This Issue Was Addressed By Medina Kalimullina, Who Is The Adviser On Islamic (Islam) Economics And Finance Of The Russian Muftis Council.
Bitcoin is a digital cryptocurrency, secured through encryption, having no bills and physical coins. The existence of the currency depends on the network of users who work together to process and verify the transactions made digitally. This chain of users and transactions is what forms bitcoins or digital cryptocurrency.
A Historical Background Of Bitcoin:
The idea of Bitcoins or digital currency came into existence with the release of a paper in November 2008. The paper was titled “Bitcoin: Peer to Peer Electronic Cash System.” It mainly focused on the idea of how a peer-to-peer transaction ‘digitally’ would make sense. The author of this paper kept his identity hidden under the fictitious name “Satoshi Nakamoto.”
He quite purposefully pitched the idea of maintaining a decentralized system for making transactions in a peer-to-peer network. It was not long after the launch of this paper that this idea of digital currency became a reality. The author himself was the first one to mine the first bitcoins in January 2009. This idea of digital currency was highly appreciated by the cryptographers and anarcho-activists, who found liberation from government rules, accountability, regulations, and surplus charges in bitcoins.
The first time bitcoins were ever used in a transaction was in 2010 when a programmer, Laszlo Hanyecz from Jacksonville, FL, paid digitally to his fellow for some Pizzas from Papa John’s.
Bitcoin started to gain value over time. Beginning from $1 in around 2011, bitcoin became popular. Gradually, things began to get better, and bitcoin value boomed to a good $200 in 2011, October. Unfortunately, that didn’t last for long as a hacking incident resulted in the crash of Bitcoin’s value. It was late November that year when Bitcoin again boomed to its highest value, $1242. These facts show that the value of this currency was never under anyone’s control. It could rise or fall anytime to any level.
How Bitcoin Works?
Bitcoins are just like any other currency that you process. Physical currency is the one, for which you make your transactions; the banks keep records of all your withdrawals and deposits in its ledger and process. Just like that, the bitcoins are transacted and kept, but the only difference with bitcoins is that the responsibility of keeping a track over transactions and maintaining ledgers comes on the entire community or network of people. There is no one accountable for keeping a check on what transactions are made. A file is maintained, which is termed as the “blockchain.” This file is open to all and acts as a ledger for the bitcoin transactions made in the community. People in the network have no bank account numbers.
Instead, they have encrypted addresses. If anyone buys any bitcoins, they are allocated to their address and then kept as a record in the blockchain with that address.
Well, Bitcoin has given an entirely new dimension to the concept of currency. It is an independent system with no one looking after it. In this era, where technology and automation are taking over everything, this digital cryptocurrency is on the top of the list. Bitcoins system of currency is completely free of corruption. It has no threat of a central bank system, incorporating regulations that are more advantageous to the bank than the users. It is entirely free of the banking’s toxic strategies that aim to take control of your finances. Bitcoin allows one to enjoy independent, free, and most importantly, an identity-free access to a financial system. Bitcoins have eased things by allowing anonymous payments.
This currency system allows the user to make instant payments through cheap and easy transfers across international borders. It has considerably eased things for people who have limited or no access to banks or other transaction systems, which is a significant factor in developing countries like Pakistan. Let’s see how Bitcoins have evolved in Pakistan and how important they are for the country.
Bitcoin Market in Pakistan:
As discussed earlier, Bitcoins are of crucial importance when it comes to developing countries, where many people do not have access to banks, especially in remote areas.
The Arrival of Bitcoin Exchange in Pakistan:
Urdubit was the first and biggest Pakistani Bitcoin exchange established in October 2014. Founded by Danyal Manzar and Zain Tariq, this platform operated over Blink trade’s platform and engine. The owners of this exchange came to know about Bitcoins in 2012, one year after the Bitcoin Boom, which gained media attention. The creators saw a gap in the market for a country like Pakistan where $16 million or above came as overseas remittances, and many of them are for people living in remote areas with no access to banks. As per the Dawn report from April 2018:
Pakistan is home to 100 million adults without a bank account, with 13 percent of adults citing religious concerns as a reason for not having an account at a financial institution, a World Bank report on the use of financial services revealed.
