Pakistan's bold move towards stablecoins has sparked a heated debate, with some experts fearing it could further weaken the country's currency.
In a recent report, the Daily Mirror highlights how Pakistan's partnership with World Liberty Financial, a US crypto firm, might accelerate the country's dollarization. This, in turn, could undermine Pakistan's macroeconomic stability, especially given its fragile currency and limited monetary policy space.
The report argues that a dollar-pegged stablecoin encourages households to view the dollar as a preferred store of value and medium of exchange, potentially leading to a shift away from the Pakistani rupee (PKR). This currency substitution could intensify exchange-rate pressures and create a feedback loop, further weakening the rupee.
But here's where it gets controversial: the report suggests that stablecoins, by bypassing banks, could divert household and business liquidity into digital wallets outside the regulated system. In Pakistan, where monetary policy relies heavily on banks' balance sheets, this could reduce the impact of interest rate changes and complicate liquidity management.
The confidence in PKR has already been shaken by recurrent inflation spikes and sharp devaluations. The International Monetary Fund (IMF) has warned that widespread stablecoin adoption could drain deposits from local banks, further undermining monetary frameworks in vulnerable economies like Pakistan.
The Bank for International Settlements also raises concerns about the basic principles of sound money, questioning the monetary sovereignty associated with such instruments.
Despite the State Bank of Pakistan's historically cautious stance on crypto, the new agreement with World Liberty Financial, linked to the Trump family, has given quasi-official legitimacy to a foreign-controlled stablecoin ecosystem. This move, the report suggests, was influenced by powerful forces within Pakistan.
And this is the part most people miss: crypto coins are private liabilities, and their stability relies on the quality of reserves, legal enforceability, and the issuer's ability to handle redemptions during stressful periods. In advanced economies, these risks are mitigated by strong supervision and deep markets. However, Pakistan lacks control over the issuer and the capacity to backstop a crisis involving a foreign-controlled stablecoin.
So, the question remains: Is Pakistan's stablecoin experiment a bold step towards financial innovation or a risky move that could further destabilize its economy? What are your thoughts on this controversial topic? Feel free to share your opinions in the comments below!
