COUNTRIES AROUND THE WORLD ARE IMPOSING BANS ON THE MINING AND TRADING OF CRYPTOCURRENCIES. IN A WORLD THAT IS INCREASINGLY PROGRESSING TOWARDS A DIGITAL ECONOMY, HOW WILL THIS BAN AFFECT THE INTERNATIONAL ECONOMY AND THE GLOBAL FINANCIAL WORLD?
Abdessamad Raghibi
Equity Research – Energy
Societe Generale Corporate and
Investment Banking – SGCIB
More than forty-two countries, including Algeria, Bahrain, Bangladesh, Bolivia, China, Egypt, Iraq, Oman, Morocco, Qatar, and Tunisia have directly or indirectly banned digital currencies by putting restrictions on banks dealing in crypto, or prohibiting cryptocurrency exchanges, according to a 2021 summary report by the Law Library of Congress published in November. While some governments are looking for a partial or complete ban, others are more inclined towards introducing regulations for such digital currencies. Bitcoin and subsequent cryptocurrencies have been controversial since their debut. These currencies while been widely criticised for volatility, nefarious transactions and such, are also widely being used as an investment and a safe currency during economic unrest.
A general consensus among public and regulators is to introduce regulations, as banning this technological advancement would not be a smart thing in a world that is moving towards a digital economy. This ban could theoretically hurt the county’s economy, as this new technology has the potential to bring an entire industry with it. We asked some professionals to share their views on the ban of cryptocurrencies and its resulting impact.
Overall, the Islamic economics paradigm is profoundly engaged in promoting and sustaining five key goals. The preservation of wealth, self, blood are vital areas of concern. In the context of wealth preservation, Islamic finance principles facilitate Muslim communities with ways and instruments to preserve, employ and invest their capital. Money is an auxiliary tool to achieve these objectives.
Cryptocurrencies and the underlying Blockchain technology presents a viable opportunity for Muslim countries.
Modifications and improvements need to be taken to acclimate these tools to Muslim countries. The economic and monetary situation of most Muslim countries, often subject to manipulations, convinces us that cryptocurrencies, given their self-regulating mechanisms, provide viable solutions.
However, this debate must be undertaken outside of the rushed and unfounded prohibition decisions, blocking all attempts to objectively study this concept. Thus, a debate must be opened by the Islamic authorities to analyze this concept carefully along with its major benefits for the Ummah.
Scholars of Islam generally lean towards discouraging and forbidding the use of cryptocurrencies. The main reason for the prohibition is the prospect of excessive speculation (volatility) and the anonymity of the transactions, giving rise to the element of gharar. My argument against the intensive anti-cryptocurrencies campaign is that there should be space for innovation for a new finance culture in Muslim countries. The counterargument of impeding the development and in some cases, limiting the discussions and research, for the sake of monetary stability, illicit activities, or “unjustified use” is a mistake.
This argument is based on the concept of “Islah” as a general philosophy on which a Muslim’s life must evolve. Hence, a true Muslim would logically conduct his business under the principle of “Islah”, which means complete harmony with society and the environment without the need for any coercive authority constraining him to do so.
To further support the argument, the cost of enforcing divine rules are lower than the cost of enforcing man-made law. Individuals tend to better conform to rules when they are internally motivated then if they were imposed by an external entity.
So, promoting a culture of preventive measures to ensure an already-weakened system will not bring much good to society and its entrepreneurial mindset. The real job for the Islamic finance regulatory bodies should be turned into engaging in a premature approach to foster, guide, and “purify” the issues surrounding cryptocurrencies. The fact that a breakthrough technology application is seen with such caution and mistrust brings in memories of the “witch hunts” in the medieval ages.
One of the major challenges facing developing countries (including the Muslim countries) is the financial inclusion bet that is yet to be generalized. The World Economic Forum estimates that over 1.7 billion people in the world today remain under – or unbanked. The potential widespread use of digital finance – financial services delivered via mobile phones, the internet, or cards – has been estimated to boost the annual GDP of all emerging economies by $3.7 trillion. The limitation of the conventional banking system and the trailing CBDC projects is an obvious obstacle to growth in a post-pandemic world rushing for opportunities.
