Emergence of digital currency ‘Bitcoin’ created a storm in the world of finance. It rose in the wake of blockchain technology and has stirred a debate on its legality. A talk organized by the Delhi based IOS throws some light. Islamic Voice reproduces an edited version.
The Institute of Objective Studies organised a lecture and a discussion on “Cryptocurrency: A Currency or A Product/Commodity? – A Case of Bitcoin” at the Institute premises on August 4. Dr. Kaleem Alam, researcher and advisor, Islamic Economics Institute (IEI), King Abdul Aziz University, Jeddah, Saudi Arabia, was the principal speaker. Excerpts:
Dr. Kaleem Alam
Researcher and Advisor
Islamic Economics Institute,
King Abdulaziz University, Jeddah.
The Merriam-Webster Dictionary says cryptocurrency is a form of currency that only exists digitally, and usually has no central issuing or regulating authority. Instead it uses a decentralised system to record transactions and manages the issuance of new units, relying on cryptography to prevent counterfeiting and fraudulent transactions. ‘Crypt’ is a Greek word which means ‘secret’.
Ronald Rivest (1990) defined cryptography as a practice and study of techniques for secure communication in the presence of third parties called adversaries. In other words, it is used for securely delivering the message to intended party or parties. The Cambridge Dictionary defined cryptocurrency as a digital currency produced by a public network, rather than any government, that uses cryptography to make sure payments are sent and received safely. The Collins Dictionary defines the term as “a decentralised digital medium of exchange which is created, regulated, and exchanged using cryptography and (usually) open source software. According to the Oxford Dictionary, he said, cryptocurrency was a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
Cumulatively, all definitions clearly hint at the objective of cryptocurrency, which was to enable trade digitally, as cryptocurrency did not exist in hard form, but they did miss to mention the most important aspect of cryptocurrency – blockchain.
Blockchain : Blockchain is a new technology network which broadcasts and validates a transaction, regardless of where it is made. If it is valid, they add it to the record of transactions, linking it to the previous transaction. This chain of linked transactions is known as the blockchain. Blockchain is a disruptive and evolutionary technology, and was bound to alter many of the existing industries the way they functioned today.
According to Jonathan Paul Wood, blockchain is a public record of transactions. It is also distributed and thus, instead of one person controlling everything, there are thousands of computers around the world connected to a network, and these thousands of computers together come to an agreement on which transactions are valid. He said that this process was a lot more secure than a traditional database. Since many computers (in case of bitcoin, thousands) were involved in validating transactions, to hack the network one needed to break into not one computer, but thousands of computers spread throughout the world, which was harder.
Hard to Manipulate: Moreover, all of these computers keep records of the blockchain and if one wishes to manipulate it, he would need to manipulate it on thousands of computers at once. Today’s double-entry book-keeping allowed firms to maintain records that reflect what the firm own and owe and also what the firm has earned and spent over any given period of time. Double-entry book-keeping revolutionised the field of financial accounting during the European Renaissance.
Triple accounting of cryptocurrency is an enhanced form of the traditional double-entry system in which all accounting entries involving outside parties were cryptographically sealed by a third entry. These included purchases of inventory and supplies, sales, tax and utility payments and other expenses. Placed sides by side, the book-keeping entries of both parties to the given transaction are congruent.
Money is a medium of exchange, or agreed medium of exchange. In other words, using money one can buy, sell, store it for future and agree to pay later. It can be counted and stored easily. Money has seen many innovations and patterns over centuries and millennia. He said that the first transaction of bitcoins took place in Florida, US, for the purchase of two pizzas for 10,000 BTC. Bitcoin is decentralised, digital and secure.
Not asset-backed: Cryptocurrency can be backed by assets. But, bitcoin is not backed by any asset. It is meant to facilitate purchase and sales. Money’s voyage began from barter which later assumed the form of gold and silver and still later as coins made from these precious metals. Then it became representative money in the form of paper money. Later, we had another major change or shock in the form of fiat money. Fiat money progressed in the electronic age in the form of electronic money and virtual money in the technology-driven era, but all representing the original fiat money that was a legal tender.
Bitcoin had price fluctuation and triggered the interest of speculators as there was no central power to control and monopolise it. Bitcoin fitted into commodity requirements. There were different types of cryptocurrency, besides bitcoin. There were ‘ethereum’ and ‘ripple’. Bitcoin had all characteristics of money and was able to meet all of its basic functions. Thus, it was indeed a currency.
Shariah Perspective: Bitcoin and its likes could be classified as currency-cryptocurrency. Many Shariah scholars had objections to it, but some of them qualified it as a currency. Those who objected to bitcoin included Grand Mufti of Egypt, Shaykh Shawki Allam, Turkish government’s religious authority, the fatwa centre of Palestine, Shaykh Haitam Alhadad and Sheikh Khaled Saifullah Rahmani.
Not a legal tender: Bitcoin is easily used for illegal activities and is intangible. It has no central authority that monitored its system and was a type of gambling. Bitcoin is subject to high speculation because there is no base for speculation control in it and other cryptocurrencies. Besides, cryptocurrency is not a legal tender. Legality was dependent on how the existing authorities framed it. Some authorities forbade bringing it within their country but it was permitted to be used as bribe in foreign lands. Similarly, some of the countries had made it illegal to deal with cryptocurrency within their borders, but they had no objection if one were dealing in it abroad. However, they have allowed mining bitcoin within the country.
In my view, it is a permitted currency with high risk. I would not call it haram as it has nothing in it that is haram per se. The world is through a transition. The governments should include cryptocurrency as alien (foreign) currency and it must also be included in income tax returns. Governments must also enact laws to regulate it. There was nothing illegal in it except the fear of the unknown among nations of the world, he concluded.
Prof. Eqbal Hussain
Professor of Law
Jamia Millia Islamia
The world is passing through a digitised environment and since there is no regulatory body to control cryptocurrency, it could facilitate money laundering. This also raised the question of legality of transactions.
Prof. M. Afzal Wani,
Asstt. Secretary General, IOS
Professor of law, GGSI University,
Bitcoin came up as a result of advanced technology and as such, it was not governed by law. Even the jurisdiction of this currency had not been determined by now. People still continued to use the currency without knowing whether it was a game or a gamble. In finance, ethnics played a pivotal role and this posed a challenge to the state currency in the face of cryptocurrency.
Prof. Naushad Ali Azad
Former Dean, Faculty of Social Sciences,
Jamia Millia Islamia
Cryptocurrency is a mode of exchange and it is a legal tender because it had been authorised by several kings. But it lacked control by government. He said that bitcoin is just one of a whole range of number of cryptocurrencies. There are as many as 700 cryptocurrencies in circulation at present, and all of them could be categorised as virtual currencies. Like dollar, every currency had a market and buying and selling of this currency also continued. Bitcoin is sort of a computer programming and common people were not using the cryptocurrency.
Dr. M. Manzoor Alam
Chairman, Institute of Objective
The currency has travelled the world in phases like transportation, communication and energy. This became possible due to the entire world becoming part of digitisation. Bitcoin has evolved naturally with the three functions merging together in the wake of digitization and it looks like that it is unstoppable. This is in line with the changes that characterise the world. Borderless coin was necessary at a time when society too had become borderless. Bitcoin is one such currency.