The State Bank of Pakistan (SBP), traditionally responsible for implementing monetary policy and overseeing the nation’s credit ecosystem, is increasingly operating beyond the scope defined by its foundational statutes—the SBP Act of 1956 and the Banking Companies Ordinance of 1962. As Pakistan rapidly digitizes, especially in the financial sector, the central bank finds itself navigating complex regulatory terrain shaped by emerging technologies and outdated federal laws.
The expansion of cross-border payment systems, rise in digital banking, and growing consumer reliance on fintech solutions have exposed critical gaps in Pakistan’s data protection framework. At a time when cybersecurity threats and concerns over consumer data misuse are on the rise, Pakistan lacks a comprehensive legal infrastructure to regulate digital innovation effectively. The State Bank, despite being a monetary authority, is now shouldering responsibilities closer to that of a tech regulator.
To bridge the gap between innovation and regulation, the SBP has taken proactive steps. In May 2025, the central bank introduced a Regulatory Sandbox—a controlled environment that allows startups, banks, DFIs, and even unlicensed entities to test innovative solutions using real consumer data without being constrained by regulatory bottlenecks. The move has attracted widespread attention from fintechs and digital entrepreneurs looking for a structured path to market entry.
While this sandbox provides a critical testing ground for innovation, it is governed by the outdated Payment Systems & Electronic Fund Transfer (PS&EFT) Act of 2007, a law that predates modern technologies like generative AI, cloud computing, and big data. As such, the framework under which the sandbox operates offers limited guidance on contemporary issues such as data privacy, AI ethics, and cybersecurity resilience.
Despite these legislative limitations, SBP has gone beyond expectations. Its 2017 Enterprise Technology Governance & Risk Management (ETGRM) framework established rigorous standards for banks and DFIs, addressing cybersecurity threats, third-party risks, and data protection. However, these standards often exceed the requirements of federal law, highlighting the imbalance between regulatory practice and legal backing.
In more advanced jurisdictions like the EU, UK, and others, sandbox environments are supported by comprehensive legislation including the EU’s AI Act 2024, the GDPR, and the Digital Operational Resilience Act (DORA). These laws provide clear boundaries and obligations, allowing central banks to focus on innovation enablement rather than legal interpretation. In contrast, Pakistan’s federal policy inertia has left the SBP to fill the vacuum, both as an innovator and regulator—an unsustainable dual role in the long term.
The Asian Development Bank’s 2025 diagnostic report on Pakistan’s digital ecosystem emphasizes the urgent need for an inclusive data governance framework. It recommends the implementation of clear protocols for data privacy, security, and cross-institutional data sharing. These reforms are essential to ensuring that innovation does not come at the cost of consumer safety.
At present, SBP’s regulatory sandbox functions more as a diagnostic instrument than a launchpad for innovation. It is being used to observe how emerging technologies behave in live environments, identify risks, and frame governance mechanisms retroactively—steps that, ideally, should be supported by coherent national legislation.
If Pakistan’s federal policymakers continue to delay the establishment of robust digital legislation, the burden will remain squarely on the SBP. While the central bank has shown commendable initiative, relying on it alone to manage the growing complexity of digital finance could stifle rather than accelerate fintech evolution.
In conclusion, the State Bank of Pakistan’s evolving role as a de facto technology regulator underscores a larger issue: the need for future-ready legislation. Without updated legal tools, SBP’s efforts, though well-intentioned, may struggle to keep pace with technological innovation. A formalized digital governance framework is not just desirable—it is imperative for Pakistan’s financial digitalization journey.