Exploring the Position Of Bitcoins in Islamic Banking and Finance

Islamic Banking and Finance

It may be too early to form a final opinion about Bitcoins (BTC) as a viable currency. In particular, it depends on its acceptability and adoption by the business community all over the globe. This will only happen when a complete trust in such a virtual currency develops to a point that is both beneficial as well as credit risk-free. The fact however remains that without the active involvement and meaningful regulations on the part of governments around the world BTC will not gain fiduciary status.

Compared with fiat money good news for Islamic finance is that Bitcoin is more of a commodity than a pure currency in terms of its definition. This is perhaps why the Norwegian government, the richest in Scandinavia has subjected the BTC to capital gains and sales tax. Treating it as a commodity means that renting the commodity becomes more in line with sharia principles instead of lending based on interest.

The world is sharply divided on the prospects of this currency concerning its viability in terms of worldwide acceptance as well as whether it fulfills the fundamental characteristics of what constitutes money.

Thought to have been a brainwave of a Japanese Satoshi Sakamoto back in 2009, BTC is now a 7.5 Billion market. It is a digital currency securely encrypted (hence sometimes called crypto-currency) for swift transactions from one part of the globe to another at a fraction of the cost currently incurred on payments and money transfers. BTC completely bypasses the entire banking system. It’s even beyond the reach of central bankers and too watery in shape to be regulated (at least up until now). More amazing is the notion that BTC is not susceptible to inflation. It is in limited supply (its growth depends on acceptability and adoption), it is highly fungible, it is divisible, it is portable, and it is a store of value, fulfilling perhaps all the required characteristics and functions of fiat money.

Like any new technology, acceptance takes time. If the currency does not fall prey to criminals out there (such as the infamous “Silk Road”, an online marketplace for illegal drugs, etc.), it is perhaps only a matter of time before it will become something mainstream. Maybe you want to think, let’s say 50-60 years from now when most shops on a street corner in many (if not all) countries will likely accept the BTC.

It seems several brick-and-mortar entities are already accepting BTC as a currency. A Shanghai-based developer surprised many when he accepted virtual coins as an alternative to hard cash. Similarly, as many as 1000 entities in Australia alone seem to be accepting BTCs. Several restaurants and other entities in Tokyo are accepting it too.

New BTCs are issued through a process called ‘Bitcoin Mining’. Miners are given a reward for verifying or validating a bunch of transactions. Mining a block helps create new BTCs. The process is somewhat complex – part of the reasons many influential financiers remain on the periphery carefully trying to decipher the core of the concept.

GOVERNMENTS:

Some governments, like Russia, have openly tried to defy the currency. Japan, like many other countries, seems to have stayed on the sidelines (http://goo.gl/t2DY66) and perhaps remains in a state of ‘wait and see’. Similarly, Singapore seems to have put forth the notion of caveat emptor (let the buyer beware). As stated elsewhere in this article, the Norwegian government recognizes BTC as a commodity-like instrument subject to capital gains tax and sales tax. Similarly, Germany would probably accept the currency as “private money” so that it will be subject to taxation. The central bank in the EU as well as did not specifically forbid the use of BTC but it did warn users of the risks and volatility associated with it. Asian countries such as China, Thailand, and Korea have their specific stance against Bitcoins pointing to their dissatisfaction with the currency not fulfilling the very definition of currency. United States Senate was told that the currency is a form of legitimate financial service. However, Homeland Security seems to be on the go to explore the underlying risks.

FUTURE:

The conversion between BTC and fiat money is primarily carried out at ‘Bitcoin Exchanges’ that remain highly unregulated and open to criminal activity such as hacking and identity fraud. Recent rumors around the failure of the Mt. Gox (Tokyo-based BTC exchange) are something that makes the regulators nervous. (http://goo.gl/h4bI4m)

With BTC taking root in the years to come, new generations will likely see a whole new global economy with completely new rules of the game and brand new macroeconomic theories. However, perhaps governments around the world will remain the biggest villain of this fledgling innovation because the new currency, perhaps in some form, undermines the authority of governments. Governments will need to match the smartness with equally innovative governance structures to sieve good from the bad – just like they must watch the legality of any other economic activity out there. http://goo.gl/lv3cfz

What camp are you in? Will BTC survive to rule the world or will it die later if not sooner?
What is your first thought on BTC as a viable Islamic Finance instrument?

Originally published on www.islamiceconomist.com