time the grey zone began to close, crypto had already altered behaviour, expectations, and risk distribution. Regulation would therefore have to contend not only with technology, but with habituated practices and shifted trust. Understanding this transition is essential. It explains why regulation in Pakistan emerged defensively rather than aspirationally, why institutions emphasised visibility over innovation, and why subsequent debates focused on containment rather than promotion. The next phase of the story follows logically: how jurisdiction was reasserted, how oversight structures were constructed, and why regulation was framed not as endorsement, but as damage control. By the time ambiguity became politically untenable, the question was no longer whether to regulate, but how to contain risk without legitimising it.
Regulation as Containment, Not Endorsement
Pakistan’s turn toward formal crypto oversight was not the result of ideological conversion or strategic enthusiasm. It was the outcome of accumulated exposure meeting institutional constraint. By the time regulation became unavoidable, the policy space had already narrowed. The question was no longer whether to engage, but how to do so without inheriting risks the state was structurally ill-equipped to absorb. Crypto was neither granted legal-tender status nor formally prohibited; regulation focused on supervising intermediaries rather than legitimising the asset itself.
The first and most immediate objective of regulation was visibility. Crypto flows had grown large enough to distort measurement at the margins of the balance of payments, particularly in an economy where external financing conditions are central to macroeconomic stability. Even if digital asset transactions did not dominate aggregate flows, their opacity introduced uncertainty into reserve management, current-account assessment, and capital-flow monitoring. For a state that has repeatedly faced external financing stress, uncertainty itself constitutes risk. Regulation offered a mechanism—however imperfect—to reinsert observability where none existed. The second objective was jurisdictional reclamation. Under the grey-zone arrangement, risk was domestic while accountability was external. Users bore losses locally. Platforms operated offshore. Enforcement options were limited, slow, and politically costly. This asymmetry weakened institutional credibility. By asserting supervisory authority, the state was not endorsing crypto activity; it was reclaiming the right to intervene when failures produced spillovers. Regulation, in this sense, was an assertion of jurisdiction rather than an invitation to participate. The third objective was compliance signalling. International standards governing anti-money-laundering and counter-terrorist-financing had expanded explicitly to include virtual assets and their service providers. Expectations had shifted from discouragement to demonstrable oversight. In that environment, continued ambiguity risked being interpreted not as caution, but as tolerance. The reputational cost of inaction began to exceed the political cost of engagement.
These objectives converged within a fragmented institutional landscape. Crypto does not map cleanly onto Pakistan’s regulatory architecture. Monetary authority rests with the State Bank of Pakistan, whose mandate prioritises price stability, reserve management, and the integrity of payment systems. Market conduct and securities oversight fall under the Securities and Exchange Commission of Pakistan, whose remit is investor protection, disclosure, and systemic stability within capital markets. Fiscal authorities retain control over taxation, while law-enforcement agencies focus on financial crime and national security exposure. Crypto intersects all of these domains without belonging fully to any one of them.
This institutional geometry matters because it explains why coordination was slow and why regulation emerged defensively rather than programmatically. No single authority could claim ownership without encroaching on another’s mandate. Premature consolidation risked legal challenge, bureaucratic resistance, and policy incoherence. In such an environment, containment becomes the only viable starting point. The establishment of the Pakistan Virtual Assets Regulatory Authority reflected this reality. Rather than subsuming crypto under existing frameworks wholesale, the state opted for a specialised supervisory layer focused on licensing, basic governance standards, and phased oversight of virtual-asset service providers. This was not an attempt to elevate crypto into the core of the financial system. It was an attempt to ring-fence risk while institutional capacity caught up. Licensing, therefore, was treated as a process rather than an event. Approvals were conditional. Requirements were incremental. Learning was prioritised over scale. Global exchanges were permitted to begin local structuring and compliance alignment without being granted blanket authorisation. No guarantees were extended. No sovereign backing was implied. This sequencing was intentional. Once endorsement is conferred, it is difficult to retract without reputational damage. Containment preserves optionality.
