KARACHI: Pakistan’s central bank is all set to launch the pilot of the country’s first digital currency within two months following the completion of the required groundwork, the deputy governor of the State Bank of Pakistan (SBP) said this week.

Increasingly seen as a potential replacement for physical cash, central bank digital currencies (CBDCs) are digital versions of cash that are issued and regulated by state-owned banks. In 2018, Pakistan’s central bank declared virtual currencies (VCs), including Bitcoin, Litecoin, Pakcoin, OneCoin, DasCoin, and Pay Diamond, as illegal and prohibited their use in trading.   

CBDCs are more secure compared to cryptocurrencies and are designed to complement existing physical cash and traditional forms of electronic money. The currencies are built on blockchain technology (DLT) and are intended to provide a secure and efficient means of conducting digital transactions. 

“The groundwork (of the digital currency) has been completed and [the SBP] will run a pilot that is called sandbox so that we could carefully examine it,” Sima Kamil, Deputy Governor of SBP, told Arab News early this week.

“The sandbox will be launched in a month or two,” she said, referring to a controlled environment provided for testing innovative products, services, or business models in a limited and supervised manner.

SBP officials said the central bank, which has been researching options for its own digital currency, is ready to launch its pilot or sandbox in a month or two.

Kamil added that the launch of the digital currency was “part of our five-year strategy.”  

Under the strategic plan titled “SBP Vision 2028,” which was announced on Monday, Pakistan’s central bank said it plans to transform the SBP into a high-tech, people-centric institution. 

The bank also plans to bring inflation to the target level (5-7%) in the medium term and promoting fairness in the banking system in next five years, as per the SBP Vision 2028.

The deputy governor said the CBDCs have been launched by a handful of countries so far while other countries and central banks are examining them.

According to Atlantic Council CBDC tracker, so far, only Nigeria, Jamaica, and Bahamas have launched their CBDCs whilr other countries including China, India, Saudi Arabia, France, Ghana, Canada, and Uruguay have launched their pilots.

Pakistan has been studying the options of launching digital currency since 2019 with the launch of laws for electronic money institutions (EMIs).

The regulations also cover other regulatory requirements including outsourcing activities, anti-money laundering and countering-financing of terrorism (AML/CFT), consumer protection, complaint handling mechanism, oversight, and regulatory reporting.

Despite not getting recognized as legal tender, the interest in cryptocurrencies has been on the rise in Pakistan, which recorded around $20 billion of cryptocurrency value in 2020-21, according to a research report by the Federation of Pakistan Chamber of Commerce and Industry (FPCCI).   

However, the deputy governor of SBP clarified that CBDCs are different from cryptocurrencies. 

“People do mix [them] sometimes,” she said, adding that CBDCs were different from cryptocurrencies as they will be considered the central bank’s legal tender currency.   

Meanwhile, cybersecurity experts termed the rollout of the sandbox by Pakistan’s central bank a “landmark step”.  

“Financial services and business models have been revolutionized by technology, and among them, digital currencies are the manifestation of state-of-the-art breakthroughs,” Dr. Muhammad Khurram Khan, professor of cybersecurity at King Saud University, Saudi Arabia, and the founder of Global Foundation for Cyber Studies and Research (USA), told Arab News on Friday. 

He said nations around the world have been stepping up their efforts to test and launch their own stable digital currencies.

“It would be a landmark step if Pakistan’s central bank laid the foundation and rolled out a sandbox to test and standardize the measures for local use cases and scenarios for the fintech industry.” 

He, however, added that cybersecurity risks make the whole financial ecosystem vulnerable to security and privacy risks.  

“The central bank of Pakistan should give paramount importance to their digital currency sandbox and comply with personal data protection and global cybersecurity standards,” Khan advised.