Cryptocurrency Position in Islamic Financial System: A Case Study of Bitcoin

Nur Rizqi Febriandika, and Raditya Sukmana Department of Islamic Economic Science, Postgraduate School Airlangga University, Surabaya, Indonesia

Keywords: Bitcoin, Islamic Finance, Cryptocurrency, Virtual Money, Commodity, Financial Asset

Abstract: The development of cryptocurrency is quite impressive. In 2017 at least there are 1148 types of cryptocurency emerging spread in 5632 market sector. Bitcoin became the starting point for the development of new applied cryptocurency science that is distributed ledger technology (DLT). It can be said that the world of cryptocurrency entered a new era since the appearance of Bitcoin. This research is purposed to find out how cryptocurrency position in islamic financial system, especially Bitcoin. This study uses library research methods; its resources are taken from secondary sources in the form of books, journals and rules related to cryptocurrency. This paper uses descriptive analysis and content analysis method. The results of this study indicate that usefulness of Bitcoin is: 1) online shopping (for outlets, web, and merchants that accept Bitcoin as a medium of exchange), 2) payments (for countries that legalize Bitcoin), 3) asset investment, and 4) trading. Bitcoin does not qualify either as money, commodity, or financial assets. In , it should not intentionally seek profit from the margin of buying and selling currency, because it is included in the category of . One of the functions of Bitcoin is as a trading tool, it is clearly not allowed in Islam because it contains the elements of maisir (gambling). If Bitcoin is regarded as commodity then it causes a because there is no intrinsic use / function contained in Bitcoin. Bitcoin also cannot be said to be a financial asset because it has no underlying assets. Its value is based solely on market schemes (supply-demand) and trust. Based on fiqh, Bitcoin contains a lot of syubhat and is not recommended for use.

1 INTRODUCTION evolved with new concepts was put forwarded by the community, which welcomed the emergence of The development of cryptocurrency is quite an open payment system that utilized the internet as impressive, by the year 2017 there are at least 1148 a transaction medium. cryptocurrency species sprung up in 5632 market With the emergence of cryptocurrency itself sectors (Marjan, 2017). The amount is expected to raises a lot of debate, many of which support or deny continue to grow considering the public demand for its existence. Some countries have issued an official cryptocurrency continues to increase. It was a circular banning cryptocurrency (Bitcoin) but not a historic day for the world of cryptocurrency in few also allow it. Many countries also have not January 2009 where on that date Genesis Block of taken a stand regarding the existence of this the new-born system, Bitcoin, was created by cryptocurrency itself. Satoshi Nakamoto (Wijaya and Darmawan, 2017). Then how is this cyptocurrency viewed in an Bitcoin became the starting point for the Islamic perspective? What is the position of development of new applied cryptocurency science cyptocurrency in the Islamic financial system? This that is distributed ledger technology (DLT). paper will discuss the characteristics of Bitcoin's existing block-chain technology allows cryptocurrency and how its position in the Islamic many parties to exchange information without economic system, especially Bitcoin. This study having to rely on trusted central parties. Token uses library research methods; its resources are taken ownership verification can be performed using from secondary sources in the form of books, cryptographic techniques with consensus method journals and fiqh rules related to cryptocurrency. mechanisms or collective agreements. Starting from This paper uses descriptive analysis and content a simple transaction in Bitcoin, cryptocurrency analysis method.

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Rizqi Febriandika, N. and Sukmana, R. Cryptocurrency Position in Islamic Financial System: A Case Study of Bitcoin. DOI: 10.5220/0007539401590163 In Proceedings of the 2nd International Conference Postgraduate School (ICPS 2018), pages 159-163 ISBN: 978-989-758-348-3 Copyright c 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

