ICAP CFO Conference Lahore

Presentation by Riaz Nazarali Chunara

12 April 2018

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Currency Management

The views expressed in thispresentation are those ofthe speaker and do notnecessarily reflect the viewsof the State Bank ofPakistan

Agenda

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PKR Depreciation and hedging approach for Forex risks

Background and Nature of Crypto Currency

Bitcoin – A Case Study

Legal Position of CCs in Pakistan

Global Regulatory Approaches

PKR Historical Statistics Depreciation 1994-11%, 1996-11%, 1997-13%, 1998-12%, 1999-10%, 2001-19%, 2008-11%, 2009-

16%, 2018-11% Appreciation 2002, 2003 & 2014

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Historical USD-PKR Exchange Rates

Forward Exchange facilities

• Chapter 4 of Foreign Exchange Manual, SBP

• Approved within the permissible “Exchange Exposure limits”

• Exporters – upto six and a half months from the last date of shipment

• Importers – Over 1 month and less than 1 year against L/C only. Not available in case of oil products

• Forward cover against Foreign Private Loans –forward cover on 12 months rolling basis

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How to hedge Forex Risk??

CNY??

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Background of Cryptocurrencies

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Money – An Overview

• Store of Value

• Unit of Account

• Medium of Exchange

• Means of Settlement

Currency

• A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade. (Investopedia)

• Any form of money that is in public circulation. Currency includes both hard money (coins) and soft money (paper money). Typically currency refers to money that is legally designated as such by the governing body, but in some cultures currency can refer to any object that has a perceived value and can be exchanged for other objects. (Investowords)

Evolution of Currency

Virtual Currencies

• Defined as “non-physical store of value that can be exchanged for goods and services at places that accept them. “ (Monetary Authority of Singapore, 2014)

• MMORPG

– Being used in Multiplayer games or MMORPG(Massively Multiplayer Online Role Playing Games)where the gamers use different virtual products to boost their performance or clear certain level or get special items within the game.

Virtual Currencies

• Centralized Virtual Currency is a type in which the Virtual Currency is issued by an organization and authorized to record Virtual Currency transactions. Herein, Virtual currency can be purchased at a fixed rate which is set by the issuing organization– Farmville Bucks/ Steam Coins / – Skype Credits

• Decentralized Virtual Currency is not owned by any organization and it’s usually being maintained by the users of the respective Virtual Currency community. The rate of Decentralized Virtual Currency is also determined by the users and there is no authentic or complete record of transactions.– Bitcoins– Litecoins

Virtual Vs Digital Fiat Currencies

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Digital Fiat Currency Virtual Currency Schemes

Money Format Digital Digital

Unit of Account Traditional Currency with legal tender

status

Invented Currency without legal

tender status

Acceptance By undertakings other than the issuer Usually within a specific virtual

community

Legal Status Regulated Un-regulated

Issuer Legally established digital money

institutions

Non-financial private companies

Money Supply Fixed Not Fixed (depends on Issuer)

Possibility of

Redemption

Guaranteed (at par value) Not guaranteed

Supervision Yes No

Types of Risks Mainly operational Legal, Credit, Liquidity, and

Operational

Source: European Central Bank

Strong Cryptography

Peer to Peer Network

Nature of Virtual Currencies

Distributed Ledger Technology (DLT)

Mining or Pre-Mined

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BITCOIN – A CASE STUDYA Virtual currency for Real Transactions

Bitcoin : An Introduction

• Introduction to Bitcoin - Video

• Centralized Ledger v/s Decentralized Ledger

• Peer to Peer Transaction Ledger

• Secured Transactions ensured by Cryptography

• A Bitcoin is a chain of Digital Signatures.

• It is based on cryptography.

• Bitcoin is the first execution of the concept of ‘Crypto Currency’ by Wei Dai in 1998.

• It is not backed by any organization or institution;

Bitcoin : Cryptography

• “Cryptography is a science of writing code in secret code and also a well-known ancient art.

• The data upon with the cryptography applied is known as ‘encrypted’

• Three Types of Cryptography– Symmetric Cryptography – Asymmetric Cryptography – Digital Signatures.

• Bitcoins Uses Asymmetric Cryptography, a public encryption key and a private decryption key

Bitcoin : Introduction

• Block Chain– Bitcoin users have the data of all the transactions in a public ledger called

‘Block Chain’. The new Distributed Transaction Processing Technology.

• Bitcoin Wallet– In order to use Bitcoin, one must have a Bitcoin wallet. A Bitcoin wallet is a

software which can be downloaded on your PC, Mac or smart phone. The Bitcoin wallet allocates the user a unique address e.g. 1Gbp8QPp1zpTv3q5j26YBpoNEvJWawhudP

– Hot Wallet– Cold Wallet

• Mining– The process used to confirm the waiting transactions is known as ‘Mining’.

Mining is a distributed consensus system which enforces the chronological order in the block chain by involving the users to verify the block chain. The longest block chain is verified as confirmed and broadcasted further.

Bitcoin : Tech Savvy

• Miners– The programmers who solve the complex

mathematical algorithms via their computers to verify the ledgers and get bitcoins in return.

