Pakistan, already testing waters of digital rupee should back it with ‘digital gold’ before the next bull run.

Pakistan, the world’s fifth-most populous and 23rd-largest economy in terms of PPP, has recently initiated plans to study and launch its own digital rupee. It is of no surprise that the primary objectives of the digital rupee remain tackling corruption, increasing taxation, and fighting terror financing: yet buying Bitcoin can allow Pakistan to reap over-arching benefits.

Before delving deep into what is there for Pakistan to gain by buying Bitcoin, let’s examine few intricacies of digital currency and cryptocurrencies.

Bitcoin the primary spearhead of cryptocurrency and the most valuable digital asset, was launched in 2009 by an anonymous engineer named Satoshi Nakamoto. The basic concept proposed a peer-to-peer electronic cash system utilizing the proof-of-work concept. Since its inception, Bitcoin has witnessed years of extreme volatility, adoption and astonishingly, fluctuated into a market size of around $600 Billion(~$1 Trillion at its 2021 peak). This valuation sets it above the ranks of several famous tech companies including Airbnb, Uber, Intel, and IBM. And not to mention, it’s the cryptocurrency space that has produced innovative companies like Coinbase, Kraken, and Binance.

Ethereum, the second-largest cryptocurrency based on the concept of proof-of-stake, has also fared well with a market valuation of >$200 Billion. In fact, the usage of Ethereum has created another field of decentralized finance (‘deFi’). Defi presents itself as an antonym of traditional finance. Billions of worth of dollars are locked up in Defi space providing financial services including loans, interest-earning, and line of credit around the clock.

The whole space of cryptocurrencies and assets is growing at a rapid pace. The potential trillion-dollar industry is hard to ignore and Pakistan should embrace it with open arms to maximize the gains.

On the other hand, the digital rupee (dPKR) is not a cryptocurrency but has characteristics of a cryptocurrency. It is in fact a digital creation of the rupee, issued and backed by the State Bank of Pakistan (SBP) and open to inflationary pressure. With a digital rupee, the amount (dPKR) can be downloaded like a file on a user’s hard drive, store on any local drive using a digital wallet, and funds can be received or sent to any other wallet cutting the role of the middle man, the bank to some extent. Likewise, it can still be easily printed (or programmed) by means of monetary policy, and just like today, it shall be traded against $USD in international markets. With access to the internet and smartphones increasing in Pakistan, it is of no surprise to expect more introduction and adoption of digital wallets. Thus, introducing a digital rupee is a step in the right direction.

Recently, the status quo PKR has appreciated against the USD, but the USD itself has been losing value year over year. This entails PKR losing value as well. Inflation, another appreciation and depreciation measure of PKR has been spiraling upwards; signaling the rupee losing its intrinsic value. In addition, excessive printing of money (part of monetary policy) can devalue PKR as well. And for this reason, central banks continue to hold gold to date. Gold is considered a safe haven against inflation, economic crisis and is internationally accepted. Pakistan possesses around 60+ million tons of gold, worth billions of dollars.

If Pakistan continues to push forward its plan to introduce the digital rupee (dPKR), it needs to back it with digital-gold as well. With the increasing digitization of national currency, there will be increased digitization of gold reserve equivalents. And currently, Bitcoin is the only digital asset to fulfill this gap. Bitcoin’s growth outperforms any traditional asset by a factor of 5–100X. Similarly, bitcoin’s Sharpe ratio (an important investing metric) surpasses other investing assets over the last 6 years. The resounding growth of Bitcoin can initially be attributed to the speculative nature of this digital asset, however, stability is slowing becoming a virtue of this asset with more institutional buying and acceptance rising across the world. Bitcoin like any other classic asset is highly divisible, can be moved around the world within seconds, highly secured, durable, and is fully decentralized.