Urdu bit decided to target Pakistan’s Freelance market for whom the money exchange or cash payments are an issue. Freelancers were a huge market in Pakistan at that time (May 2016) too. To accommodate such a massive number of users, Urdubit decided to partner with Bitwage. But all this was ceased as Urdubit announced to shut down all of a sudden! However, talented youth from Freelancer.com is still getting a lot from it. Thanks to them that they are also operating in Pakistan.
Issues with Bitcoin in Pakistan:
Pakistan became one of the medium density Bitcoin region on the world map in 2014. Many people in Pakistan started to use Bitcoins for their transaction as it offered an easier way out. In a report from Tribune in February 2014, one of the famous tech gurus and payment expert Faisal Khan recorded his stance on Bitcoins:
“At present, there is no official stance on Bitcoins in Pakistan. However, there is no cost on Bitcoin transactions, and that makes it a very attractive perspective”
For quite a long time there appeared no government stance over the regulation of Bitcoins in Pakistan. The issue was only rendered to debates and articles where people presented the pros and cons of using bitcoins in Pakistan. One of the reasons for the confused, somewhat disputed opinion about bitcoins was its alleged use in money laundering activities worldwide, making the digital currency extremely volatile. Few rendered it an issue with the transparency of transactions, which is essential with Pakistan’s state bank. So anytime that the bitcoins are to be approved, there needs to be a transparent mechanism to accept the system nationally.
The issue never came up on a bigger platform to be discussed until the end of 2017.
The Halal Bitcoin A Shariah Perspective:
A lot of issues were rising along with the value of bitcoins, one of the most critical questions for the Muslim communities around the globe was, “Is Bitcoin Halal or Haram form of financing?”
Shariah law requires currency to be tangible (having evidence of existence) and have a stable market value to be halal.
This Issue Was Addressed By Medina Kalimullina, Who Is The Adviser On Islamic Economics And Finance Of The Russian Muftis Council. She opened up a discussion about creating a halal cryptocurrency. She Concluded That There Was No Shariah Law For The Usage Of The Bitcoin Till The Moment. Therefore, Whether The Bitcoins Are Permissible In Islam Or Not Was Yet To Be Decided. She hoped that there would be a law under which one could declare the bitcoins as either halal or haram way of financing within the coming years.
“Sharia standards do not cover this issue yet, but in the perspective of two or three years they can be developed,” Kalimullina said after a conference in Kazan.
The concern that most Muftis had over the bitcoin currency was the lack of regulation and volatility associated with bitcoins. Scholars who participated in the conference agreed that there was no final verdict over the issue raised. It needed more analysis and formation of law to get the issue resolved. “Among the main arguments against Bitcoin is a high degree of risk (maisir) and uncertainty (garar), a lack of provision of real assets and state guarantees,” Kalimullina said.
Whereas Matthew J Martin of Blossom Finance, a Fintech startup based in Indonesia said:
“As a payment network, Bitcoin is halal. Bitcoin goes beyond what more conventional closed banking networks offer,”
FIA Recommends Banning Bitcoins in Pakistan:
It was almost January 2017 when the federal Investigation Agency urged Pakistan to declare bitcoin/digital currencies illegal in Pakistan. The institution also recommended the government to declare it illegal and advised taking strict action against anyone who violates or goes against the ban. “Bitcoin / digital currency is not recognized by State Bank of Pakistan as a legitimate business and are causing huge monetary loss to the government exchequer. So it should be declared illegal with the inclusion of definition and distinct punishment of this emerging crime”, according to the cybercrime bill.
