Top intelligence agency has shared policy, regulatory and enforcement plan with Finance Minister Asad Umar to effectively deal with fast emerging trend of crypto currency (Bitcoin) trade in Pakistan, which is providing a platform for tax evasion.
Sources told Business Recorder here on Saturday that the top intelligence agency has also made a set of recommendations, way forward and countermeasures to the finance minister for phase-wise implementation in June 2019 and December 2019.
"Irrespective of the option GoP adopts, ie, declaring crypto-currencies as legal or illegal, a robust oversight mechanism (mapping, investigation and prosecution) will have to be put in place as soon as possible," the premier intelligence agency added.
Reportedly, there are over 5,000 dealers/exchanges involved in this illegal trade through cash/online payment system in approximately 100 cities of the country and it is expanding with a growth rate of 400 percent per year. Prevailing international environment demands a serious and speedy attention by all stakeholders to evolve a befitting response in this regard, the premier intelligence agency added.
According to the letter of the intelligence agency to Asad Umar, the finance minister's efforts towards revival of economy and recent steps taken in countering the terror financing (TF) convey volumes about his vision, professionalism and dynamism. The intelligence agency would take the opportunity to highlight a fast emerging trend of crypto currency (Bitcoin) trade in Pakistan; providing an easy/anonymous platform for the tax evasion, money laundering (ML), TF and funding for other criminal activates. This posses serious implications for the GOP and can be a cause of embarrassment at international level, especially in the absence of robust/comprehensive oversight mechanism to map/monitor the illegal business.
The finance minister's office is requested to sensitise the relevant ministries/ departments/ law enforcement agencies about the said issue in order to initiate concerted efforts for desired response. The following recommendations, way forward and countermeasures have been suggested:
1. Declaration of Crypto-currencies as legal: All such currencies have definite future prospects and are likely to cap the overall financial market in near future. Pakistan also needs to capitalise on such business opportunities to her advantage like other modern countries instead of declaring these as illegal. The responsibility may be given to MOF/SBP and timeline should be June 2019.
2. Registration of Crypto-currency exchanges and individuals: In order to monitor/ bring under tax net, the crypto currency/Bitcoin exchanges and individuals involved in trade need to be registered under Pakistan Stock Exchange(PSX) and Securities and Exchange Commission of Pakistan (SECP) for mapping/clear visibility purposes and to increase taxation. The responsibility may be given to MOF/SBP/SECP/PSX and timeline should be June 2019.
3. Classification of Crypto currencies: There is a need for new classifications of crypto-currencies as "an investment" with all net gains to be taxed. For example, the US tax authority (IRS) has classified crypto-currencies as "property" for the purpose of federal taxation, whereas the US Treasury Department's FinCEN (Financial Crimes Enforcement Networks) has classified crypto-currencies as "value" for the purpose of AML/CFT obligations. Other countries have taken a different approach, avoiding a formal classification and focusing instead on the nature or type of transactions being conducted. The responsibility may be given to MoF/SBP/FBR and timeline should be June 2019.
4. Develop a coordinated virtual currency strategy: It should include outcome goals, a description of how the GoP intends to achieve these goals, and an action plan with a timeline for implementation. In addition, the strategy should be to use the tools available to FBR and identify how the FBR is going to meet its Bank Secrecy Act (BSA), criminal investigation and tax enforcement obligations as related to virtual currencies as well as identify how actions will be monitored and the methodologies used to measure the actions taken. The responsibility may be given to PTA/MoF/SBP/FBR and timeline should be June 2019.
5. FATF report and guidance: All concerned are also required to carry out study of FATF reports including 'Virtual Currencies Key Definitions & Potential AML/CFT Risks-June 2014' and 'Guidance for a Risk-Based Approach-Virtual Currencies June 2015.' All countries are required to implement the relevant AML/CFT requirements specified by the FATF as international standards to convertible virtual currencies (VC) exchanges. This should include three areas like know your customer procedures, maintaining certain transactional records and reporting suspicious transactions of various types. The responsibility may be given to all departments and timeline should be June 2019.
6. Monitoring of crypto-currencies: It is the most difficult part which needs specific expertise/laws through which crypto-currency trade being carried out via hidden platforms needs to be brought under a registered banner. For the purpose, following is recommended:
A): Analysis of models adopted by different countries and promulgation of relevant laws.
B): Training to acquire technical expertise to oversee/track such trade i.e. through exchanges and well as individual based trading.
C): Establishment of a special department within the SBP to study the impact of trade and deal with such currencies housing financial experts, cyber experts, data analysis and representatives of intelligence agencies.
D); Nomination of a lead agency/deportment to carry out related investigation. Recom-mended department is FIA.
E): Stringent KYC and scrutiny of transactions by financial institutions (FIs).
F): It is suggested that GoP to establish a national task force on the module of Australia and the USA comprising members from all concerned departments to monitor the flow of transactions through crypto-currencies.
G): Examples of establishment of a monitoring department of virtual/crypto currencies by contemporaries: In December 2017, Australia passed an amendment to AML/CFT legislation to cover digital currency exchanges which are being monitored by AUSTRAC under the amended legislation i.e. Digital Currency Exchange Providers Law under which they are required to register in AUSTRAC's new digital currency exchange register.
In USA, a Bill titled 'Financial Technology Innovation & Defence Act' aims to form a new task force headed by secretary of treasury, with other members (attorney general & directors from LEAs including FBI, CIA & secret service) who can propose regulations to counter such activities.
South Korea has banned anonymous trading of crypto-currencies and introduced the real-name system which went into the effect immediately.
The following countermeasures have been suggested:
Investigation: Until the government collectively enforces the regulatory principles, the responsibility will fall on the law enforcement and bank AML units to identify suspicious transactional behaviour at the points of ingress and egress between the financial institutions and basic crypto exchanges. For banks, this approach should be two-fold i.e. investigator training and crypto-exchange focused detection scenarios. Many legitimate investors regularly transact between banks account and basic exchanges. As with any AML operation, segmenting normal customers from possible money launderers requires specific considerations. The GOP also needs to adopt this model. The responsibility may be given to MoF, SBP, FIA, FMU and PTA with timeline of December 2019.
Human Resource (HR) Training: It is of utmost importance that requisite capacity building of HR/LEA/representatives of intelligence agencies dealing with the subject be done through technical training in order to effectively play their role. The responsibility may be given to MoF and SBP with timeline of June 2019.
Creation of Framework for Initial Coin Offering (ICOs): ICOs are the basic tool for Bitcoin users to go through its future process. It is a new business model for the exchanges/companies offering new coins. If an exchange wants to offer ICOs, the regulation should require them to ensure that the ICO meets certain criteria. A clear set of rules on what is and isn't acceptable should be set out.