Fintech, Virtual Assets and Anti-Money Laundering Compliance in Pakistan’s Banking Sector: Legal Challenges and Regulatory Reform

Abstract

The movement, storage, and conversion of money have been transformed by financial technology and virtual assets. Such developments open up financial inclusion and quicker payment services opportunities and generate novel risks of money laundering. The banking sector in Pakistan is currently going through a challenging changeover. The virtual assets were mostly safeguarded against the formal banking system by the state bank of Pakistan banning the dealing in virtual currencies, a ban which was imposed many years ago. The recent trend towards legalizing virtual asset providers implies that banks will probably become significant fiat gateways between conventional accounts and digital asset platforms. This paper discusses the legal and regulatory issues that are brought about by this change. It specializes in Pakistani banking organizations, anti-money laundering regulations, fintech transactions, virtual assets, digital wallets, legacy information systems, financial intelligence and regulatory reform. The article applies a doctrinal approach to law and relying on Pakistani law, State Bank regulations, the FATF standards, the case law and literature. It suggests that the AML framework in Pakistan is generally in line with international standards, but it is not effectively implemented due to old-fashioned bank technology, low quality of data, defensive suspicious transactions reporting, low blockchain analytics capabilities, weak inter-agency data sharing, and ambiguity in addressing virtual asset-related transactions. The article concludes with the finding that Pakistan should have a risk-based regulatory framework that integrates legal obligations that are easily understood, enhanced supervision by the State Bank, licensed regulation of virtual assets, blockchain forensic tools, enhanced by artificial intelligence monitoring, a more robust Financial Monitoring Unit, and improved over-reporting and under-detection.