If a Pakistani citizen launches a crypto exchange, can it operate locally without SBP regulation?

No, you're not correct. While you can certainly create a crypto exchange that operates solely within the crypto world, the situation changes the moment you involve the Pakistani rupee or provide intermediary services.

As soon as you start dealing with the Pakistani rupee, your exchange falls under the jurisdiction of the Pakistani government and the State Bank of Pakistan (SBP). Additionally, if your exchange allows others to sign up and trade, you're also subject to regulations by the Securities and Exchange Commission of Pakistan (SECP).

Moreover, the Financial Intelligence Unit (FIU) from the SBP would also be involved, as you'd need to comply with Know Your Customer (KYC), Anti-Money Laundering (AML), and Counter-Terrorism Financing (CTF) regulations.

I'm not entirely sure if there is a specific law in the Pakistani Penal Code that outright bans crypto, but regardless, if you create an exchange, these are the regulatory challenges you'll face. You cannot simply operate without regulation. To allow people to fund their accounts in Pakistani rupees, you'd need to navigate the restrictions imposed by the SBP. If you're onboarding multiple customers, SECP regulations will apply, and you'll need to report to the FIU.

In short, your exchange will indeed be regulated, and you'll need the appropriate licenses to operate legally in Pakistan. So no, your assumption is not correct.