The legalization of cryptocurrency in Pakistan is gaining momentum, requiring a strong regulatory framework to mitigate financial crimes.

The previous articles in this series have laid the basis by discussing the fundamental mechanisms of cryptocurrency, the oversight body and licensing requirement, and consumer protection measures.

The implementation of Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations is considered a significant pillar in ensuring compliance with international standards and securing the financial ecosystem against illicit activities.

Pakistan’s roadmap to crypto legalization–III

The concept of blockchain and distributed ledger technology (DLT) serves as the backbone of cryptocurrency transactions.

The fundamental principle behind blockchain is decentralization, allowing transactions to be recorded in a public ledger that is immutable and transparent. The nature of wallets, addresses, and hashes is integral to understanding how transactions take place.

The distinction between custodial and non-custodial wallets is significant in implementing AML regulations since custodial wallets are managed by exchanges or third parties, while non-custodial wallets give users complete control over their private keys.

The classification of crypto assets, including Bitcoin (BTC), Ethereum (ETH), ERC-20 tokens, stablecoins, decentralized finance (DeFi) assets, and non-fungible tokens (NFTs), requires a clear regulatory approach.

The Financial Action Task Force (FATF) has emphasized that virtual assets (VAs) and virtual asset service providers (VASPs) must adhere to risk-based compliance requirements to prevent their misuse for financial crimes.

The introduction of FATF Recommendation 15 has mandated the inclusion of VASPs under AML-CFT regimes globally, including Pakistan.

Pakistan’s roadmap to crypto legalization–II

The FATF Travel Rule requires VASPs to collect and share originator and beneficiary information for transactions exceeding a certain threshold. The challenge of assessing money laundering (ML) and terrorist financing (TF) risks in cryptocurrency lies in its pseudo-anonymous nature, cross-border exposure, and........

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