From a monetary perspective, caution was rational. Crypto introduces leakages into the transmission of policy. When economic actors can move value outside formal channels, interest-rate adjustments, administrative controls, and prudential measures lose precision. In a system already struggling with transmission effectiveness, amplifying those leakages would have been imprudent. Regulation therefore aimed to slow, observe, and condition flows rather than accelerate adoption. From a fiscal perspective, the concern centred on visibility rather than yield. Crypto gains and losses had occurred largely outside the tax net, mirroring broader informality but at greater scale and speed. Attempting to tax without first establishing measurement and reporting would have been performative. Oversight was a prerequisite for any credible fiscal engagement. From a financial-stability perspective, the risk lay not in direct bank exposure—still limited—but in second-order effects. Retail losses could generate political pressure. Platform failures could erode confidence beyond the crypto sector. Informal leverage and rehypothecation could amplify shocks. Containment sought to pre-empt these spillovers before they migrated into regulated balance sheets.
Crucially, regulation was framed explicitly as non-endorsement. Crypto was not granted legal-tender status. Banks remained restricted in their exposure. Official language emphasised supervision, not promotion. This signalling was deliberate. In a context where institutional trust is fragile, perceived endorsement of a volatile asset class would have transferred moral hazard from intermediaries to the state. This posture, however, created an inherent tension. Users who had migrated to crypto precisely because it lay outside institutional discretion were sceptical of late-arriving oversight. Intermediaries accustomed to operating with minimal constraint resisted disclosure, segregation, and governance requirements. Regulators faced a steep learning curve, forced to supervise systems built on code, custody models, and cross-border liquidity rather than on familiar balance-sheet mechanics.
Containment therefore functioned as a stabilisation strategy rather than a resolution. It narrowed the grey zone without collapsing it. It shifted some risk back toward intermediaries without fully absorbing it. It signalled intent without over-promising capacity. The political economy of this approach should not be underestimated. Endorsement would have implied confidence the state did not yet possess. Suppression would have driven activity further underground, preserving opacity while increasing enforcement costs. Containment was the narrow path between these extremes. Once oversight is claimed, responsibility follows. This reality shaped the cautious tone of engagement and the reluctance to move faster than institutional learning allowed. Regulators were acutely aware that endorsing intermediaries before fully understanding their risk profiles would expose them to blame when—not if—failures occurred.
In this sense, regulation marked a transition from denial to management. Crypto ceased to be treated as an external anomaly and became an internal variable—unwelcome, perhaps, but unavoidable. This shift did not resolve the drivers of adoption. It did not restore trust in formal monetary instruments. What it did was change the rules of engagement. Containment stabilised the perimeter. It did not answer the deeper question of whether, or how, crypto infrastructure might be selectively integrated into the formal system. That question could only be approached once jurisdiction was reasserted and institutional capacity strengthened. The persistence of caution, therefore, is not evidence of policy confusion. It is evidence of risk awareness in a state where failure is asymmetric and credibility is hard-won.
Trust, Architecture, and Institutional Anxiety
Trust in financial systems is neither singular nor abstract. It is layered, conditional, and shaped by repeated performance under stress. In Pakistan’s case, trust has long been unevenly distributed across institutions, instruments, and processes. Households may trust banks to execute payments but not to preserve value. Firms may trust regulators to enforce rules selectively but not predictably. These distinctions matter because crypto did not ask users to trust institutions. It asked them to trust architecture. This distinction lies at the heart of both crypto’s appeal and the state’s unease. Crypto’s foundational promise was not profit, but determinism. Transactions could be verified. Supply rules were legible. Settlement was programmable. Custody could, at least in theory, be self-managed. For users accustomed to opaque policy shifts, administrative discretion, and uneven enforcement, this architectural clarity carried weight.
In practice, however, architecture and implementation diverged sharply. While base protocols offered transparency, most users interacted with crypto through intermediaries that reintroduced discretion. Exchanges aggregated liquidity, controlled custody, set internal risk rules, and determined access. In doing so, they recreated institutional dynamics without institutional obligations. This gap between theoretical transparency and operational reality became the central fault line of Pakistan’s crypto ecosystem. Failures exposed this fault line with force. Platform collapses, withdrawal freezes, and unexplained outages revealed how much trust had migrated away from code and toward intermediaries. Losses were often sudden and asymmetric. Users bore downside risk. Information flowed unevenly. Legal recourse was limited or non-existent. These episodes did not discredit crypto as a concept. They discredited specific custodial and governance models.
