Crypto -currency ! Is it Sharia compliant?

By Syed Ilyas Basha

Crypto-currency is an asset in virtual form, made available by its launchers for trading activities. It is exchanged in lieu of internationally tradable currencies like US Dollars, Euro etc. Though it sounds so but it is not a currency in that form. In simple words it is an imaginary mode of currency in units. It sponsors can be either individuals, traders or may be a Government. It is defined as a digital asset, designed to work as a medium of exchange. Its value is represented in units and such records are stored in a ledger in computerized database form. For exercising administrative control, creation of additional coins and register ownership, it uses cryptography as machine language. Though initiated in 2009 in US Market in 2009, it is being widely being dealt with since recent past months. Though based on speculative values it is not barred by most of the countries. A few have started planning to regulate it by issuing through their own Central Banks. While Bit-coin was the first to arrive, several similar have come up recently. Other prominent crypto-currencies are Doge-coin, Dark-net, Ethereum, Elongate, Rat-coin etc. It is placed in the wallet of the owner and used for making transactions world-wide. (Dogecoin is a decentralized, P2P digital currency that enables you to easily send money online.) So far several countries too have launched their own Crypto-currencies. To name a few are Ecuador, China, Senegal, Singapore, Tunisia. They may soon be joined by Estonia, Japan, Palestine, Russia and Sweden, which are looking to launch their own national crypto-currencies. Some of these countries are likely to take it a step further and replace paper tender altogether with China being one nation that is looking to take one step beyond a virtual and paper version. The system does not require a central authority and is maintained through distributed consensus. It also keeps an overview of crypto-currency units, their ownership, defines scope for new such units can be created, origin and the ownership. The ownership of crypto-currency units can be proved exclusively cryptographically. The validity of each crypto-currency’s coin is provided by a block-chain which is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. The Block-chain is written in Java, the double-layer block-chain supports multiple ledgers on its crypto-currency layers. Block-chains are secured by design. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.

UNIVERSAL ACCEPTABILITY

Though highly volatile, its mobility and transferability has been attracting some investors worldwide. The international Travel and payment industry is recognizing the importance this system enjoys today. Visa Inc., a global payments technology company has said on March 21, 2021, that it will allow the use of the crypto-currency USD Coin to settle transactions on its payment network, the latest sign of growing acceptance of digital currencies by the mainstream financial industry. The USD Coin (USDC) is a stable coin crypto-currency whose value is pegged directly to the US dollar. Tesla CEO Elon Musk has been vouching for bit-coin, the most popular crypto-currency, for quite some time. Musks Tesla has recently invested $1.5 billion in the crypto-currency. Tesla also mentioned the possibility of accepting payments in bit-coin, in the future. It is also being rumored that he himself is now planning to initiate a separate such unit in the market. The US Federal Reserve as usual welcomes every trade linked transaction as long as it pays taxes to the US Treasury. The consumers have to no recourse to that end. It has even allowed hundreds of ATM Machines and Crypto-currency vending machines to Bit-coin to promote this industry in the country. This has been the academic back-ground and practical usage for the consumers. This being a web-based platform is open with sky is the limit option all around the world for its users.

A FIELD FOR FRAUDSTERS?

With little control or lack of it, it is open for manipulation and misuse by fraudsters and frivolous elements simultaneously in the financial world. The absence of a Controlling and Regulatory Authority has enticed the hackers, fraudsters and criminals to this field of thick-air. There are many ways in which bit-coin is being actively used by criminals. It is difficult to accurately identify or regulate those individuals who seek it to benefit out of it features. It was reported that Bit-coin is frequently used as a means for paying for drugs or other illegal goods and services (such as weapons) and to hire individuals for malicious hacking. This includes trying to access other individuals financial information, other personal information, and also attempting to take over a specific computer. It was also reported to be deployed in acts of international distribution of weapons, similar such threats to the public safety. Thus it was found to be incredibly difficult to pin these activities on a specific individual or organization.

1.The Software Icon, Mr. John McAfee recently was charged in New York as he cashing-in in a pump-and-dump scheme. He had started promoting crypto-currencies on Twitter to drive up their value. Involved in money laundering acts, he was tricking the crypto-currency investors, according to US Department of Justice. Teamed up with Watson, both had used Twitter and raked in more than $13 million from investors through their fraudulent schemes,” according to US attorney Audrey Strauss.

