A word of caution on cryptocurrency

THE enormous progress of cryptocurrencies in the fintech industry seems to have created more work for regulators, economists, technologists and jurists all over the world.

The increased market capitalisation of the newly invented money has alarmed supervisory bodies, which are contemplating many factors to regulate it.

They want to ensure the ultimate objective of economic, social and political stability, and to ensure that its development will be to the advantage of society.

Cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography (in blockchain algorithms) to secure a transaction and to control the creation of additional units of value.

Cryptocurrencies like Bitcoin, Ethereum, Dogecoin and Monero are on a speculative wave and likely to become a mainstream topic as many parties decide whether to support or oppose them.

As of September 2017, there were over 1,100 digital currencies in existence.

Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet.

The legal status of crypto­currency varies substantially from country to country and is still undefined in many of them.

While some countries have explicitly allowed their use and trade, others have banned or restricted them.

The position for Malaysia is expected to be announced by Bank Negara before the end of this year.

This is, of course, an important announcement because it can affect the whole country and the future of the fintech industry.

In the latest development, control over a local currency’s conversion to cryptocurrency has attracted international attention.

About eight years after its birth, Bitcoin, the most preferred cryptocurrency, has reached more than US$5,700/BTC (RM24,136 per Bitcoin). The rate continues to dramatically increase the market capitalisation of over US$55bil (RM232.89bil).

Based on the total number of Bitcoin tokens available (estimated to be BTC21 million), BTC16 million are in circulation, and four million more are expected to be mined in the next 10 years.

Money is the lubricant of a financial system. From Islam’s point of view, money should be intrinsic in value, observed as a medium of exchange and a standard of measurement of an economic value.

Money is a consideration, not an item which can be traded or one that is likely to produce yields without economic undertakings.

Money can be anything that is of value, but it is neither a productive good nor a consumption good.

Therefore, if money is to be traded with money, the Islamic ruling on transaction ribawi (usury) is applicable.

Such a transaction must take place on an on-the-spot basis and for an equal amount. These principles are very important when considering the Syariah ruling on crypto­­currencies.

It appears to be up to the rest of the world to determine whether these currencies assume the role of legal tender and are considered a recognised medium of exchange.

Will a country be willing to give up control over the currency in circulation that directly affects money supply and liquidity?

Recent observations on the cryptocurrency phenomena show that many conventional control and monetary tools have ceased to be applicable, with some miners essentially being on a pyramid scheme.

Even if it is acceptable as a medium of exchange and not a commodity in itself, the jurists have not preferred that such a medium of exchange be used as a means of one’s livelihood, as it is not intended for trading with its own kind.

In fact, jurists have mentioned that currency should only be traded with currency to the extent of necessity, while fulfilling the prevailing rules pertaining to trading in currency.

One has to be very careful as far as Syariah compliance is concerned when trading on most of the web platforms and markets, as the conditions of a valid trade are not generally adhered to.

Transactions are very often speculative and hedge-based, which casts away Syariah compliance and governance. To establish the ultimate objective of money as an economic lubricant, the Syariah aspect should be supreme.

Sound Syariah ruling is the best gatekeeper for the regulators, strategists, economists and technologists.

> Mohd Noor Omar is a Fellow with Ikim’s Centre for the Study of Syariah, Law and Politics. The views expressed here are entirely the writer’s own.

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