From an institutional standpoint, this distinction is critical. Regulators are designed to supervise entities, not ideologies. They can impose capital requirements, segregation rules, governance standards, and disclosure obligations. They struggle to supervise decentralised protocols that lack identifiable counterparties, balance sheets, or jurisdictional anchors. Pakistan’s regulatory anxiety stems in part from this mismatch. Crypto’s most attractive features—borderlessness, programmability, self-custody—are precisely those that complicate enforcement. This anxiety is compounded by capacity constraints. Supervising traditional financial institutions relies on established tools: audited financial statements, prudential ratios, on-site inspections, and legal enforceability through courts. Supervising crypto requires different capabilities: understanding custody architecture, tracking on-chain flows, auditing smart contracts, and assessing counterparty risk across borders. Building this capacity is neither quick nor cheap. In the interim, oversight risks legitimising intermediaries before fully understanding their risk profiles.
Trust dynamics further complicate the picture. Users often prioritise immediacy, liquidity, and peer validation. Institutions prioritise stability, predictability, and enforceability. Crypto platforms optimised for rapid user growth frequently did so by maximising discretion—over custody, leverage, internal controls, and risk management. This optimisation aligned with user demand in an environment of limited alternatives, but conflicted directly with regulatory expectations. The result was a trust inversion. Users distrusted domestic institutions shaped by past instability, but trusted offshore platforms with little formal accountability. Institutions distrusted platforms but lacked leverage over users operating beyond formal channels. Regulation entered this environment late, inheriting scepticism from both sides.
Architecture matters because it determines where trust ultimately resides. Systems that minimise discretionary control reduce reliance on institutional credibility. Systems that centralise control demand it. Pakistan’s crypto ecosystem evolved toward centralised custodial models not because users demanded them, but because scale, convenience, and liquidity favoured them. This evolution increased systemic risk while preserving the appearance of decentralisation. Institutional anxiety intensified as regulators recognised this divergence. Licensing exchanges without addressing custody architecture risks importing banking-era failures into a new domain. Custodial concentration creates single points of failure. Rehypothecation obscures liability. Internal ledgers substitute for on-chain finality. Each of these features undermines the very architectural clarity that drew users to crypto in the first place.
Attempts to restore trust through partial measures illustrate the difficulty. Proof-of-reserves initiatives increased transparency at the margin but failed to reassure fully. They captured assets at a moment in time, not liabilities or contingent exposures. They revealed balances, not governance. They did not constrain behaviour between attestations. Users intuitively understood these limits, which is why such measures did not materially alter trust dynamics. For institutions, the problem runs deeper. Architectural transparency does not substitute for legal enforceability. Code executes deterministically, but disputes arise at the interface between digital assets and the real economy. Ownership, liability, insolvency, and consumer protection remain legal constructs. Without clear jurisdictional anchors, even transparent systems can leave participants exposed.
This tension exposes a core limitation. Architecture without enforceability produces fragility. Regulation without technical comprehension produces false confidence. Trust becomes suspended between systems that promise certainty but deliver volatility, and institutions that promise stability but deliver unpredictability. The anxiety this generates is not abstract. It manifests in cautious regulatory language, incremental licensing, and reluctance to confer full endorsement. Authorities are acutely aware that once trust is extended, it is difficult to retract. Endorsing intermediaries that later fail damages not only users but institutional credibility, particularly in a state where credibility is already scarce. At the same time, prolonged scepticism carries its own costs. Users continue to operate outside formal safeguards. Learning remains fragmented. Risk accumulates in less visible forms. Trust does not revert to institutions by default; it migrates elsewhere.
