Pakistan’s crypto experiment risks destabilizing Its currency and weakening the economy

Pakistan’s January 14 understanding with the U.S. president’s family-linked crypto business, World Liberty Financial, has been pitched as a modern solution to an old problem. By lowering remittance costs and positioning Pakistan as an early mover in regulated digital payments, the partnership is framed as efficiency-enhancing rather than disruptive. Yet the real implications lie not in payment speed or transaction fees, but in macroeconomic mechanics. For a country with a fragile currency, recurring balance-of-payments stress, and limited monetary policy space, the introduction of an officially endorsed dollar-linked stablecoin risks amplifying rather than reducing instability.

 

At the core of the problem is currency substitution. A dollar-pegged stablecoin is not simply a neutral technological layer. It embeds a preference for the U.S. dollar as a unit of account, store of value, and medium of exchange. In economies with strong currencies and deep financial markets, this may be marginal. In Pakistan, where confidence in the rupee has been periodically shaken by inflation spikes, sharp devaluations, and International Monetary Fund (IMF)-driven stabilization cycles, the effect can be structurally significant. When households and businesses are given an accessible, state-tolerated alternative that tracks the dollar, the incentive to hold and transact in PKR weakens.

 

This mechanism is well understood by central banks. The IMF has repeatedly warned that widespread stablecoin adoption in emerging markets can create competitive pressure on domestic currencies and encourage de facto dollarization, especially where monetary credibility is limited. Reports suggest that the IMF’s Davos discussions highlighted concerns that stablecoins could drain deposits from local banks and undermine monetary frameworks in vulnerable economies. The Bank for International Settlements has gone further, arguing that stablecoins fail basic tests of sound money and pose risks to monetary sovereignty, particularly outside advanced economies.

 

For Pakistan, reduced demand for PKR is not an abstract risk. Currency substitution directly affects exchange-rate dynamics. As transactional and savings demand shifts toward a dollar-linked instrument, pressure builds in foreign-exchange markets, increasing sensitivity to external shocks. Even small portfolio shifts can matter in a system where reserves are thin and expectations play an outsized role. The result is a feedback loop in which stablecoin adoption, initially marginal, accelerates rupee weakness and reinforces the perceived need to exit PKR exposure.

 

The State Bank of Pakistan’s historical posture on crypto trading reflects awareness of this risk. In its 2018 circular, the SBP explicitly instructed regulated entities not to engage in virtual currency transactions, citing concerns about anonymity, illicit use, and legal uncertainty.[3] Under pressure from powers within Pakistan, subsequent SBP communications have softened in tone but not in substance, emphasizing that any move toward digital assets must be tightly regulated and coordinated with fiscal and financial-stability objectives. In May 2025, the SBP reiterated that it had not licensed crypto activity and was only engaging in exploratory work with the government to develop a regulatory framework focused on investor protection and systemic safety.[4] That caution stands in tension with an externally anchored stablecoin ecosystem gaining quasi-official legitimacy.

 

A third destabilizing channel is financial disintermediation. Stablecoins bypass banks. Funds held in digital wallets are funds not held as deposits within the regulated banking system. In Pakistan, where monetary policy transmission depends heavily on banks’ balance sheets and liquidity conditions, this matters. If even a modest share of household and business liquidity migrates to stablecoin wallets, the SBP’s ability to influence credit conditions weakens. Interest-rate changes become less effective, liquidity management grows more complex, and stress episodes can escalate more quickly.

 

The fourth mechanism relates to transparency and the integrity of trade and business payments. Pakistan has spent years under FATF scrutiny and continues to face pressure from international partners to improve financial transparency, trade documentation, and AML/CFT compliance. Bank-mediated payment systems, for all their inefficiencies, provide audit trails that support tax enforcement, trade verification, and financial monitoring. Stablecoin-based settlement, even when nominally regulated, complicates this ecosystem.

 

Once flows move outside conventional banking rails, visibility declines. This affects not only illicit finance detection but also routine economic governance, including trade invoicing, customs valuation, and corporate taxation. The efficiency gains of crypto settlement come at the cost of weaker institutional oversight in an economy that can least afford it.

 

A fifth vulnerability lies in governance and risk. Crypto coins are private liabilities, not sovereign money. Their stability depends on the quality of the reserves, the legal enforceability of the instrument, and the issuer’s ability to meet redemptions under stress. The BIS has warned that even well-designed stablecoins can face liquidity mismatches and redemption pressures, potentially triggering asset fire sales. In advanced economies, such risks are mitigated by strong supervision and deep markets. Pakistan has neither control over the issuer nor the capacity to backstop a crisis involving a foreign-controlled stablecoin.

 

This creates an asymmetric exposure. If a dollar-linked stablecoin becomes embedded in domestic commerce and savings behavior, Pakistan absorbs the downside risk of any disruption, whether due to regulatory action abroad, political controversy, or market stress.

 

Finally, the political economy of the Trump linkage itself deserves scrutiny. According to reports, the partnership involves World Liberty Financial, described as the main crypto venture of Donald Trump’s family, positioning Pakistan as one of the first countries to engage at this level. Regardless of intent, tying a sensitive payment and settlement function to a politically exposed U.S. ecosystem increases external vulnerability. Changes in U.S. regulatory attitudes, compliance rules, or reputational dynamics could have immediate spillover effects on Pakistani users. For a country already navigating complex external dependencies, this is an unnecessary exposure.

 

Taken together, these mechanisms point in one direction: Pakistan’s crypto bet risks accelerating quiet dollarization, weakening PKR demand, and undermining macroeconomic stability.