CRYPTOCURRENCY AND BITCOIN

The development of e-commerce has given birth to new terms such as electronic funds transfer, online transaction processing, electronic data interchange, internet marketing, automated data collection systems, etc. They all designate certain key components of the sophisticated e-commerce system. The concepts of e-business such as e-commerce and e-banking are acceptable in Islam since the default ruling of business transaction in Islam is permissibility until proven otherwise. So, dealing with business by internet is considered Shari’ah compliant.

Therefore, a new method of digital currency is introduced. An electronic payment introduced that system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.

A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. A cryptocurrency is a virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature.

A defining feature of a cryptocurrency and arguably its most endearing allure is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

The security of cryptocurrency ledgers is based on the assumption that the majority of miners are honestly trying to maintain the ledger, having financial incentive to do so. Most cryptocurrencies are designed to gradually decrease the production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation, mimicking precious metals.

An electronic payment system based on cryptographic proof is allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms implemented to protect buyers. In 2017, Bitcoin attracts many investors because of high return.

Hence, there is a need for us to evaluate the operational framework of Bitcoin from the perspective of Islamic finance.

Bitcoin is one of the first digital currencies(العملة الاكترونية) to use peer-to-peer technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bitcoin network, also known as “miners,” are motivated by rewards (the release of new bitcoin) and transaction fees paid in bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a Satoshi.

The proposed system of Bitcoin is suitable for a certain community of internet users. However, to implement in all sectors of the economy, authority is needed to confirm the validity of the transactions. There is a possibility of a fraud case if there is no central authority that validates and monitoring transaction system. This element is associated with uncertainty (gharar).

This system is vulnerable to hacking activity; which means gharar in the scope of shari’ah. Also, this cryptocurrency has no physical form and exists only in the network. Bitcoin also has no intrinsic value in that it is not redeemable for another commodity.

Also, the value of Bitcoin is not tied to a tangible asset or government regulation or law. Which makes Bitcoin validity in a current economic system has an uncertainty status which is questionable.

The value of Bitcoin is unstable because of high volatility. And this caused the operation of Bitcoin to be classified as uncertainty (gharar) in Islamic Finance perspective. And since Bitcoin’s volume resembles a small cap stock, the currency has not hit the mass-market adoption rates that would be necessary to provide option value to large holders of the currency.

Bitcoin purchases are discrete. Unless a user voluntarily publishes his Bitcoin transactions, his purchases are never associated with his identity, much like cash-only purchases, and cannot be traced back to him. In fact, the anonymous Bitcoin address that is generated for user purchases changes with each transaction. The bitcoin account holder is anonymous. Therefore, it is difficult to track the real account holder if any suspicious activity occurs. This also creates uncertainty (gharar) condition which is forbidden in Islam.

Transactions are not encrypted, so it is possible to browse and view every transaction ever collected into a block. Once transactions are buried under enough confirmations, they can be considered irreversible.

Since Bitcoin has no intrinsic value, there is a need for us to look at what constitutes ‘Money’.

Money is an agreement within a community, to use something as a medium of exchange.

Hence, they could practically use anything as money. This money – agreement is observed historically made freely or coerced, formally or informally, and even consciously or unconsciously. Most Islamic scholars agree with such definition of money. Whatever a society takes as money, so long the item is halal item, scholars approve it based on the concept of maslahah, and hence the rules of as-sarf and riba are applied upon it.

All subsequent Islamic business contracts and exchanges and finance would then be based on that ‘money’ which the society agreed upon.

In this regard, makind has used various commodities and materials as money, for example cowry shells, leather gold, silver, wheat, salt, etc. Later, fiat money like national paper currencies and electronic money came into the picture. Now we see the interesting phenomenon of cryptocurrencies where these are neither issued by Central authorities nor even regulated.

Nontheless, over time, societies discovered that for an item to play an effective and efficient role of money, it must meet certain requirements:

A: Accepted – the item must be desired for its own sake, i.e. having intrinsic value.
B: Divisible – it must be easily divisible into smaller units.
C: Homogeneous – it must be uniform so that is easily divisible.
D: Durable – it has to be long lasting and not easily destroyed.
E: Mobile – it lends itself to be easily carried around.
F: Rare- this allows a small quantity of it to have a large value.
G: Stable value – it has a stable value relative to other things, particularly those naturally occurring things.

Societies have used many items in the past, that have the above criteria, as money including cowry shells, beads, and items mentioned in a hadith of the Prophet regarding ‘ribawi’ items, i.e. gold, silver, wheat, barley, salt and dates, etc. Societies have similarly evolved to use paper currencies, coins, cheques, electronic money, and now cryptocurrencies as money. Note that all those items fulfill most of the above-mentioned criteria.