• Determination of Exchange Rate– Determined by the simple Demand & Supply of

the Bitcoin

– Now traded in various exchanges

• How does it Work ? - Video

Bitcoin : How to Use ?

• Setup the Bitcoin Wallet– Choose your Wallet

• Mobile HOT Wallet

• PC HOT / COLD Wallet

• Hardware COLD Wallet

• Web HOT Wallet

– Setup your Wallet Address • 1P6L8DhGwBRAticg7HNyiH64h1jWjFaY5Z

– Save your Wallet Password (Encrypting your Wallet)

Virtual Currency Ecosystem

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Miners create Bit

coins by using

computers to solve

complex

mathematical

functions. The

same process also

verifies previous

transactions

Bitcoin Exchanges

trade between

conventional

currencies and

Bitcoin offering a

way into the market

from non-miners as

well as a way to

cash out

Wallet: Users download Bitcoin wallet that works

a little like an email address, providing a way to

store and receive currency. Bit coins can be

transferred from one wallet to another

Businesses create

wallet in the same

way as an individual

user, typically using

a website button to

enable a Bitcoin

payment.

Bitcoin : Security Breach!

• BITCOIN NEVER GETS HACKED! Bitcoin’s Wallet Does !

– Hacking Bitcoin technically means that counterfeit bitcoins have been injected into the Blockchain.

• Hacking the Bitcoin Wallet

– Malware Software to copy the passwords

– Bitcoin Wallet’s Website (Hot Wallets)

– Human is the weakest link in the Cyber security.

Bitcoin : The Buzz!!!

• Bitcoin got the limelight due to Silk Road

– An illegal marketplace in the deep web for the trading of illegal weapons, drugs, assassins etc.

• Bitcoin’s anonymity became the Key Player in the limelight

• Silk Road could only be accessed by special protocols like TOR (The Onion Ring) to keep the user’s IP address anonymous.

• On October 2, 2013, Ross William Ulbricht, alleged by the FBI to be the owner of Silk Road and the person behind the pseudonym "Dread Pirate Roberts”, was arrested in San Francisco.

• The ‘Silk Road’ is shut down, and the owner is in custody. Feds confiscated 144K bitcoins, worth $133m* (*W.r.t. rate at that time)

• The site was seized but alternate sites have already sprung up.

Bitcoin : How to Use ?

• Carrying out the Transaction

– Scan the QR Code Bitcoin Wallet Address

– Enter Amount

– Enter your Password (Passphrase)

– Hit Send !

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Every block introduces 50 new coins in the system. This quantity (50) halves every 210,000

blocks. So, getting the limit of coins it is possible to generate is quite easy : it's the sum of a

geometric series.

Also, note that this is an upper bound ; the actual quantity will probably be a bit lower due to

rounding issues (BTC has a finite number of decimals, 8).

Bitcoin in Different Jurisdictions!

Bitcoins are Awesome!

• Australia

• Brazil

• Canada

• USA

• South Korea

• Cyprus

Bitcoins … Not Cool!!!

• Thailand

• India

• Bangladesh

• Bolivia

• Ecuador

• Kyrgyzstan

• China

• Pakistan

Risks & Benefits of Virtual Currencies

• Risks are more than benefits

– Money Laundering and Terrorist Financing

– Capital Outflow

– Frauds & Scams

• No immediate benefit but the underlying Distributed Ledger Technology (DLT) may bring innovation and efficiency in the long run

– Example: Cross Border Payments

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Altcoins & Tokens

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SBP Caution regarding risks of Virtual

Currencies

• Virtual Currencies/Coins/Tokens (like Bitcoin,Litecoin, Pakcoin, OneCoin, Pay Diamond, etc) areneither recognized as Legal Tender nor has SBPauthorized or licensed any individual or entity forthe issuance, sale, purchase, exchange orinvestment in any such Virtual Currencies/Coins/Tokens in Pakistan

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A Near-Ban approach

SBP Guidelines on Cryptocurrencies

• Advised financial institutions (Banks/DFI/ Microfinance Banks and Payment System Operators/Payment Service Providers to refrain from facilitating VCs activities (BPRD Circular 03 of 2018)

• Reasons – High degree of Anonymity, can be used for illegal activities, no legal protection or recourse, High price volatility, transferring value outside Pakistan are subject to prosecution. Hacking / security compromises, similar to Ponzi schemes

• Refrain from indulging in activities to mining, exchanging, transferring value, promoting and investing

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Global Regulatory Approach

• Responses have varied across jurisdictions

• Actions have usually been initiated by Central Banks

• Cautious – wait and see approach

• Regulatory Action has been taken by authorities for:

– AML/CFT

– Taxation

– Customer Protection

– Frauds

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Country Specific Approaches & Measures

Petro (PTR) - Venezuela

• A crypto currency back by Oil and Venezuelan government

• Based on NEM/Ethereum Blockchain• Pre-mined – 100 million tokens• Planned in two stages:

– Presale – 38.4 million PTR (Started Feb 20, 2018)– ICO – 44 million PTR

• Government expects to raise 6 Billion USD at current market price of Oil ($62 per barrel)

• Raised USD 735 million worth of Petros on 1st Day

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Thank You

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