Critique of Virtual Assets Ordinance, 2025

The evolution of cryptocurrency regulation in Pakistan reflects a complex interplay of global influence, domestic resistance, and policy pause. The initial opposition from the State Bank of Pakistan (SBP) in 2018, coupled with stringent enforcement actions, gradually shifted under international pressure, particularly from the Financial Action Task Force (FATF), toward cautious acceptance. The growing momentum during 2024, supported by technical consultations with global agencies and domestic regulatory bodies, culminated in the promulgation of the Virtual Assets Ordinance, 2025, on July 8, 2025 [“the Ordinance”]. The Ordinance signifies Pakistan’s formal legislative leap into the domain of digital assets, but raises more questions than it answers.

The Ordinance, became effective from July 8, 2025, is modeled largely on the frameworks of United Arab Emirate’s VARA, EU’s MiCA, and FATF recommendations. The promulgation the Presidential Ordinance under Article 89 of the Constitution, bypassing a full parliamentary debate, highlights the urgency but also raises concerns over democratic oversight. The structure of the Pakistani economy, with high cash reliance, low digital literacy, and informal sector dominance, differs starkly from those jurisdictions whose models Pakistan has mirrored. Therefore, attempting to transplant complex global frameworks without contextual tailoring risks regulatory dysfunction.

The Ordinance begins with the establishment of the Pakistan Virtual Assets Regulatory Authority (PVARA) narrative under Part-II, a central licensing and supervisory body. The composition and appointment of its management are vaguely defined, and there are insufficient institutional safeguards to guarantee autonomy or transparency. The overlaps between PVARA, SECP, and SBP present unresolved institutional conflicts that may create regulatory paralysis.

The licensing regime under Part-III & IV of the Ordinance introduces steep procedural and financial entry barriers. The paid-up capital thresholds are ambiguously left for future prescription, placing startups and small-scale innovators in limbo. The lack of transitional licensing or sandbox provisions, combined with immediate criminal liability under section 50 for non-compliance, severely curtails entry and experimentation.

The classification of Virtual Assets Services under section 14 [Schedule – I] recognize exchange services, custody, transfers, issuance, broker dealers and advisory roles. However, the failure to account for DeFi applications, decentralized liquidity pools, automated market makers, cross-chain bridge providers, and Decentralized Autonomous Organization (DAO) operators renders the Ordinance technologically outdated. The rapid pace of crypto innovation necessitates a far more dynamic classification framework.

The Ordinance includes a broad definition of virtual assets under section 3(xxii), but ignores critical sub-classifications like e-money tokens (EMTs), and hybrid instruments. The absence of explicit regulation of stablecoins is a glaring omission, particularly when these instruments are central to real-world crypto use cases such as remittances and treasury management.

The anti-money laundering and combating the financing of terrorism (AML/CFT) obligations in sections 38 to 41 mirror FATF’s Recommendation 15, including Travel Rule compliance. However, the requirement under these sections for VASPs to monitor all transactions for suspicious activity appears disproportionate, especially for low-volume, peer-to-peer service providers. The FATF emphasizes a risk-based approach, which Pakistan’s ordinance does not sufficiently accommodate.

The provisions related to penalties and enforcement in sections 46 to 53 are punitive in tone. The Ordinance prescribes imprisonment, fines, license revocation, and asset forfeiture. The absence of graduated penalties, compliance warnings, or appeal procedures undermines procedural fairness.

The Ordinance is also conspicuously weak on consumer protection. There are no escrow mechanisms, no mandated insurance against exchange default, and no framework for complaint redressal. Section 25 calls for asset segregation by VASPs but provides no institutional infrastructure to enforce or audit such segregation, especially in bankruptcy scenarios.

The taxation provisions under section 54 of the Ordinance merely direct licensed Virtual Asset Service Providers (VASPs) to comply with the obligations under the Income Tax Ordinance, 2001, along with any rules or regulations issued by the Federal Board of Revenue (FBR). The Ordinance fails to define the tax treatment of key digital asset transactions such as capital gains, staking rewards, token issuance, airdrops, or decentralized trading proceeds. The absence of precise tax classifications for various types of virtual assets creates ambiguity for businesses and investors, making compliance heavily reliant on future FBR notifications that may be inconsistent or delayed. The reliance on general tax law instead of tailored provisions demonstrates regulatory avoidance rather than foresight.

The lack of clarity regarding valuation benchmarks, withholding tax triggers, and recordkeeping standards opens the door to both arbitrary enforcement and widespread non-compliance. The failure to integrate a comprehensive tax reporting regime undermines the policy goal of economic documentation and risks encouraging offshore migrations or informal operations.

The provision under section 2(2) defining closed-loop and controlled systems mimics models from UAE VARA . However, it lacks clarity on eligibility, limitations, and obligations. The large conglomerates may abuse/misuse these to shield enterprise blockchains from oversight, while genuine fintech disruptors face onerous compliance.

The operational barriers created by the Ordinance become even more evident when benchmarked against leading crypto-friendly jurisdictions. Switzerland’s FINMA enables conditional licensing regimes that accommodate small fintech players without excessive preconditions. Estonia’s Financial Intelligence Unit has streamlined virtual asset licensing with rapid processing and transparent documentation standards.

Singapore’s MAS fosters a collaborative regulatory ecosystem by actively supporting startups through regulatory sandboxes, dialogue, and phased compliance pathways. The United Arab Emirates, through Dubai’s VARA, balances firm oversight with adaptive licensing tiers, making it attractive for both startups and institutions. Hong Kong’s SFC provides a well-structured path for centralized exchanges, paired with clear AML and investor protection mandates.