The fact was stated well in PECA documents. Though the State Bank of Pakistan termed digital currencies illegal, no law could be applied to this situation. Therefore, the cybercrime bill was proposed to make this act the part of state law.
State Bank of Pakistan Warns Against The Use Of Cryptocurrency:
On 6th April 2018, the state bank of Pakistan banned cryptocurrencies in the country. The state bank of Pakistan declared all types of cryptocurrencies, including Bitcoin, Litecoin, Pakcoin, OneCoin, DasCoin, Pay Diamond, or Initial Coin Offerings (ICO) tokens, are not legal or guaranteed by the state bank of Pakistan.
According to the circular by the State Bank of Pakistan:
“The SBP has not authorized or licensed any individual or entity for the issuance, sale, purchase, exchange or investment in any such virtual currencies/coins/tokens in Pakistan, All banks, development financial institutions, microfinance banks and payment system operators, payment service providers are advised to refrain from processing, using, trading, holding, transferring value, promoting and investing in virtual currencies/tokens. Further, they will not facilitate their customers/account holders to transact in VCs/ICO Tokens. Any transaction in this regard shall immediately be reported to the Financial Monitoring Unit (FMU) as a suspicious transaction.”
Although the State Bank of Pakistan advised the public to refrain from cryptocurrency, it doesn’t put a straight ban due to the absence of a formal law to address this issue. Like the Reserve Bank of India, the state bank of Pakistan also cautioned the users of cryptocurrency about the fraudulent activities that might result from digital currency usage.
As the SBP kind of banned the cryptocurrency, the first Bitcoin exchange Urdubit decided to shut down, as FBR was already tracking and going against people involved in the bitcoin trade. On April 12, 2018, Urdu bit announced that it canceled all the orders after the SBP rolled out the circular.
Current Legal Status Of Bitcoins In Pakistan:
Things are quite awkward with the SBP circular out there and FBR tracing people involved in the trading of bitcoins. Everyone knows that bitcoins are not prohibited in the law of Pakistan. The tech guru, and renowned payment expert, Faisal Khan conducted in-depth research to determine if the law anywhere in any form limits people from the use of bitcoins, but failed to find even a single piece of evidence.
Where Do We See Bitcoins Globally In The Future:
The world is moving towards a cashless future but not entirely with bitcoins. Bitcoins or cryptocurrency can replace many applications and processes, but it can never eliminate physical cash. It does have the anonymous transaction feature along with a safe peer-to-peer transaction involving no intermediary. However, the one flaw that remains there with bitcoins is that it can hold nobody accountable for their value. Unlike the physical currency, the value of bitcoins is not controlled by a central bank, and the results can be fatal. The value of the money can fall to zero anytime, making it a lot volatile, which is why it is safe to say that bitcoins can never replace physical money but can be used side by side.
Future of Bitcoins in Pakistan:
Since the bitcoins became famous worldwide, a lot of investments were made in Silicon Valley too. Many entrepreneurs of Silicon Valley from Pakistan tried to pursue opportunities that came from digital currency. Undoubtedly, for developing countries like Pakistan, using a cheaper, easier, and transparent system in recording transactions can be a good option for many.
For people who don’t have their bank accounts estimated to be around 2 million, these blockchain and digital currencies are a blessing. Not only this, a huge number of freelance workers saw great hope in using this digital currency system, which would save them from higher transaction charges and many other issues that they could have faced otherwise.
As mentioned earlier, no law restricts the use of bitcoins in Pakistan except that the SBP doesn’t support or appreciate digital currency usage. The regulation of bitcoins through government platforms seems a dream only, as this is something that is not possible anytime soon. But, one should realize that cryptocurrency does not necessarily need to be regularized through the government like the physical currency. It can be taken alongside the central bank system as this way of transaction has eased many problems for many people in Pakistan.