However, like other subcontinent neighbors, the people of Pakistan have a cultural association (in jewelry and ornaments) with gold. Thus, an idea to replace gold with Bitcoin shall be far too fetched. In fact, the best thing Pakistan’s SBP can do is to buy bitcoin. Investing even a half-worth of gold in bitcoin can yield returns to be on par with Pakistan’s existing gold reserves, given another 10x appreciation.

Even if SBP doesn’t peg the bitcoin to the digital rupee, simply holding bitcoin as a strategic reserve is a good bet for the country. The government of Pakistan which often underutilizes its budgets, and makes poor investment bets can diversify some of its risk with investing and holding bitcoin. The return potential is far greater than the risk SBP can afford.

Moving on from Bitcoin’s position as a store of value, the intrinsic advantage of Bitcoin is the decentralized network behind it. With a fully decentralized currency, not run and controlled by any financial institution, Pakistan can shove off the risk of financial delisting. Pakistan, which has been struggling to get itself off the FATF’s greylist despite regular improvements, can suffer very damaging economic (such as asset freeze) and financial (such as disinvestment, embargoes) circumstances. This FATF episode itself appeals to an alternative system Pakistan or for that matter, any country can rely on to avoid financial deplatforming. Pakistan, being a strategic partner of the US and economic partner of China, can often find itself in a tug of war between the two superpowers. Therefore, for Pakistan, a possibility of social, economic, financial, and military pressures always lingers on. Thus, it needs a financial network that it can rely on in times of conflict. Bitcoin, not being controlled by anyone individual and cannot be frozen or seized by any state, shall allow Pakistan to safeguard its financial and national security.

Furthermore, buying Bitcoin can create a new entrepreneurial ecosystem in the country. To begin with, with the acceptance of cryptocurrencies Pakistan-based entrepreneurs can tap a large pool of foreign capital. Notable investment firms, venture capitalists, billionaires, and companies are hunting for big solutions based on cryptocurrencies. By buying Bitcoin, Pakistan can show its willingness in supporting such propositions and it is for the same reason countries like Singapore and Switzerland are taking favorable stances towards cryptocurrency. This is akin to giving tax breaks to foreign companies to set up manufacturing plants and offices in the country, except with Bitcoin everything takes place digitally and securely.

Likewise, buying Bitcoin can spur growth in Pakistan’s local financial sector. Decentralized Finance (Defi), a blockchain-based form of finance is a rapidly growing field, eliminating the role of a central authority and utilizing smart contracts. With Pakistan buying Bitcoin, it can show its intent to stimulate innovation in this Defi space. Local entrepreneurs can utilize this opportunity to help create solutions based on blockchain, which will consequently bring in investment and economic opportunities. In addition, the field of cryptocurrency mining is one Pakistan can tap off as well. It is worth mentioning that so far a buzz around cryptocurrency has been created in Pakistan with prominent social media personality, Wakar Zaka and his team tenup.io, taking a lead role.

In terms of price projections and movement, Bitcoin has fallen 42% from its April peak ($63,729 USD) owing to an amalgamation of issues including a possible crackdown in China, energy consumption concerns, and regulatory tightening. The currency has entered into a consolidation phase, with a continued decrease in overall volatility. With an aim of holding for the long term, the current price of ~$31,005 USD reflects a perfect entry point for SBP to buy it.

To get things rolling, Prime Minister Imran Khan and SBP should immediately:

• buy Bitcoin for strategic and hedge purposes
• fast track the development and implementation of the digital rupee
• initiate regulatory framework development
• introduce crypto-friendly capital policy
• encourage the development of a local crypto ecosystem

Pakistan having no shortage of talent, and skill can put itself at the forefront of the crypto industry. The best and foremost thing it can do is to buy Bitcoin and avoid banning the cryptocurrency at all costs, as one Twitter user famously said:

Countries don’t ban bitcoin. They only ban themselves from the bitcoin network.

Written by: Muhammad Fahad Faizan (Founder, PakESDA)