ICPS 2018 - 2nd International Conference Postgraduate School

2 DISCUSSION between computers can share. The technology that governs the use of Bitcoin is called cryptocurrency (Nubika: 2018). 2.1 Cryptocurrency and Bitcoin Some things that can be used using Bitcoin: 1) Shop online (for outlets, web and merchants that Cryptocurrency is a set of cryptographic and logarithmic technologies, which will mathematically accept Bitcoin as a medium of exchange), 2) compile codes and passwords to print virtual payments (for countries that legalize Bitcoin), 3) asset investment, 4) trading (Nubika: 2018). currency (Nubika, 2018). Cryptography itself is a programming language that serves to bind a virtual Table 1: Differences in Bitcoin, physical currency, and program with certain security standards. e-money. Cryptography technology is a major component in cryptocurrency technology. In the early days, Physical cryptography was used to conceal information Bitcoin Currency E-Money during World War II, where German Nazi forces (Fiat Money) developed one of the hardware devices called Has no Has physical Derived from Enigma used to randomize (encrypt) command physical form form physical messages from control centers to all German troops money scattered throughout the world (Wijaya and converted to Darmawan, 2017). digital form Since then cryptography technology continues to Using Issued by Issued by a be developed in many ways, one of which is in the cryptocurrency Bank Central Bank (or by a making of a virtual currency that is currently on the technology and licensed market. One of the first products that emerged and produced by private entity had the largest market share was Bitcoin. Bitcoin has "miner" a cryptocurrency market of 49% of the total and the Mining or Issues and Limited in current market value is recorded at USD 4,348.99 production is printers are debit balances (Marjan, 2017) limited to a not limited as and maximum Actually, before the existence of Bitcoin, there maximum of long as there transactions was an E-Gold, a digital currency established in 21 million is sufficient per day or 1996, by Gold & Silver Reserve Inc. which is based warranty month in Nevis, the Lesser Antilles archipelago (Sondakh: Requires a Does not Requires an 2016). E-Gold still purely uses the internet network computer desk require any internet-based and does not use cryptographic and block-chain or smart phone device device or it technologies like Bitcoin today. Currently there are connected to may not be if still cryptocurrency types that offer gold as the the Internet. the device is underlying gold-based cryptocurrency, such as: card-based Golden Currency, GoldVein, GoldMineCoin, AgAu, There is no There is Regulated and and many more (http://www.goldscape.net). Based official official controlled by on that cryptocurrency can be categorized into two regulation regulation each issuer, types; 1) that has underlying assets (gold), 2) has no with the underlying. supervision Bitcoin is a pioneer in cryptocurrency as well as Can use Physical Stored on a implementation of the first block-chain technology. personal device form, can be chip or server This system was created by an anonymous who software, placed connected to claimed to be named Satoshi Nakamoto, although mobile phone, anywhere an internet- until now no one knows the identity of the figure. or on internet that has an connected Satoshi laid down the basic principles of network. empty space device cryptocurrency through a whitepaper titled bitcoin: a The value of a Depending The value peer-to-peer Electronic Cash System (Wijaya and currency on various follows the Damarwan, 2017). In 2009 was the first year of depends on: aspects of the physical Bitcoin's emergence in the global business world. demand, country's currency Peer to peer mechanism is a network between supply, and economy computers that connect each other with the trust level mechanism of a single umbrella network, allowing

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Cryptocurrency Position in Islamic Financial System: A Case Study of Bitcoin

There is no No Ownership Central. What distinguishes the virtual money with owner data ownership data and each electronic money (digital) is related to its existence (anonymous), data of any transaction is that still has the original money underlying. As often currency in recorded by used in debit card transactions, e-cash, e-tol, go-pay, circulation. each issuer and the like, the numbers shown in the digital Its current use Can be used Its use is nominal are representations of the ownership of a is still limited freely while limited to certain amount of fiat nominal value. In this case the to a particular still in the business ministry of finance and Bank Central have business. territory owners who regulation related to this matter and its circulation have can still be supervised. cooperation with publishers 2.3 Bitcoin Position In Fiqh Perspective and Islamic Finance

In fiqh perspective, currency terms are known as nuqud (Hasan: 2005). As a currency, money cannot be a commodity at the same time, because fiqh law Figure 1: How Bitcoin works has different rules between commodities and currencies. Money will not be used as an investment 2.2 Electronic Money and Virtual object because money is a medium of payment. Currency exchange (sharf) may only be carried out Money with special conditions formulated in Fatwa Dewan Syariah Nasional-Majelis Ulama Indonesia (DSN- In Conventional economics, money functions as: 1) MUI) or the Accounting and Audit Organization for medium of exchange; 2) standard of value or unit of Islamic Financial Institutions (AAOIFI). The main account; 3) store of value or store of wealth; 4) problem that arises in Bitcoin is not only a character standard of deferred payment. However, this is that is not stable and does not have legal tender, but different from the Islamic economic system that only its own function which is used as an investment recognizes the function of money as a medium of medium (commodity/financial assets) makes its exchange and unit of account. As for the store of form increasingly unclear (containing syubhat). The value and standard of deferred payment is still a terms of riba will apply to money that contains debate among Islamic economists (Hasan, 2005). profits from sales, in contrast to goods that are Islam does not set in detail how the terms of a indeed allowed to profit from buying and selling currency because when Islam emerged already activities. Based on fiqh, Bitcoin contains a lot of contained the currency first. Based on the agreement syubhat and is not recommended for use. the terms of the currency are: 1) acceptability (the Cryptocurrency position with foreign currency is money is widely accepted by the public and its not the same. In Indonesia for example, the money users), 5) divisibility (can be divided into smaller that applies is money issued by a trusted government fractions), 6) legal tender (no government agency (for example rupiah), but may exchange it guarantee), 7) portability (easy to carry anywhere), for foreign money (for example dollars) under and 8) durability (last long and not easily damaged certain conditions such as foreign travel, investment when stored) (Nubika, 2018). or trade in goods and services related to international In 2012 the European Central Bank defines as a market (Bank Indonesia Regulation no. 18/20 pbi form of non-regulated currency created and 2016. In Indonesia itself, Bank Indonesia bans supervised by the developer for use by its transactions using virtual currency (bitcoin) (Bank specialized members of the virtual community Indonesia regulation chapter VII article 34 number (Sondakh, 2016). 14/40 /pbi/ 2016. In AAOIFI and Fatwa standards While the US Department of Treasury in 2013 DSN-MUI states that foreign currency transactions states explicitly that virtual money as a medium of may only be done directly/spot and may not be exchange that operates like a currency in certain forwarded to avoid potential gharar and riba due to environments, but does not have any attribute as a changes in the value of a currency in the future. real currency. So virtual money has no definition as Although some foreign currencies are often legal tender. In the case of regulation itself, unstable (sometimes weakening and rising), they are circulation cannot be controlled by the local Bank still within reasonable limits. Changes in the value

