A five-month Gulf war has choked off a major source of unofficial dollar inflows into Pakistan, disrupting the hundi and hawala networks that once funneled hundreds of millions of dollars into the economy. The conflict, centered on Dubai's informal trading hub, has simultaneously accelerated a shift toward cryptocurrencies, drawing billions of dollars out of the local market and reshaping the country's foreign exchange dynamics. Main Developments Small exporters and manufacturers have been hit hardest as the Gulf war—now in its fifth month—crippled the informal trade route to Dubai. Known as "khapiya" travelers, hundreds of people on flights each year carried unregistered goods to Dubai, generating dollars that entered Pakistan through illegal channels. One manufacturer of embroidery products reported his factory now operates at just 10 percent of last year's production, serving only the domestic market. Currency dealers confirm the hundi and hawala system, while never fully eradicated, has seen a sharp decline. A well-known dealer noted that the Gulf war has further eroded the possibility of dollar inflows through these informal channels, though the exact volume remains difficult to assess. Read also: 3 Key Reasons Pakistan Must Fast-Track Electric Vehicle Adoption Meanwhile, the currency market is reporting dollar outflows for cryptocurrency purchases. Crypto traders are offering up to Rs292 per dollar, compared to around Rs280 in the local market. Malik Bostan, chairman of the Exchange Companies Association of Pakistan, said exchange companies sold about $4 billion to banks during the first 10 months of calendar year 2025, but that figure fell to $3 billion in the same period this year. He attributed the missing $1 billion to cryptocurrency investments. Background Pakistan has long struggled with unofficial dollar inflows through hundi and hawala networks, which operate outside the formal banking system. These channels have historically been fueled by informal exports to Dubai, where goods are sold without official documentation. The Gulf war has now disrupted this decades-old practice, cutting off a key source of foreign exchange that previously supported small manufacturers and exporters. On the crypto front, Pakistan had an eight-year ban on crypto-related banking activity until mid-April 2026. The State Bank of Pakistan then lifted the ban, allowing financial institutions to work with licensed virtual asset providers. This followed the passage of the Virtual Assets Act 2026, which established the Pakistan Virtual Assets Regulatory Authority. The new framework permits banks to open accounts for registered entities but prohibits them from using their own capital or customer deposits to trade, hold, or invest in digital assets. Why It Matters The dual shocks—a dried-up informal dollar inflow and surging crypto outflows—are squeezing Pakistan's foreign exchange reserves at a time when the country is already grappling with economic instability. Small manufacturers, who relied on informal exports, face potential closure, while the outflow of dollars to cryptocurrencies undermines the official exchange rate and reduces liquidity in the formal banking system. The shift also complicates the State Bank's efforts to stabilize the rupee and manage inflation. What's Next The State Bank is expected to continue developing a regulatory framework for crypto trading, building on the recently lifted ban. However, illegal channels for crypto purchases persist, with Pakistanis buying dollars from exchange companies, depositing them in foreign currency accounts, and then withdrawing them to buy cryptocurrencies. Further government action may target these loopholes. For small exporters, the end of the Gulf war could revive informal trade, but the long-term viability of the hundi and hawala system remains uncertain as regulatory scrutiny and digital alternatives grow.