In the case of cryptocurrencies, anyone who has access to the internet can participate in a cryptocurrency network. Furthermore, participation is not limited to purchasing or selling cryptocurrencies.
THE POTENTIAL WIDESPREAD USE OF DIGITAL FINANCE – FINANCIAL SERVICES DELIVERED VIA MOBILE PHONES, THE INTERNET, OR CARDS – HAS BEEN ESTIMATED TO BOOST THE ANNUAL GDP OF ALL EMERGING ECONOMIES BY $3.7 TRILLION.
Primary participation includes participating in governance voting and staking, examining blockchain transactions using a block explorer, running nodes, or mining transactions to underpin the decentralized distribution and security of any given crypto blockchain network. This alone can boost an absent financial culture in our countries and pave the way to address existing issues in cryptocurrencies or pressure the release of CBDC.
I believe that killing the cryptocurrency debate will not prevent our youth to stop pursuing this new trend. Instead, it would rather deepen the gap between organized financial markets. Growth tends to foster through innovation and money is not an exception to the rule.
Mutia Sari, MBA
Marlin Group
Indonesia
Currently, more and more countries are prohibiting cryptocurrencies such as crypto bitcoin, Ethereum, dogecoin, etc. Cryptocurrencies carry high risk and are considered dangerous to the financial system.
Observing the financial risks of these crypto-assets, several countries are trying to make regulations that can regulate the digital currency industry. However, there are also some countries that prohibit cryptocurrency transactions in their territory. The price appreciation of the crypto assets can shoot up indefinitely, but can also fall freely – implying that crypto assets are instruments of speculation.
Although crypto assets are considered speculative instruments, they can also be analysed fundamentally regarding the prospect of rising prices in the future. The first fundamental analysis indicator is information about the technological advantages and functions of the crypto coin.
Cryptocurrencies are billed as a world-changing technology with the potential to create new economies and empower people who do not have access to bank accounts.
The cryptocurrency uses blockchain technology, similar to a digital ledger that records all transactions. Because of technological innovation, cryptocurrency has the potential to go beyond the traditional financial system. Therefore, the digital asset industry is expected to mature and grow even bigger.
The blockchain underlying cryptocurrencies can offer transactions that are faster, more efficient, and more secure than fiat regulated by a central bank. To facilitate industry participation, regulators and businesses want to ensure that investors enjoy certain safety nets in both digital and traditional markets.
On the other hand, the regulators play a pivotal role in reducing the occurrence of risks in both long and short-term scenarios. With regulations, the market is bound to operate in accordance with the rules. Without regulation, market participants can be exposed to both long-term and short-term risks. The key point to understand is that it is not the regulators and governments who will determine the future of crypto. It is the investors and the general public, who will decide the fate of digital assets.
It’s important to point out that many people have an incorrect understanding of blockchain and that it may take over the world and even replace fiat with banks. Blockchain is about solving problems, and not taking over the world. Replacing fiat or banks is a common misconception among the general public in the future markets will be more mature and consumers will be protected. Blockchain delivers transparency, predictability and honest communication.
As the market matures, customers can figure out “which digital assets have actual value and which are used as manipulative tools to make the rich richer.” Since the beginning, ups and downs in trends have occurred. But we have also seen that what lasts at the end of the day is always the brilliant ideas that solve the problems that arise today.
The COVID-19 pandemic has become a catalyst for forcing the entry of all financial and banking industry sectors into the digitalisation era. Imagine a concept of a world without physical currency. It is strange but real. Money will be removed and replaced with a digital currency system.
BLOCKCHAIN IS ABOUT SOLVING PROBLEMS, AND NOT TAKING OVER THE WORLD. REPLACING FIAT OR BANKS IS A COMMON MISCONCEPTION AMONG THE GENERAL PUBLIC IN THE FUTURE MARKETS WILL BE MORE MATURE AND CONSUMERS WILL BE PROTECTED. BLOCKCHAIN DELIVERS TRANSPARENCY, PREDICTABILITY AND HONEST COMMUNICATION.
Blockchain seeks to fill certain roles that traditional multi-layered payment systems cannot. However, it does lead to high costs incurred by the payment system itself. Blockchain seeks to bring unbanked individuals into the financial ecosystem, using a hybrid approach. The pandemic accelerates digitisation.