2.In another similar incident a Delhi based Jeweller Mr.Umesh Verma was arrested in New Delhi on January 1, 2021 in a Rs.2.5 crore running a racket under the garb of being a crypto-currency promoter. He had fled to Dubai earlier in 2018 and living there since. Along with his son Bharat Verma and others, he had induced hundreds of investors into investing in a scheme operating under the name of Pluto Exchange, in the posh Connaught Place locality. He was promising monthly fixed returns 20 and 30 per cent and allegedly issued units of a crypto-currency called Coin Zarus. However, soon the returns dried up and post-dated cheques issued by Verma’s firm began to be dishonored, he had fled to Dubai. This confirms that its non-transparent character has made it more vulnerable for frauds.

A WIDER MARKET

Analysts believe there has been a growing acceptance for the digital currency in the current year as traditional currencies and assets took a pounding due to the global economic crisis. Bit-coins valuation has also soared as many big brand investors and companies have also stockpiled the digital currency. Most analysts believe that the Covid-19 hit year is responsible for the revival and meteoric rise of the digital currency. Many Bit-coin investors have said that the pandemic-hit year offered a perfect environment for the crypto-currency. The fact that interest rates on traditional investments hit rock bottom during the year also helped in the rise of Bit-coin as more investors poured their money into the crypto-currency. As the digital currency saw more investors, its value soared from just $7,200 dollar at the start of the year to almost $28,000 now. Matt Hougan, chief investment officer of Bitwise Asset Management, was quoted in a Bloomberg report saying that Bit-coin is moving from a fringe esoteric asset to the mainstream. If its going main stream, there is just so much money on the sidelines that is going to have to come in and establish a position that it leaves me very bullish for 2021, Hougan added.

China has recently announced it is planning to have its own Crypto-currency with regulatory backing. India, Japan have long been allowing its transactions un-officially, have planned to regulate it through legal backing. Strategists and investors believe today that Bit-coin trade or the broader crypto-currency industry could see tighter regulations in future, especially in the United States under Joe Bidens administration. Most crypto-currency experts feel that a lot will depend on how countries around the world regulate crypto trade, signaling that the air of uncertainty surrounding such trade remains at large. While most experts believe that the digital currency will improve on its position in 2021, they have warned interested investors to be prepared for sharp corrections and wild volatility.

Some of the nations are alert and more active to take on the fast rising risks to wealth. Turkeys central bank has banned the use of crypto-currencies and crypto assets including Bit-coin to purchase goods and services, citing possible “irreparable” damage and significant transaction risks. The bank published a legislation in the Official Gazette on Friday, saying that crypto-currencies and other such digital assets based on distributed ledger technology could not be used, directly or indirectly, as an instrument of payment.(India Today Tech/April 16, 2021). Similarly, Nigeria has ordered regulation of Bit-coin transactions through its February 5 directive by its Central Bank.

WHAT IS ISLAMIC PERSPECTIVE?

Basically, Islam does not allow trading of any product or article which is physically non-existent. Ethics based transactions can be possible when the commodity or service is in existence and its value in terms of exchange is agreed upon. Islamic Finance promotes total transparency in dealings and transactions. The Divine direction in Quran in Chapter 5 /Verse 2 is very clear on this. It says:

1) “And do help each other in virtuous, pious deed; and dont cooperate in matters of vices and adversity.”

2) “And dont consume deceitfully others wealth by resorting to wrong means and methods. (Chapter 2/Verse 188)
Islamic Finance stands for ethical application of money power for the progress and development of the society. It is named so because its genesis is the basic principles of Islam which accord top priority to the prosperity of every living being, protection of the weak, vulnerable and the needy. The Policies, operations and functioning are transparent. Progress and prosperity of the society is its target. Profit or Loss here means to earn profit and avoid profiteering. It is opposed to the theory of survival of the fittest. Everyone is important in the society. The belief in the divine authority and belief are driving force in transactions. The Managers are aware of their imminent and un-escapable accountability. The concept was institutionalized during the long tenure of Second Caliph, Omar bin al-Khattab. He established State Treasury Department to handle Finances. Both Public and Private sector find equal importance with minimum regulation by the State. Collection of annual obligatory Taxes from the eligible and distribution among the eligible was declared to be the duty of this department. Voluntary alms were placed under unregulated category. Another institution for Public Trusts with legal status of collective ownership was initiated for regulating and administering the alms, charities received. Violators of laws were severely dealt with irrespective of their status in the society. Prosperity, progress, peace and social justice were thus achieved in a period of few decades then.

Market-watchers describe Crypto-currency is a similar method launched by its’ initiators to drain out funds of the common man through web-based channels to lesser known destinations. Those interested to make money out of money simply cant resist it. Such a system leads to widen gap between haves and have-nots, the poor and the rich in the society. The main reason of social unrest and human miseries today can be attributed to increased application of these methods.

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The author is Director School of  Islamic Finance, Hyderabad.Email: sdilyashyd@yahoo.com

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