The kidnapping of a cryptocurrency trader has revealed a web of illicit activities and corruption in the law enforcement agencies. As a result Raja Umar Khattab, the Intelligence DSP of the Counter Terrorism Department and Raja FarrukhYounus, a DSP of the Special Protection Unit, have been suspended from service. Their suspension comes after allegations that two constables under their command were found complicit in a brazen kidnapping and forced transfer of $340,000 from the victim's account.

On December 25, cryptocurrency trader Arsalan was abducted in Manghopir. Arsalan filed an FIR at the Manghopir police station on December 27. He told police that private individuals, under the pretense of buying dollars, used a police vehicle with five police officers to kidnap him from Manghopir.

Arsalan was taken to a place near the passport office inSaddar where they transferred around $340,000 to other accounts. Later they abandoned him near the Quaid’s mausoleum. CCTV footage of the incident caught the police officers riding a police vehicle.

The incident exposed a darkside of Pakistan's thriving cryptocurrency market, which has been operating in a regulatory grey area, leaving traders vulnerable to scams, corruption and illicit activities.

The cryptocurrency landscape in Pakistan is expanding rapidly, with over 20 million registered accounts on exchanges, providing users with a platform to buy, sell and trade digital currencies.

In 2024, blockchain analytics firm Chainalysis ranked Pakistan ninth on its Global Crypto Adoption Index. Despite a lack of regulations, the annual trading volume of digital assets in Pakistan is estimated to range between $18 billion and $25 billion. Crypto trading in Pakistan is currently unregulated.

In 2018, the State Bank of Pakistan had notified a ‘prohibition’ on dealing in virtual currencies for the entities it regulates and advised the general public to refrain from indulging in crypto trading. To get around this restriction, most Pakistani cryptocurrency traders and investors use peer-to-peer (P2P) transactions to fund and withdraw from their exchange accounts.

The rise of decentralisedcryptocurrencies has introduced a new layer of complexity in the fight against financial crimes and terrorist financing. The anonymous and decentralised nature of cryptocurrencies such as Bitcoin has made these an attractive option for illicit activities. Criminals and terrorist organisations can use cryptocurrencies to receive funding from sympathisers and supporters, making it difficult for authorities to disrupt their financial networks.

The anonymity and cross-border nature of cryptocurrencies make them an attractive option for terrorist organisations seeking to evade detection. This was one of the primary reasons for the ban on cryptocurrencies in Pakistan. O January 19, the ISIS has sought donations through cryptocurrency using a media outlet that published a poster in English and Arabic.

The poster instructed supporters to make donations via Monerocryptocurrency, providing a Monero (XMR) wallet address and a QR barcode directing to it, as well as a Telegram account to contact.

The increasing use of cryptocurrencies in Pakistan, coupled with the lack of education on digital asset security, makes traders vulnerable to crimes. There is always an added risk of hacking or identity theft while using bank cards.

Binance Square, a social media networking content platform, reported dozens of frozen accounts in the last week of December 2024.

The trouble began with scammers approaching potential investors with lucrative offers to purchase cryptocurrency at unusually high rates of return. Once the payment was received and the currency purchased, via P2P platforms, transferred into their wallet, the account was frozen by authorities tracking ‘stolen funds.’

The increasing use of cryptocurrencies in Pakistan, coupled with the lack of education on digital asset security, makes traders vulnerable to crimes. There is always an added risk of hacking or identity theft while using bank cards.

The amount was stolen from some other accounts and the receiver became part of a fraud chain and left to face investigation. Only 15 percent of the accounts were restored after establishing legitimate business activity.

Cryptocurrency uses cryptography for security and its transactions are recorded on a public ledger called a blockchain that ensures integrity and transparency. Blockchain technology is the underlying infrastructure for most cryptocurrencies. It is a decentralised, distributed ledger that records transactions across a network of computers. It offers security through advanced cryptography. The ledgers cannot be altered or deleted.

Bitcoin, Ethereum (ETH), Litecoin (LTC), and Monero (XMR) are some of the most popular cryptocurrencies. Bitcoin is the most widely recognisedcryptocurrency, with a limited supply of 21 million coins. Its blockchain is primarily used for peer-to-peer transactions.