Umar bn Khattab radiya Allahu anhu is said to have apparently wanted to use camel skin as money, which also in a way fulfills the above criteria, but was short of implementing it apparently for fear that people might start killing or stealing camels in order to create money. Nontheless, any item chosen by the society as money would then automatically fall under the rules of as-Sarf and Riba.

Most of the general items mentioned above were referred to as ‘wasilat at-tabaadul’, or a wider medium of exchange, Scholars like Al-Mawardi, Abu Ubayd, Al-Ghazali, Ibn Khaldun, and Al-Maqrizi, relative to their unanimous preference and definition of the dinar and dirham as ‘an-nuquud al-islaamiyyah’. On top of playing the normal functions like medium of exchange, unit of account, standard of deffered payment and store of value, money in Islam is also used as a standard in shari’ah legal requirements of Zakat, jizya(tribute tax), kharaj(tax on conquered territory), diyat, sariqa(theft), mahar, and sarf(currency exchange).

Bitcoin has no intrinsic value and its monetary value is not stable. You should also note that having a stable value, i.e being a good store of value, is a litmus test for shari’ah money, so that it can function as a protector of wealth, which is one of the maqaasid shari’ah. Without having intrinsic value, the element of economic injustice would creep it, through the seigniorage of fiat money.

Also, without intrinsic value, or having ‘ainالعين”, it does not fall into any of the four permissible money transactions. It has no refrence material.

However, since Bitcoin is accepted by thousands of merchants throughout the world, it is therefore, still ‘money’ by modern definition of it and shari’ah are likely to approve it and make it subject to the rules of as-Sarf and Riba.

SUMMARILY,

We have established that a cryptocurrency like bitcoin is indeed money so long a group of subjects like individuals and merchants accept it for payment among themselves. It is no different from normal e-money (which is also fiat money) except that it is not centrally issues and neither regulated nor guaranteed by any authority. However, the following further issues and observations are noted regarding bitcoin:

1: The price of Bitcoin has been soaring lately. Just in 2007 its price has increases more than 1900% from a USD1000 per bitcoin to USD20,000 by mid-December. Also, the price has been highly volatile.

2: No one knows for sure who is behind the bitcoin software. It is attributed to one Satoshi Nakamoto, but no one knows if this is a true person, a group of people or what. It was indeed released as an open – source software. Hence, there is no one actually taking responsibility for the bitcoin ‘money’ or for the system as a whole.

3: How does one know or confirm that the bitcoin system does not reward its creator(s) handsomely, say periodically giving its creator(s) thousands of bitcoins free? Some might argue that this is not possible because all codes and transactions are transparent and known to all. But then,

4: How does one know the system made available in the open source is also the system that is operating in actuality? People may argue that the codes are available for all to see, but then hidden codes etc. are all possibilities nowadays. Hence, even the statement that the maximum amount of bitcoin is capped at 21 million units only, can be disputed or yet to be seen. Basically, there is no one who is truly auditing the system in the interest of all, even though most bitcoin users seem to believe in the authenticity and transparency of the system.

5: Bitcoin is not ‘real money’, i.e. It is digital money not backed by some real commodities or services. Bitcoin’s value is highly volatile. Its value has also gone up tremendously over the years. Hence, there is a possibility that bitcoin value is being manipulated into a bubble. As such, the Wolrd Bank called bitcoin a Ponzi Scheme(kind of fraud).

6: Also, Bitcoin has no intrinsic value and issued privately, issuance of hundreds or even thousands of similar cryptocurrencies are expected, as have been observed. The mushrooming of such multitude of cryptocurrencies are bound create inflation on a global scale.

7: What if people get their bitcoin e-wallet hacked and stolen? There were some such cases in South Korea and Japan lately. To whom to complain? Similarly, what if the system crashes, sometime in the future? The absence of a central administrator makes all these uncertain – which is prohibited by the shari’ah.

The above discussion reveals that there is tremendous uncertainty(gharar) and likely riba present in bitcoin and its payment system.

Notwithstanding the above points and arguments, gold-based cryptocurrencies, like OneGram, that was launched in Dubai, is acceptable as an Islamic cryptocurrencies. This is because OneGram has all the required characteristics of money compared to bitcoin, including having intrinsic value, issuer, administrator, auditor, and guarantor.

On the contrary, any money having intrinsic value would promote socio-economic justice and should be supported by both the people and the government. Such money even if forced on people through legal tender law should be acceptable since they promote socio-economic justice in the society. Hence, sovereign precious metal coinage of past including the gold dinar and silver dirhams, gold standard etc. are acceptable even if these were forced upon the people. Such money will have stable value over time and space and hence able to play the ‘store of value’ function well.

Accordingly, we contend here that Bitcoin should be rejected by both the people and governments.

Money having no Refrence Material will eventually lose its value and result in an utter collapse. Bitcoin is the closest example of this. Hence, it remains IMPERMISSIBLE.