From a systemic perspective, the central question is not whether crypto can be trusted. It is where trust should reside. In Pakistan’s case, neither pure code nor pure authority has proven sufficient. Hybrid arrangements—where architecture constrains discretion and institutions enforce boundaries—offer a potential path forward. But such arrangements require sequencing, technical capacity, legal reform, and restraint. This explains why debates around deeper integration provoke unease. They are not merely technical discussions about efficiency or innovation. They challenge existing distributions of trust and responsibility. They force institutions to confront whether they can supervise systems that were designed to bypass them. Understanding this anxiety is essential before considering any attempt to repurpose crypto infrastructure for sovereign or quasi-sovereign functions. Without resolving the trust-architecture mismatch, integration risks amplifying fragility rather than mitigating it. The dossier now turns to that point of confrontation—where macro pressures, global cycles, and institutional ambition intersect, and experimentation shifts from containment to stress testing.
Crypto, Macro Cycles & Tokenization Stress Tests
Crypto’s trajectory in Pakistan cannot be understood outside the global macro-financial cycle. Its expansion phases have coincided less with domestic optimism than with moments of stress—tight external financing, currency pressure, volatile energy prices, and shifts in global liquidity. In such periods, crypto behaves not as an alternative monetary system insulated from macro forces, but as a pressure valve that absorbs demand when formal channels narrow and releases it when conditions tighten. This cyclicality matters because it binds domestic behaviour to forces beyond national control.
For financially exposed economies, these cycles are asymmetric. Liquidity upswings create the impression of access and optionality; downswings expose fragility. Capital that arrives easily departs just as quickly. For Pakistan, where external buffers are thin and policy space constrained, this asymmetry amplifies risk. Crypto adoption during stress therefore reflects not exuberance, but hedging behaviour in the face of constrained choice. It is within this macro context that the state’s posture evolved from containment toward cautious experimentation. Not because crypto promised stability, but because ignoring it imposed rising costs. The exploration of tokenising up to $2 billion in national or quasi-sovereign assets—reportedly through a non-binding framework involving Binance—should be read accordingly. It was not a declaration of intent. It was a probe — one that, regardless of internal motivations, would inevitably be interpreted through the lens of constraint.
Globally, tokenization has proceeded slowly for a reason. Where it has occurred, it remains embedded within traditional custody frameworks, clear legal enforceability, and limited pilot scale. Settlement efficiency, not capital substitution, has been the objective. Failure in advanced economies is absorbable. Legal systems are robust. Reputational buffers are deep. In financially constrained states, failure is reputationally expensive and politically salient. The asymmetry is decisive. Tokenization is most tempting precisely when conventional channels are constrained. It promises access, speed, and global reach. Yet those are the moments when sequencing matters most. Experimentation undertaken under pressure risks mistaking liquidity for credibility. For sovereign or quasi-sovereign assets, credibility is the asset. Any structure that introduces ambiguity over custody, enforceability, or jurisdiction undermines that credibility rather than extending it.
Recent regulatory steps underscore this caution. Conditional clearances, phased licensing, and supervisory learning signal curiosity without commitment. They acknowledge the existence of new rails without ceding control over state balance sheets. No sovereign assets have been tokenised. No guarantees have been extended. The emphasis remains on governance, not scale. Tokenization therefore functions as a stress test rather than a strategy. It tests whether institutions can supervise new infrastructure without diluting authority. It tests whether legal systems can enforce claims that traverse code and contracts. It tests whether markets can distinguish between innovation and substitution. Most importantly, it tests whether ambition can be restrained until capacity catches up. This stress-test framing also clarifies what tokenization is not. It is not a shortcut to capital access. It is not a substitute for fiscal reform or reserve accumulation. It does not resolve balance-of-payments fragility. Treating it as such risks compounding vulnerability rather than alleviating it.
Crypto did not create Pakistan’s monetary constraints. It revealed them. It exposed the distance between lived financial behaviour and formal monetary design. Whether crypto remains a parallel ledger or becomes selectively integrated will depend less on technology than on sequencing—on whether institutional capacity, legal enforceability, and credibility are strengthened before experimentation expands. Sovereignty is rarely lost to innovation. It erodes when urgency outruns capacity and when experimentation substitutes for reform. Crypto simply accelerates that reckoning, compressing timelines and narrowing room for error. In Pakistan’s case, restraint is not conservatism; it is statecraft.
Reference Corpus: 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15
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