On the other hand, cybercriminals are also constantly evolving. Ransomware attacks are reaching an unprecedented scale. Threatening thousands of organizations worldwide and even holding critical infrastructure hostage. The decentralised nature of cryptocurrencies offers anonymity and cybercriminal identity protection. Moreover, the currency is not tied to the central bank. As a result, it is difficult for regulators to track.
As the boundaries between the ‘physical’ and ‘digital’ become increasingly blurred, who or what we trust affects our cybersecurity. Cyber attackers now have more and more latitude. Also, the API (application programming interface) economy is driving a new era of digital fraud and exploitation.
Greater reliance on digital services presents more opportunities for cybercriminals to commit identity theft, fraud, and, unauthorised data collection. Moreover, the attacker will target the critical digital infrastructure of the countries. An increased amount of daring attacks are expected in the years to come. Furthermore, the workforce and employees need seamless cybersecurity solutions. With the concepts such as work-from-home (WFH) evolving more than ever, solutions to support employees are certainly also required. Working remotely triggers businesses and IT professionals to adopt the new means of technology, especially regarding information security.
Cybercriminals also don’t want to be left behind in the pursuit of profit. It’s not surprising that Crypto is also a target for attacks. Inherently, cryptocurrencies are digital assets and all transactions are done online. Crypto offers anonymity to users. This is an interesting feature for cybercrime groups. State-sponsored threat actors are also targeting this industry.
Driven by the pandemic, the mobile banking phenomenon is also evolving. More mobile banking trojans are predicted for the Android platform, local and regional Android implant projects is expected to move globally, spreading to Western Europe and other countries around the world, presenting a stern security challenge for many organisations. Various companies have started handling remote access for ad-hoc employees, and patching internet-connected hardware systems to withstand ransomware attacks. It’s important to build on-core principles in the evolving financial threat landscape and leverage help from experts.
Dr Sutan Emir Hidayat
Director
National Committee for Islamic Economy
and Finance, Indonesia (KNEKS)
At the time of writing this article in February 2022, the Indonesian Government recognizes Cryptocurrency as an asset or commodity that can be traded but not used as a medium of exchange or currency in Indonesia.
The Institutions that issued the regulations to govern the use of Cryptocurrencies are the Central Bank of Indonesia (BI), the Indonesia Financial Services (OJK), the Commodity Futures Trading Supervisory Agency (BAPPEBTI) under the Ministry of Trade of the Republic of Indonesia, and the Indonesian Ulema Council (MUI).
As with most central banks in the world, the Central Bank of Indonesia (Bank Indonesia) prohibits the use of crypto as a currency or medium of exchange in Indonesia. The use of crypto as a currency is against the Act number 7 of 2011, concerning Currency; and Central Bank of Indonesia Regulation number 17/3/PBI/2015 concerning the Obligation to Use Indonesian Rupiah (IDR) in the Territory of the Republic of Indonesia.
Indonesia Financial Services Authority (OJK) thus, restricts the banks and non-banking financial services institutions to facilitate cryptocurrencies. The prohibition includes the usage, marketing and facilitation of the trading of cryptocurrencies. According to the data issued by the Indonesia Financial Services Authority, the Indonesian financial literacy is still very low, around 38%. Hence, it is necessary to make restrictions and prohibitions to protect consumers and investors of financial services institutions. From a legal standpoint, the respective institutions must apply the Know Your Customer (KYC) principle to prevent unlawful activities such as fraud, ponzi schemes, and money laundering.
However, the restriction by the Central Bank of Indonesia does not make crypto transactions in Indonesia completely illegal. Crypto can still be traded as an asset or commodity on the Futures Exchange.
Crypto trading is regulated and supervised by the Commodity Futures Trading Supervisory Agency (BAPPEBTI), the Ministry of Trade of the Republic of Indonesia. Several regulations that regulate the trading of crypto as assets or commodities, among others are the Minister of Trade Regulation Number 99 of 2018 concerning General Policy for the Implementation of Crypto Asset Futures Trading (Crypto Assets); The BAPPEBTI Regulation Number 7 of 2020 concerning the List of Crypto Assets that can be Traded in the Physical Crypto Asset Market, and the latest regulation was the BAPPEBTI Regulation Number 8 of 2021 concerning the Guidelines for The Trading of Physical Market for Crypto Asset on the Futures Exchange.
