A new revolutionary technology in computing has been developed. The technology called blockchain, a distributed ledger which facilitates the transfer of value or data without the need of a central authority or a third party. The popularity of the blockchain has led many experienced and powerful business leaders within the financial services sector to predict a competition between the blockchain and fiat currencies by as early as 2025.
The potential of blockchain is so powerful that thousands of financial institutions, millions of investors and entrepreneurs are utilizing this powerful tool for their benefit. In fact, Dubai has unveiled its plan in becoming the leader of blockchain across its private and public sector by 2020. It is no surprise that central banks and regulators are taking a keen interest in blockchain technology. The South African Reserve Bank has formed a joint working committee to develop regulations for the blockchain and crypto-currencies. The International Monetary Fund (IMF) recently published a discussion document indicating that banks around the world should begin to seriously consider investing in cryptocurrencies and other fintech opportunities, as a means of adapting to new technological demands.
WHAT IS BLOCKCHAIN?
The blockchain is a decentralized digital ledger which records transaction chronologically and publicly, allowing anyone to verify and access the data. The blockchain is the underlying technology that powers Bitcoin, a decentralised digital currency which is the first and original application of blockchain. The blockchain allows anyone to send money from anywhere in the world at little to no cost, with no banks or third parties involved in the transaction. The use for blockchain is limitless; it can cater to any form of transactions involving value such as money, property and goods.
In 2008, an individual (or a collective) under the pseudonym Satoshi Nakamoto published a white paper on how Bitcoin would work, along with the open-source software needed to run the protocol the following year. His invention has sparked the blockchain revolution, without anyone knowing who he is.
“THE BLOCK- CHAIN IS THE UNDERLYING TECHNOLOGY THAT POWERS BITCOIN, A DE- CENTRALISED DIGITAL CUR- RENCY WHICH IS THE FIRST AND ORIGINAL APPLICATION OF BLOCK- CHAIN.”
IS BLOCKCHAIN SECURE?
Blockchain’s security protocol is effective since it re- lies on 2 important characteristics;
Use of cryptography: Blockchain uses cryptographic techniques backed by complex mathematical algorithms to verify and secure the data.
Nature of decentralisation: It is much harder to hack a decentralised network rather than a centralised, sin- gle-point-of-failure system. Imagine the amount of work needed to hack into thousands of computers distributed in a decentralised network! The features of immutability and transparency of the blockchain process removes the possibility of fraud and theft.
DIGITAL CURRENCIES
The emergence of blockchain technology is in tandem with the advent of cryptocurrencies, in particular, Bitcoin. Hence, it is only fair that we examine both elements individually to explore their compatibility with Islamic finance.
Unlike fiat money, cryptocurrencies cannot be made out of thin air. A huge amount of effort and resource is required to produce the supply of cryptocurrencies like bitcoin. This is called “mining”, where individuals or entities use sophisticated computer equipment and software to solve complex mathematical problems through the use of cryptography. This process creates 2 outcomes: ensure the security of the entire network and creation of crypto-currency supply as a reward for miners’ efforts.
Since the blockchain is a decentralized network, miners have an important role in securing transactions. Their interests will naturally be aligned since miners will be rewarded with cryptocurrencies for every successful block they secure. The exertion of computing power, electricity and time by the miners represents the value that validates the creation of cryptocurrencies. This is contrary to the fiat system, where governments and banks can create money out of impulse with no corresponding injection of value. It is important to point out that fiat money is debt-based. It follows that whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrow- er’s bank account, thereby creating new money.
SHARI’A AND BLOCKCHAIN
Fiat Currency is considered to be a valid medium of exchange in Islam and is not viewed as a store of value such as physical assets and commodities. Cryptocurrencies may be viewed as a valid medium of exchange and hence Shari’a compliant. However since there are various forms and denominations of such currencies, a more detailed re-search is required from a Shari’a perspective.