The Ordinance promulgate without any public consultation and debate, on the contrary, maintains opaque licensing requirements, lacks fast-track approvals, and burdens entrants with blanket obligations detached from market size or technological maturity. The absence of proportionality, consultation channels, and adaptive frameworks makes the local regulatory architecture less enabling and more exclusionary.

The regulatory sandbox framework under sections 42 to 45 of the Ordinance introduces a formal mechanism to support responsible innovation in a controlled environment. Section 42 mandates the establishment of a sandbox to test virtual asset products and services. Section 43 outlines application requirements, including detailed innovation descriptions, risk assessments, and exit strategies, while section 44 restricts testing to 18 months with discretionary limits on financial exposure and customer participation. Section 45 allows the Authority to issue no-action letters, offering temporary relief from enforcement.

However, the framework, though well-intentioned, lacks practical facilitation mechanisms such as pre-defined approval timelines, reduced compliance obligations for sandbox participants, or technical support. Unlike the UK’s FCA or Singapore’s MAS, which actively nurture innovation through mentorship, funding access, and regulatory dialogues, Pakistan’s sandbox appears administrative rather than enabling.

The absence of clear criteria for scalability post-testing and the Authority’s discretionary power to terminate participation without defined cause further introduces uncertainty. A sandbox in name alone, without structured acceleration pathways or proportional regulatory burdens, may fail to attract genuine fintech participation and instead serve as a bureaucratic layer rather than a launchpad for innovation.

The transactional monitoring requirements are technologically demanding. The expectation of traceability, reporting, and KYC across a decentralized environment is not matched by investments in regulatory technology or capacity-building. Therefore, without digitizing public sector enforcement or building alliances with blockchain analytics firms, enforcement will remain aspirational.

The classification of VASP categories omits NFT marketplaces, tokenization platforms for real-world assets (RWA), and staking-as-a-service models. These are increasingly popular forms of Web3 services and should have been accommodated within a broader taxonomy of virtual asset activities.

The imposition of high capital requirements, as stipulated in Schedule 2 of the Ordinance, creates significant financial barriers for entry into the virtual asset ecosystem. The requirement of Rs. one billion for exchanges, asset-referenced token issuers, and fiat-referenced token issuers, Rs. 200 million for custody-only providers, and Rs. 100 million for broker-dealers is far above the thresholds seen in innovation-supportive jurisdictions. These elevated thresholds are detached from the financial realities of Pakistan’s startup ecosystem and disproportionately disadvantage local entrepreneurs and small and medium enterprises (SMEs).

The Ordinance fails to provide a tiered or risk-sensitive capital structure, nor does it acknowledge the distinction between small-scale service providers and large-scale financial operators. This one-size-fits-all model effectively discourages innovation and incentivizes offshore registration of promising startups. The absence of regulatory relief, incubatory provisions, or phased licensing further aggravates the exclusionary impact of this capital regime, stifling local participation in the global digital asset economy.

The Ordinance’s opacity in defining revenue models, reporting requirements, and licensing costs presents practical implementation risks. The small size of Pakistan’s digital asset economy should have warranted a phased or consultative rollout. Instead, the sudden enforcement without pilot testing or feedback mechanisms invites systemic friction.

The Ordinance’s attempt to appear internationally aligned without addressing local economic constraints is its core flaw. The Pakistani market, with limited crypto adoption, low savings, and limited institutional trust, cannot absorb a rigid regulatory template imported wholesale from developed financial jurisdictions.

The challenges ahead include capacity-building within PVARA, stakeholder mapping, harmonization with SBP and SECP mandates, FBR integration for taxation, investor education, and channeling diaspora remittances through tokenized channels. The regulatory framework must also incorporate public consultation and review cycles to evolve organically.

The Ordinance represents an ambitious yet inconsistently executed regulatory initiative. The inclusion of sandbox provisions under sections 42 to 45, while conceptually aligned with international best practices, remains structurally underdeveloped and operationally limited. The outdated definitions, high capital thresholds, punitive enforcement stance, and generic tax obligations collectively erode its effectiveness.

The lack of scalability pathways, unclear sandbox incentives, and absence of compliance facilitation measures further impair implementation risks. The risk of non-compliance and jurisdictional arbitrage becomes systemic when legal mandates are excessively rigid, commercially impractical, and technologically mismatched with local realities.

The way forward requires revisiting the Ordinance through implementing rules, stakeholder workshops, and clear-cut statutory regulatory orders (SROs). The licensing regime must be tiered, startup friendly. The compliance load must be proportional to risk, and enforcement must be paired with support. The innovation economy of Pakistan demands regulatory empathy, not just rigidity.

The Virtual Assets Ordinance, 2025 is a welcome step in acknowledging the legitimacy of digital assets. The success of its implementation, however, rests on its ability to facilitate not frustrate. Pakistan’s digital future. The next 12 months will determine whether Pakistan leads in responsible innovation or chokes its potential with regulatory excess.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws.

He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law.

He is Chief Editor of Taxation.  He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

X (formerly Twitter): DrIkramulHaq

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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.

His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.

His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .

X (formerly Twitter): Abdul Rauf Shakoori

The recent publication, coauthored by these writes with Huzaima Bukhari is                       

Pakistan Tackling FATF: Challenges & Solutions, available at:

https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35

https://www.amazon.com/dp/B08RXH8W46