Impact of Stablecoin on Pakistan’s Banking Sector: Evident from Foreign Currency Deposits

Abstract

This research seeks to explore the impact of stablecoin transactions on the banking sector of Pakistan. Using Pakistan as a case study, this study tries to capture the growing trend of using cryptocurrency based payment solutions as a hedge against inflation of the local currencies. Pakistan is the perfect study due to high inflationary levels that have hit the country periodically, leading to periods of massive currency devaluation which has led to distrust of the Pakistani Rupee (PKR) to hold its value leading to individuals, SMEs, and Corporates wanting to settle payments in means other than the local currency. The shift in means of payment and settlement impacted the organized banking sector of Pakistan. Stablecoins present a great oppurtunity for means of payment. Stablecoins operate on the Blockchain but they are either pegged to the USD or backed by tangible assets such as gold. As such, stablecoins observe exhibit little volatility and hold their value making them an attractive medium as a means of payment. As a result, this study explores the relation between the banking sector which was been the impactee of the shift in payment system and stablecoins which have been the receipent from the change in the payment system. For the study, we have taken data observations from 2016 to 2023. This is the era after the Global Financial Crises shook the financial system leading to the development of cryptocurrencies. This timeframe also covers the financial crises of Covid-19. The period after the Covid-19 is a transitionary phase for the adaption of Decentralized Finance (DeFi) and the studies suggest stablecoins could take the lead in DeFi applications. It is also evident from the existing literature that Pakistan is one of the top adopters of stablecoins. The existing banking system in Pakistan is underdeveloped serving only 47% of the population. Based on the state of the existing financial system in Pakistan, the massive inflation and devalue of Pakistani Rupee and the regulatory hurdles associated with opening a bank, we aim to research whether stablecoins can be an alternate to traditional financial system. Existing literature has focused on the impact of cryptocurrency on the banking sector measuring relationship between payments. We seek to explore the impact on the balance sheet of the banks by assessing the relation between stablecoins net transactions and bank’s foreign currency deposits. To carry out of the research,