Pakistan’s central bank is preparing to launch the pilot phase of the country’s inaugural CBDC within two months, announced the deputy governor of the State Bank of Pakistan (SBP) this week.

Central bank digital currencies (CBDCs) are increasingly viewed as potential substitutes for physical cash. They are digital versions of cash regulated by state-owned banks. In 2018, Pakistan’s central bank declared virtual currencies such as Bitcoin, Litecoin, Pakcoin, OneCoin, DasCoin, and Pay Diamond illegal, prohibiting their use in trading.

Compared to cryptocurrencies, CBDCs offer enhanced security and are designed to complement traditional forms of electronic money and physical cash. Built on blockchain technology (DLT), these currencies aim to facilitate secure and efficient digital transactions.

Sima Kamil, Deputy Governor of SBP, stated, “The groundwork for the digital currency has been completed, and we will run a pilot called sandbox to carefully evaluate it.” A sandbox is a controlled testing environment where innovative products, services, or business models can be evaluated under limited supervision.

SBP officials confirmed that the central bank, which has been researching its own digital currency options, is poised to launch the pilot or sandbox within one to two months. Kamil added that the digital currency’s launch aligns with their five-year strategy.

The strategic plan, titled “SBP Vision 2028” and unveiled on Monday, aims to transform the SBP into a technologically advanced and people-centric institution.

The plan includes targeting inflation within the 5-7% range in the medium term and promoting fairness in the banking system over the next five years.

While a handful of countries have already launched CBDCs, others, including China, India, Saudi Arabia, France, Ghana, Canada, and Uruguay, are in the pilot phase, according to the Atlantic Council CBDC tracker.

Pakistan has been exploring the possibility of launching a digital currency since 2019 with the introduction of laws governing electronic money institutions (EMIs). These regulations encompass various requirements such as outsourcing activities, anti-money laundering and countering the financing of terrorism (AML/CFT), consumer protection, complaint handling mechanisms, oversight, and regulatory reporting.

Despite not being recognized as legal tender, the interest in cryptocurrencies has been increasing in Pakistan. A research report by the Federation of Pakistan Chamber of Commerce and Industry (FPCCI) indicated that the country recorded around $20 billion in cryptocurrency value in 2020-21. The deputy governor of SBP clarified that CBDCs differ from cryptocurrencies, as the former will be considered the central bank’s legal tender currency.

Cybersecurity experts view the launch of the central bank’s sandbox as a significant step. Dr. Muhammad Khurram Khan, a cybersecurity professor at King Saud University, Saudi Arabia, and founder of the Global Foundation for Cyber Studies and Research (USA), stated, “Digital currencies are the manifestation of state-of-the-art breakthroughs in the financial services and business models revolutionized by technology.”

He emphasized the importance of complying with personal data protection and global cybersecurity standards to mitigate risks to the financial ecosystem.