Will There Be a Customer Compensation Scheme in Pakistan?

Crypto customers who have watched an exchange fail elsewhere in the world often ask the same question before they trust a Pakistani platform with funds: is there a safety net if it collapses? The Virtual Assets Act, 2026 gives Pakistan’s regulator the power to build one, through section 29. It does not, on its own, create one.

This article explains what section 29 actually authorises, what triggers it, and what it leaves entirely to the Authority’s discretion.

Does the Virtual Assets Act 2026 guarantee compensation if a crypto platform fails?

No. Section 29 gives the Pakistan Virtual Asset Regulatory Authority (“PVARA” or “the Authority”) the power to establish a customer-compensation or safeguard mechanism, but it does not oblige the Authority to do so, and it does not itself create any fund, guarantee or entitlement. The section reads:

The Authority may, establish a customer-compensation or safeguard mechanism for losses arising from custodial failure, in such manner as may be prescribed by Regulations.

The word “may” is doing real work here. Compare this to obligations elsewhere in the Act phrased with “shall” — for example, section 24(1), which requires a Licensee to hold Customer Assets in segregated accounts “at all times.” Section 29 is discretionary on its face: the Authority is empowered to build a compensation mechanism, on terms it prescribes by Regulations, but nothing in the Act compels it to actually do so, and no scheme existed under this section at the time of writing.

What kind of loss would a section 29 scheme actually cover?

Section 29 is narrowly scoped to “losses arising from custodial failure.” That phrase, read on its own terms, points to losses caused by a failure in how a Licensee safeguarded Customer Assets — for example, a breach in custody controls, a hack of custodied assets, an operational failure in the segregation regime, or an insolvency event affecting assets a Licensee was supposed to be holding on customers’ behalf.

The provision does not, on its wording, extend to every kind of loss a customer might suffer while using a Virtual Asset Service. It is reasonable to read “custodial failure” as excluding, for instance, ordinary market losses from price movements, losses from a customer’s own trading decisions, or losses arising from fraud that does not involve a breach of custody. The Act does not spell out the boundary in further detail, and the precise scope would ultimately depend on how the Regulations under section 29 define “custodial failure” if and when such a scheme is established.

How does section 29 connect to the rest of the Act’s custody regime?

Section 29 sits at the end of Chapter 4, Prudential Requirements, Safeguarding and Custody, immediately after the reserve custodian provision in section 28. Read in sequence, Chapter 4 builds a layered set of protections: section 24 requires segregation of customer assets and states that Customer Assets do not form part of a Licensee’s estate on insolvency; section 26 sets custody standards and key-management controls; section 27 requires proof-of-reserves and an annual audit; section 28 regulates the custodian of reserve assets. Section 29’s compensation mechanism, if established, would function as a backstop for the specific scenario where those preceding layers fail and a genuine custodial loss occurs despite them.

This placement matters for how a compensation scheme, if built, would likely operate. It would sit downstream of the segregation and audit regime rather than replace it — the Authority’s enforcement tools under section 23, which allow variation, suspension or revocation of a licence for contraventions, and the administrative sanctions under section 59, remain the primary mechanisms addressing a custodial failure. A compensation mechanism under section 29 would be an additional layer for the residual loss customers suffer even after those protections and enforcement powers have operated.

Why might the Authority choose not to build a compensation scheme, or delay it?

The Act gives no indication either way, and speculating about PVARA’s policy intentions beyond the text would go further than the source document supports. What can be said from the structure of the Act is that section 29 is one of several powers the Authority holds but is not required to exercise — similar in character to section 35(1), which permits but does not require the Authority to establish a regulatory sandbox, and section 9(2)(k), which permits the Authority to operate regulatory sandboxes “in a transparent and accountable manner” without mandating a specific design. Discretionary powers of this kind are common in framework legislation, where the operating detail is deliberately left to Regulations issued once the regulator has assessed market conditions.

What should a VASP applicant tell customers about compensation in the meantime?

Given that no compensation scheme exists under section 29 at the time of writing, a Licensee should not represent to customers that their holdings are protected by a government-backed compensation fund, since doing so would misstate the current legal position. Under section 43(2), marketing materials must contain risk disclosures and comply with conditions the Authority prescribes — a claim of guaranteed compensation that does not yet exist would sit uncomfortably against that obligation.

What a Licensee can accurately represent, and should build its actual protection around, is the segregation, custody and audit regime that does apply now under sections 24, 26 and 27. These are the operative protections a customer currently has, regardless of whether a section 29 scheme is ever established. Firms preparing customer-facing disclosures as part of market entry planning should draw a clear line between “the Act requires your assets to be segregated and audited” — true today — and “there is a compensation fund if something goes wrong” — not yet true, and dependent on a discretionary power the Authority has not yet exercised.

What would need to happen for a section 29 scheme to exist?

The Act requires Regulations to prescribe the manner of any scheme the Authority establishes under section 29. Until such Regulations are issued, there is no scheme, no fund, and no defined trigger mechanism beyond the general phrase “losses arising from custodial failure.” Firms and customers tracking this should watch for Regulations issued under section 68, which empowers the Authority to make Regulations in consultation with the Division concerned — that is the mechanism through which a section 29 scheme, if the Authority chooses to build one, would take legal shape.

Section 72 offers one practical way to monitor this. It requires the Authority to prepare an annual report, and permits special reports on any matter of particular urgency, both of which must be placed before the Majlis-e-Shoora within ninety days and published on the Authority’s website once tabled. Since customer protection is named as one of the Authority’s core objectives in section 9(1)(b), a decision to build, or not to build, a section 29 mechanism would plausibly surface in that public reporting cycle before dedicated Regulations are drafted and published in their own right. Firms structuring long-term compliance calendars should treat the annual report, rather than press statements or informal guidance, as the more reliable early signal of the Authority’s direction on this specific power.

About this analysis

This analysis was prepared by the CoinConnect research desk from the Virtual Assets Act, 2026, read as published. Where practice is not yet settled or guidance has not been issued, that is stated in the text above.

Regulatory positions change and specific requirements should be verified against the current position published by the relevant authority before you act on them. This is information and analysis, not legal advice, and it does not create an advisory relationship. Take professional advice on your own circumstances.