Ethereum, the second-largest cryptocurrency by market capitalisation, is a smart contract platform that enables the creation of decentralised applications (dApps). Its blockchain supports a wide range of applications beyond transactions. USDT (Tether) and USDC (USD Coin) are also popular stable coins, designed to maintain a stable value relative to the US dollar, reducing the volatility associated with other cryptocurrencies. They are widely used in cryptocurrency trading, often as a hedge against market fluctuations.

Some international exchanges like Binance, Coinbaseand Kraken are accessed from Pakistan. Some local businesses and individuals also operate over-the-counter desks, where they buy and sell cryptocurrencies.

These transactions are typically made in person or through Facebook and WhatsApp groups. In the absence of regulatory oversight, purchasing cryptocurrency is risky. Experts say any platform, exchange or individual must be thoroughly researched before engaging in cryptocurrency transactions.

To trade cryptocurrencies it is imperative to select a reliable exchange or a peer-to-peer marketplace. The peer-to-peer model works when a buyer transfers money directly to the seller of coins, whereas service providers act as intermediaries and provide escrow services to hedge credit risks. A software wallet (MetaMask) or a hardware wallet (Ledger) can be used to store cryptocurrencies.

Many service providers across the world facilitate financing into cryptocurrencies. The most popular among them in Pakistan are Binance, Coinbase, Crypto.com and OKEX.

Traditional international payment instruments such as debit/credit cannot be used due to the State Bank of Pakistan’s prohibition on financial institutions under its umbrella. Investors instead use bank transfers through a local bank account, JazzCashor EasyPaisa through the P2P system.

Through over-the-counter services, they deposit Pakistani rupees into the platform's account to buy the desired cryptocurrency by placing a market order or a limit order. After the purchase, the amount is transferred to the digital wallet for safekeeping. EasyPaisa and JazzCash allow users to purchase these. For a sale, the cryptocurrency can be transferred back to the platform and exchanged. The exchange platforms charge fees for trading.

Crypto is a highly volatile digital asset. Its biggest fall was reported in 2022 when the price of Bitcoin fell below $19,000 from nearly $70,000 a few months ago, amid a broader market meltdown driven by rising interest rates, inflation and economic uncertainty spurred by the war in Ukraine. It reclaimed some of its lost value when Trump embraced it during his election campaign.

Former secretary finance Mohammad YunusDagha, who chairs the Policy Advisory Council, in his policy brief for Federation of Pakistan Chamber of Commerce and Industry: Prospects of Cryptocurrencies, called for tapping into the vast wealth of crypto assets held by Pakistani citizens and dual nationals.

Currently, investors are utilising P2P mechanisms, rendering them undetectable. He recommended allowing these virtual assets through a one-time asset declaration scheme, accompanied by a capital gains tax.

Furthermore, there is an urgent need to develop a comprehensive regulatory framework and national cryptocurrency strategy. This would enable Pakistan to adopt the ecosystem swiftly, safeguard its economic interests, and minimise vulnerabilities. Recognising speculative gains in digital coins as a legitimate asset class, rather than a legal tender, would be a prudent step, Dagha suggested.

“Introducing crypto-linked exchange-traded funds will attract domestic and foreign portfolio investments, revitalising the Pakistan Stock Exchange's status as an emerging market. Delaying this process may result in these assets being diverted to more crypto-friendly jurisdictions, ultimately depriving Pakistan of a significant economic opportunity,” he said.

Since, cryptocurrencies pose significant risks, including threats to financial stability and facilitating fraudulent transactions, money laundering and illegal purchases, the policy brief recommended regulation by implementing the legal framework to align with the Financial Action Task Force and the International Monetary Fundguidelines.

India currently taxes crypto gains at 30 percent. It has been suggested that Pakistan could devise a similar taxation framework.

Earlier this month, Senator DrAfnanUllah Khan tried to introduce the Virtual Assets Bill 2025 in the Senate. The bill aimed to regulate the issuance, use and trading of virtual assets. It also proposed the introduction of a digital rupee backed by the Pakistani rupee, the establishment of virtual asset zones to ensure financial stability and investor protection and a legal framework to recognise the digital rupee as legal tender. However, Law Minister AzamNazeerTarar argued that, under the constitution, only the federal government has the authority to propose such legislation.

- The writer is a staffer at The News