With no physical bank presence required and no staff to take care of, a lot of money can be saved to run this transparent and standardized financial system in Pakistan. Pakistan’s National Financial Inclusion Strategy should look into the matter to find out if the digital currency system can be incorporated as something good for people who strive for a better, safer, anonymous, and transparent financial system.
What does Philippines have to say about Cryptocurrency?
In the Philippines the Philippine Central Bank, Bankgo Sentral ng Pilipinas (BSP), reported that as of end-March 2020, there were a total of 111 banks, consisting of 41 universal/commercial banks, 29 thrift banks, and 41 rural and corporative banks, offering different modalities of electronic banking platforms to the public. Over the period of enhanced community quarantine, digital financial transactions grew exponentially. BSP data showed that around 4.1 million digital accounts were opened among banks and non-bank electronic money issuers (EMIs). The Philippines’ Bangko Sentral ng Pilipinas (BSP) revealed that it has started to grant licenses for fintech companies to operate as an official Electronic Money Issuer (EMI).
The EMI license authorises these companies to deliver e-wallet services through their mobile apps. The accreditation allows the companies to convert consumers’ cash into electronic money which they can use to transact online to pay bills, remit money, purchase mobile load, and shop for products and services in partner merchant stores.
In addition, customers can withdraw and add money to their e-wallets through online bank transfers and over-the-counter payment centres.
In Philippines, the term E-money refers to “monetary value as represented by a claim on its issuer, that is:
- Electronically stored in an instrument or device;
- Issued against receipt of funds, of an amount not lesser in value than the monetary value issued;
- Accepted as a means of payment by persons or entities other than the monetary value issued;
- Withdrawable in case or cash equivalent; and
- Issued in accordance with this Circular;
E-money instruments include cash cards, e-wallets accessible via mobile phones or other access devices, stored value cards, and other similar products. E-money shall not earn interest and is not a deposit. In the case of banks offering e-money, such e-money not be considered a deposit. E-money is not insured with the Philippine Deposit Insurance Corporation. E-money issuers required to hold liquid assets that equal the amount of outstanding e-money issued.
In the Philippines, Virtual Currency Exchanges are regulated. Virtual Currencies are defined as “Virtual Currencies refers to any type of digital unit that is used as a medium of exchange or a form of digitally stored value created by agreement within the community of Virtual Currencies users. Virtual Currencies are not issued nor guaranteed by any jurisdiction and do not have legal tender status
(1) have a centralized repository or administrator; (2) are decentralized and have no centralized repository or administrator; or (3) may be created or obtained by computing or manufacturing effort.
It shall not be construed to include e-money as defined under Sec.X780 of the Manual of Regulations for Banks, digital units with stored value redeemable exclusively in goods or services and limited to transactions involving a defined merchant such as rewards programs.
The Virtual Currency definition excludes e-money, rewards programs and non-convertible Virtual Currency’s including those in online games. However, it accepts both centralized and decentralized ‘digital units of exchange. The BSP does not endorse any Virtual Currency as a currency, since it is neither issued or guaranteed by a central bank nor backed by any commodity. Virtual Currency exchanges require a license, and they are considered to be similar to remittance companies. The government has already begun issuing licenses for Virtual Currency Exchanges.
A Legal Perspective On Cryptocurrency:
The Sindh High Court while being seized of with a matter pertaining to the legality of Cryptocurrency in Pakistan in the case titled as Waqar Zaka Versus Federation of Pakistan and others (Constitutional Petition No D-7146/2020) was informed by the State Bank of Bank that it had never declared cryptocurrency as “illegal”.
A student accused of sending Bitcoin to Islamic State (IS) was arrested by the Counter Terrorism Department (CTD). According to police the accused had transferred Rs/- 1 Million to a militant group in Syria in a year.
