Cryptocurrencies in Pakistan: A high-tech replacement for hawala-hundi?

Underbilling solar panels and bags full of cash to casually move dollars are so last century. There are more technological ways to send money across borders without alerting authorities, and one of them is through cryptocurrencies.

The new cash/check The type is stablecoins like Tether (commonly known as USDT). Stablecoins differ from normal free-floating cryptocurrencies, such as Bitcoin, in that they seek to ensure price stability within the cryptoverse. They aim to maintain a constant value, regardless of broader crypto market fluctuations, and are often pegged to different assets, such as fiat currency.

USDT is the most popular stablecoin and is pegged to the value of the US dollar. So whether the dollar to PKR exchange rate is 250 rupees or 350 rupees, a single unit of USDT will always be worth 1 dollar.

Locals can use rupees to buy USDT and buy Bitcoin. In this case, think of USDT as a token in a university cafeteria: you use rupees to buy a token, which you present at the buffet line so you can buy lunch. The token is not legal tender, meaning you cannot use it to purchase a pack of Kurkure locally. paybut you can use it to buy samosay in the buffet line.

Given the challenges of transferring foreign currency in and out of the country, many are turning to the facility of USDT, which, once transferred, can be converted back into fiat money.

On the one hand, the government is trying to encourage remittances. On the other hand, IT professionals working for foreign clients lament the challenges of bringing home their hard-earned money. People are leaving the country, but the inflow of official remittances is decreasing. This is partly because remittances have shifted towards stablecoins.

"I am 100 percent sure this is happening," says Shabbar Zaidi, former chairman of the Federal Board of Revenue. "It is a form of cash/check, with a different structure. Pakistan’s potential for remittances is about $40 billion, but it is distributed in small amounts,” he said.

In FY23, Pakistan received $27 billion in remittances, up from $31.3 billion in FY22. This indicates that nearly $10 billion could have been diverted into various informal channels, including stablecoins. Instead of the hassle of formal channels to send money, a person in the US can send transfer remittances in 15 minutes because it is a faster process where there is no exchange of physical cash.

“Some people use the business-to-business marketplace to transact in USDT. Even when dollars were not easy to come by, you could buy USDT, which you could then use to trade cryptocurrencies or hold as a hedge,” says payments expert Moiz Hussain, chief financial officer (CFO) at Neem Exponential Financial Services.

“Many companies that export, as well as freelancers from international companies, choose to receive payments in stable currencies such as USDT. So if you sell to a company in the United States, instead of sending dollars, they convert them to USDT and send them to Pakistan,” says Hussain.

While 1 USDT is equivalent to $1, the PKR to USDT rate fluctuates at a premium. So if USD is trading at Rs 300 in the open market, USDT could be trading at Rs 305.

“USDT reflects the USD, but cryptocurrency fluctuations impact USDT. When the cryptocurrency market goes down, people sell cryptocurrencies to liquidate their positions, which increases demand for USDT and drives up its price. Therefore, the gap may increase from Rs 5-6 to Rs 8-9,” explains Hussain.

While many laypeople find the complexities of the cryptoverse still baffling, Pakistan's adoption rate is one of the highest in the world, according to blockchain data platform Chainalysis, which ranked the country eighth. Global Cryptocurrency Adoption Index 2023.

“Regardless of the exchange rate, the pace at which cryptocurrencies are purchased in Pakistan continues to grow,” says Zeeshan Ahmed, country managing director at Rain Financial. “Remittances have moved from banking channels to crypto channels, and many freelancers are also being paid.”

However, it is difficult to measure the volume or percentage of informal trading that takes place with stablecoins. “Cryptocurrencies are difficult to trace due to their nature. However, common sense dictates that if more people are moving abroad, but remittances are decreasing, then money is moving somehow,” says Ahmed.

Their hypothesis is supported by observations in Chainalysis. recent reportwhich notes that a large portion of the activity that occurs in Pakistan is done through peer-to-peer exchanges, common in emerging markets or countries with stricter capital controls.

“The need to preserve wealth in the face of high inflation and currency devaluation appears to be the reason why many Pakistanis have turned to cryptocurrencies,” the report says, quoting Ahmed. Since most of Pakistan's transaction volume, especially the purchase of stablecoins, is done through informal P2P marketplaces, it cannot be easily identified on-chain, the report states.

Over the past decade, cash in circulation has increased from 28 to 41 percent as a percentage of bank deposits and from 22 to 29 percent as a percentage of total money, according to an article in Sunrise. This means that many more people are walking around the country with wads of Rs 5,000 notes in their pockets. More cash in circulation indicates an increase in the informal economy.

When money must cross borders, the use of USDT is useful. While many, even those at the top levels, appear to be blind to cryptocurrencies, those with some technological knowledge have more enlightened ways of staying under the radar.