According to the BAPPEBTI Regulation Number 8 of 2021, the physical market for crypto assets on the Futures Exchange is defined as a physical market for Crypto Assets that is held using electronic means owned by Physical Crypto Asset Traders for buying or selling Crypto Assets whose market supervision is carried out by the Futures Exchange. In Article 3, paragraph (2), it is explained that Crypto Asset Types can be traded if they meet the following criteria: a) the crypto assets based on distributed ledger technology; b) in the form of utility crypto assets or asset-backed Crypto Assets (Crypto Backed Assets); and c) has obtained the results of the assessment using the Analytical Hierarchy Process (AHP) method determined by the BAPPEBTI.
The preamble of the respective regulation stated that the existence of a Physical Crypto Market Regulation aims to meet the needs of future market, and to provide added value for the development of Crypto Asset business in Indonesia. Hence, it could be understood that the Government of Indonesia is open and welcoming digital innovation in financial transactions and services.
The Physical Crypto Market Regulation is quite comprehensive, particularly for filtering the Traders, the tradable Crypto Assets and the transaction security. The regulation consists of seven chapters, namely: the General Provisions, the Institutional arrangements, the Trading Mechanisms, the Arrangements for Prospective Crypto Asset Physical Traders, the Approval Mechanisms for Futures Exchanges, the Futures Clearing House Arrangements, the Regulations for Physical Traders of Crypto Assets and the Crypto Asset Storage Managers, the Sanctions, the Dispute Settlement and the Closing Provisions.
To strengthen the supervision and security of crypto Asset transactions in the physical market for crypto assets, this regulation authorises the Head of BAPPEBTI to arrange a Crypto Asset Committee to provide consideration and/or advice to the BAPPEBTI in promoting and developing the trading on the Physical Market for Crypto Assets. The Crypto Asset Committee consists of elements from the BAPPEBTI, relevant Ministries and Institutions, the Futures Exchange which organises the Physical Crypto Asset Market, the Futures Clearing House which organises the Crypto Asset Physical Market, the academics, practitioners, and associations related to the Crypto Asset Committee.
Then, what is the view of the Indonesian Ulema Council (MUI) regarding this cryptocurrency phenomenon? In the 7th Ijtima’ Ulema held on November 9-11, 2021, the Indonesian Ulema Council (MUI) issued the Fatwa that stated that the use of cryptocurrency as a legal currency is haram. While trading the crypto as a commodity or asset is valid if the crypto meets the requirements as sil’ah (commodity that can be traded), has an underlying, and has benefits.
The Indonesian Ulema Council (MUI) prohibits crypto as a currency on grounds such as the high level of vulnerability associated with Cryptocurrency, categorized as gharar (excessive uncertainty), which may endanger (dharar) the parties involved in the transactions. In addition, the danger of using the crypto as a currency is even higher as it is against several Acts of Indonesia, including the Act concerning Indonesian Currency and the Obligation to use Rupiah in the Republic of Indonesia.
The Shari’a principles are purposed to protect at least five basic needs of humans (maqashid Shari’a) including the wealth. This Fatwa is carried out by applying the precautionary principle (sad dzari’ah) to protect the assets of the parties involved in the transaction. According to one of the Islamic legal maxims (Qo’idah Fiqhiyah), derived from the Hadith of the Prophet Muhammad, narrated by Ibn Majah (hadith no. 2340 and 2341), He, PBUH said, َراَر ِض َال َو َرَر َض َال , meaning it is not permissible to perform actions (in this case crypto transactions) that may harm oneself and harm others. The crypto assets are legal and valid (Saleh) for trading if they meet at least some of the requirements. First, Crypto assets must meet the requirements as sil’ah or commodities that can be traded according to shari’a, namely, they have a physical form, have value, the amounts are known, and the property rights can be handed over to buyers. Second, Crypto assets must have underlying assets. Some cryptocurrencies have underlying in the form of physical assets such as gold, USDT, LSILVER, XSGD. Lastly, crypto can be treated as an asset if it has any uses and benefits.