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of a country's currency against another country's margin of buying and selling currency because it is currency have nothing to do with the validity of the included in the category of riba. currency in the country itself. Although the money Moreover, one of the functions of Bitcoin is as a compared to foreign currencies tends to weaken, it trading tool, it is clearly not allowed in Islam still applies in its own country based on regulations because it contains elements of maisir (gambling). It made by the local government. Unlike Bitcoin, it can is regarded as a commodity raises a hardship be worthless at any time if no country wants to because there is no use/intrinsic function contained accept it. On the other hand, the main function of in Bitcoin. Its existence becomes worthless because Bitcoin is trading and investment tools. The function it serves as a means of exchange (money). While of bitcoin as a payment medium is still very limited Bitcoin also cannot be said to be a financial asset to certain merchants and it only aims to promote the because it has no underlying assets. Its value is cryptocurrency itself so that its value continues to based solely on market schemes (supply-demand) soar without having an intrinsically certain use. and trust, without the support of the Bitcoin is one of the most unique cases in guarantor/regulator of the government to make the Islamic finance. Unlike the conventional financial future Bitcoin contains elements of Gharar. system, in the Islamic economic paradigm the status or position of a business object implies the law of and haram, whether Bitcoin is money, 3 CONCLUSIONS commodities, or financial assets? The following characteristics of Bitcoin are shown in Table 2. The results of this study indicate that Bitcoin does not qualify either as money, commodity, or financial Table 2: Position Bitcoin (Marjan, 2017) assets. In Islam, it should not intentionally seek Money Comm Financial Assets profit from the margin of buying and selling odities currency, because it is included in the category of Acceptability Recogn Value is riba. One of the functions of Bitcoin is as a trading (yes) ized by dependent on the tool, it is clearly not allowed in Islam because it Difficult to time is priced contains elements maisir (gambling). If Bitcoin is Imitate as (Yes) regarded as commodity then it causes a gharar (yes) valuabl because there is no intrinsic use/function contained e in Bitcoin. (Yes) Bitcoin also cannot be said to be a financial asset Storable Must Recognized by because it has no underlying assets. Its value is (yes) have an sharia as based solely on market schemes (supply-demand) intrinsi valuable and trust. However, as a currency, money cannot be c value Yes) a commodity at the same time because fiqh law has Stability of that can Identifiable/trans different rules between commodities and currencies. value (No) be ferable Money will not be used as an investment object benefit (Yes) because money is a medium of payment. Based on Legal tender ed from Can be owned fiqh, Bitcoin contains a lot of syubhat and is not (No) (No) (Yes) recommended for use. Characteristic of Bitcoin Portability Can be Store of value (Yes) owned (Yes) (Yes) Divisibility Identifi Must be backed REFERENCES (Yes) able by underlying (Yes) aset/ sharia Marjan (2017), Shari’ah Analysis of Durability Transfe compliant Cryptocurrency: bitcoin. a presentation made at (Yes) rable investment Shariah Fintech Forum (SFF), 8 November 2017, Hilton Hotel, Petaling Jaya. (Yes) activities Hasan. Ahmad.2005. Mata Uang Islami. Jakarta : PT Raja (No) Grafindo Persada Based on the analysis, Bitcoin does not qualify http://www.goldscape.net accessed 05-05-2018. either as money, commodity, or financial assets. In Nubika, Ibrahim. 2018. Bitcoin:mengenal cara baru Islam, it should not intentionally seek profit from the berinvestasi generasi milenial. Yogyakarta :Ganesa Learning

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Sondakh,Alfred M. 2016. Berburu Bitcoin: Bagaimana Meemanfaatkan Peluang Sukses Melalui Mata Uang Global Ini. Jakarta : PT.Gramedia Wijaya, Dimasz Anka, Darmawan, Oscar. 2017. Blockchain : Dari Bitcoin untuk Dunia. Jakarta :Jasakom.

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