In a significant development the Supreme Court of India in its significant judgment dated 4th March 2020 in the case titled as Internet and Mobile Association of India Versus Reserve bank of India while being seized with a matter pertaining to the legality and validity of a circular banning regulated financial institutions from providing services to businesses dealing in exchange/trading of cryptocurrencies, which put the entire Indian cryptocurrency trading industry in turmoil was pleased to struck down the circular. The Supreme Court analyzed the role of RBI in the economy as a central bank to manage currency, money supply and interest rates and recognized that the maintenance of price stability as an objective of RBI. The Supreme Court noted that cryptocurrency is capable of being accepted as valid payment for purchase of goods and services, and payment systems can be regulated by the RBI.
The Supreme Court held that the RBI was within its rights to issue the circular in fulfillment of its objective under law to safeguard the “public interest, interests of depositors and interests of the banking policy“. The Supreme Court stated that “Therefore, anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system.” As the circular was found to be issued in the interest of banking policy, the depositors and of the public at large, the Supreme Court rejected the contention that there had been excessive use of power by RBI.
The circular was also challenged on the grounds that denial of access to those who trade in cryptocurrency would tantamount to a denial of their constitutional right to carry on any trade or profession and thus would be violative of Article 19(1)(g). The Supreme Court upheld this contention by stating that “There can also be no quarrel with the proposition that banking channels provide the lifeline of any business, trade or profession.” However, the Supreme Court drew a clear distinction between the three categories of persons those who trade in cryptocurrency as a hobby as opposed to those who engage in trading in cryptocurrency as their business/occupation.
The Supreme Court held that the first category who buy and sell cryptocurrency as a mere hobby cannot base their claim on Article 19(1)(g) as it only covers trade, occupation, profession or business. The Supreme Court further held that the second category of citizens those who trade in cryptocurrency cannot also claim that the circular had the effect of completely shutting down their businesses, as they could still continue trading in “crypto-to-crypto” pairs or use the currencies stored in their wallets to make payments for purchase of goods and services to those who are prepared to accept them, within India or abroad.
Therefore, it is only the third category i.e., cryptocurrency exchanges that suffered due to the circular, as they had no other means of survival if they were disconnected from banking channels.
Though the RBI was held to be within its rights to issue the circular, the factor that led to the striking down of the circular was the lack of proof of the “proportional damage” suffered by RBI regulated entities in dealing with businesses operating in cryptocurrencies. The Supreme Court observed that the circular disconnected the banking sector from cryptocurrency exchanges despite the RBI not having found anything wrong with the functioning of these exchanges. It was also noted that before issuing the circular, the RBI did not explore the availability of alternative and less intrusive measures such as regulating cryptocurrency trading and cryptocurrency exchanges
Though the judgment has provided temporarily relief, there is currently an absence of definitive regulation on the cryptocurrency market. In light of such a vacuum, it is unlikely that financial institutions and the banking sector would be inclined towards investing in virtual currencies. The wide-scale use of cryptocurrency also seems to be questionable, as the “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019” has been proposed with the aim to ban all private cryptocurrencies. Though the Indian Parliament is yet to approve this bill, it would be interesting to think through the role of digital currencies in the post-COVID-19 economy.
In a rapidly growing digitized world, organizations need to keep up with the increased efficiency and productivity provided by highly advanced technologies. The increasing popularity of cryptocurrencies is an indicator of the inability of the global financial system to cater to people’s needs and concerns, especially in the aftermath of the 2007 financial crisis. Technology has always preceded regulation, making regulatory options more complicated. There is therefore a need for regulators to meet this technological challenge and take a proactive approach to harness this complex modern technology.
The DLT adopted by cryptocurrencies has numerous uses that could reap multiple long-term benefits, especially for developing economies. The Blockchain market is predicted to grow from £160.5 million in 2016 to £1.7 billion by 2021 (Research and Markets, 2018) and it has the capacity to be used as a regulatory tool for achieving public policy goals. Regulators in Pakistan must recognize the importance of this technological breakthrough and join global efforts to regulate the riskier aspects of cryptocurrencies while adopting DLT and Blockchain for their numerous productive uses.
This news was originally published at Global Village Space.