Pakistan and Digital Currency: Strategic Intent of Crypto Norms

Amidst a dwindling economy, rising inflation, and loan repayments for the IMF and other nations, Pakistan is aiming to modernise and explore alternatives to get back on track. A dedicated body to develop blockchain-based infrastructure, known as the Pakistan Crypto Council (PCC), was recently created by the Government of Pakistan.

Illustration by The Geostrata

On May 21, Bilal bin Saqib was appointed as Pakistan’s Minister of State for Crypto and Blockchain. Within a remarkably short time, Pakistan actively engaged in multiple initiatives to integrate digital assets into its economy and enhance strategic international partnerships.

Bin Saqib, on his visit to the White House, met the executive director of U.S. President Donald Trump’s Council on Digital Assets, Robert “Bo” Hines.

Other key strategic discussions during the meeting include the establishment of a Strategic Bitcoin Reserve, partnership with World Liberty Financial (WLF- a decentralised finance platform backed by former US President Donald Trump), establishing Bitcoin mining infrastructure, exploring remittances from blockchain, and the formation of the Pakistan Digital Assets Authority (PDAA) to monitor the regulation of blockchain-based financial infrastructure. This strategic move by Islamabad poses serious concerns for the global financial order, with India to face the most immediate and subtle impacts.

CROSS-BORDER SPILLOVERS

Directly, crypto regulations in Pakistan will not have a major impact on India. However, there are several loopholes if the government of India doesn’t keep a check on the advancements in Pakistan. Legalising and a rise in dealing with cryptocurrencies without strict monitoring can help terror outfits exploit these platforms. Foreign donations to these organisations can be received in anonymous digital wallets, which might be very difficult to track.

Furthermore, liquidating this money will be easier with the help of peer-to-peer platforms or mixers. Mixers are the tools that divide the cryptocurrency into smaller bits and transfer it to anonymous accounts, which enhances the privacy of the transaction and complicates the process of tracking.

Easily accessible online, these mixers often require a minimal amount to use and are designed to complicate and obscure the origin of crypto, to protect the user from fraud or unwanted attention, but they can often be misused. Secondly, Islamabad’s ‘Strategic Bitcoin Reserve’ creates a grey space in the geopolitical landscape.

It will be very easy for Pakistan to trade in crypto with countries under sanctions and support proxies in other nations. Such a move by Pakistan will weaken the SWIFT system to track financial flows or detect suspicious activities. Further, crypto will make it easy for ISI to fund its covert operations and provide financial support to its sleeper cells, along with providing end-to-end encrypted messaging channels.

The NIA (National Investigation Agency) has traced back some transactions in cryptocurrency Tether and Bitcoin used for radicalisation drives in Kashmir.

And that’s not all. India has imposed heavy (30%) taxes and strict regulations on trading in cryptocurrency. Whereas Pakistan can allow a low-tax or easy environment for such transactions. If India fails to keep pace with the evolving crypto policies, Pakistan could emerge as a preferred hub for traders dealing with crypto, looking to evade India’s stricter laws. This could subtly undermine India’s digital diplomacy edge, despite the strategic gains made through UPI.

GLOBAL CASE-STUDIES FOR CRYPTO-FINANCED THREATS

Cryptocurrency is used as a good alternative by some nations to evade sanctions, fund hostile actors, or weaken the financial systems of other nations. Let’s understand the severity of the issue with some case studies. One such example is North Korea. North Korea is under severe sanctions imposed by the UN and other countries, including the US, the EU, Japan, South Korea, and Australia.

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The reasons to impose such hefty sanctions are mainly the Nuclear Weapons Program, Ballistic Missile Tests, several human rights abuses, and illegal economic activities.

North Korea, under a dictatorial regime, owns a state-sponsored hacking unit, the Lazarus Group, that has been linked to several high-profile cyberattacks. The group is responsible for stealing funds and laundering them through mixers to use them for these illegal activities, leaving untraceable marks. 

Lazarus Group has been involved in major heists, including $620 million stolen from Axie Infinity (2022), $275 million from KuCoin (2020), and millions more from crypto ATMs and P2P (digital platforms for direct transactions between two users without relying on an intermediary) apps.

Further, through the advancement in crypto technology, North Korea is easily existing amidst huge sanctions, rerouting the funds through shell companies often located in Southeast Asia and Africa.  Another example is the use of crypto by terror groups like Hamas, Hezbollah, ISIS, Al-Qaeda, JeM, LeT, and their affiliates.

Specifically, terror groups like JeM and LeT, which are the proxies of Pakistan and its secret agency ISI, use cryptocurrency for terror activities in India.  In August 2022, the Jammu and Kashmir State Investigating Agency (SIA) raided several locations in the Union Territory, seizing digital devices, SIM cards, mobile phones, and documents of suspects of certain terror activities.

This revealed a sophisticated network involved in transferring funds from Pakistan’s ISI and affiliated terror outfits through crypto, evading financial surveillance. The funds were transferred via Bitcoin to agents in Jammu and Kashmir, who used them to incite violence and militancy in the valley.

Pakistan is modernising its economy by introducing cryptocurrency laws in the country. All this legal, less-regulated, and faster alternative can turn Lahore and Karachi into a cybercrime hub that already targets Indian markets. 

The move might get Pakistan in Trump’s good books, but it is a matter of serious concern for the world. India will be the first to face the impact because of the frequent cross-border terrorism.

The regulation of cryptocurrency will not just impact the digital diplomacy of India, but will raise several security, compliance, and criminal misuse concerns. 

Without any regional framework, cryptocurrency will become a cross-border blind spot, under which terrorist groups will be able to transfer funds more easily. They are yet to do so, but after the set regulations of Pakistan, the number of crypto transactions will be so huge that without an efficient and indigenous infrastructure, India will face a hard time tracing them. It is high time India strengthens its blockchain monitoring capabilities for national security and pursues regional cooperation to secure its financial assets.

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BY NEHAL SHARMA

CENTRE FOR DIPLOMACY AND INNOVATION

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