Is cryptocurrency a medium of exchange if not legal tender
Virtual currencies have different levels of convertibility. Game coins, for example, is only used in their virtual domain. The exchange to fiat currency outside their virtual domain is restricted. On the contrary, the convertible virtual currency allows the exchange into fiat currency and also can be used for good and services payment in the real economy. When the convertible virtual currencies use decentralized systems, they need cryptography technique to identify and verify transactions.
It is called cryptocurrencies. By using decentralized systems, they allow the peer-to-peer transaction, so they do not need the central authority for administering the systems, and the clearing process can be eliminated. The innovation of cryptocurrencies created a challenge for the concept of fiat currency. Money in Sharia perspective Referring to Lietaer regarding the definition of money, most Islamic and Sharia scholars Meera, agree that whatever a society takes a money based on the concept of maslahah general welfare that can be interpreted all things that give benefit to the community for the common good and , it is allowed halal.
Hence, the rules of purchase agreement of a currency with another currency or foreign exchange as-sarf and the determination of interest of the loan upon repayment based on a certain percentage of the principal amount borrowed to the borrower riba are applied upon it. Referring to Uthamni, money in Sharia law is a medium for exchange. It is forbidden to make a profit by dealing with money and make interest from the papers that represent the money.
The only profit that is allowed is generated from the exchange of intrinsic utility that is sold for money or when different currencies are exchanged. Imam Ibn Taymiyah stated: When currencies and money are inter-traded with the intention of investment and profit, it opposes the very purposes of money and Thamaniyyah.
Referring to Sharia law, someone who has money must spend it or put effort and put labor to derive benefit from the money. Money is only a medium of exchange or a unit of measurement. It does not have an intrinsic value. It depends on the production activity that generates surplus value. The Quran interprets the role of money as following: Do not entrust your properties — which Allah has made a means of support for you — to the weak of understanding, but maintain and clothe them out of it, and say to them a kind word of admonition.
The word properties refers to wealth as one of the main supports of human life. Furthermore, the verse refers to the fact that Allah has created a medium to upkeep the entire worldly system. The Quran has not defined the form of money but in and , the Quran shows that the previous society used gold dinar and silver dirham.
Futhermore, Meera argued that Islamic money is something that contributes to the attainment of meaning and purpose desired in presenting a law for the benefit of mankind maqasid al-shariah. In order to examine the characteristics of cryptocurrency, whether it is suitable for Islamic law, first of all, we need to take a look at the components of currency based on Islamic law.
There are three components such as property mal , lawful due to its value taqawwum and monetary value thamaniyyah. The Quran and the Sunnah of the Prophet Muhammad do not make a clear statement regarding property mal. Referring to Islam , since there are many definition interpretations of mal among Sharia scholars, the definition due to the different ways of expression is closely examined.
The following are some definitions: Mal is a human tendency that is able to be stored over time. Mal is something that has been created for the goodness of human being. Mal is usually desirable and can be stored over time. From the definition above, there are two keywords that describe mal, which is something that is desirable and something that can be stored over time.
Furthermore, Islam argued that mal is something for which there is a lawful benefit. Hence, something that does not give benefit, for example, insects, and is unlawful in Islam, for example, alcohol drink, is not considered as mal.
The requirement for the mal to be exchanged is mutaqawwim. Mutaqawwim refers to lawful item or subject for use in Sharia. There two criteria for any item that can be traded and exchanged, which is tamawwul and taqawwum.
Referring Hayder , tamawwul refers to anything used as mal. Taqawwum refers to anything that is lawful according to Islamic Law, as a result of being considered valuable. Thamaniyyah is a monetary value or the key element in an asset that is eligible to serve as currency and money. Thamaniyyah has two functions, which are as an independent standard of value and as a unit of account. Since it is an independent standard value, it must have stability and should be worldwide acceptable.
This refers to being the main reference point and it is a benchmark for people to send prices and record debt. Methodology In this study, the methodology used is descriptive with a qualitative approach. The object of this research is cryptocurrency. The data are secondary data obtained from peer-reviewed journal articles, conference papers review, working paper, and Sharia consultant report addressing the legality of cryptocurrency.
The literature review analysis includes the following steps: material collection, descriptive analysis, discussion with people in Sharia competency, and intuitive-subjective material evaluation. Results Cryptocurrency as the nature of money As mentioned above, referring to Meera , money can play an efficient and effective role if it meets the seven requirements. First of all, this paper will examine whether cryptocurrency represented by Bitcoin has fulfilled the seven requirements compared with other currencies Table I.
From Table I , it can be observed that Bitcoin has the same characteristics with fiat currency that fulfills six of the seven requirements. Both of them do not have intrinsic value. The stable value requirements refer to the store of value function. All of the currency can be used as a store of value, but the value may decrease due to risk that may happen.
For the durable requirements, in commodity currency is stated mixed depends on the commodity type. For example, commodities like wheat or salt are perishable through fungal, pest, water, fire, bacterial activity and are also destroyed by the process of consumption. Despite its highly volatile price, the value of Bitcoin exists when its users have trust to use it and accept it as payment.
It needs vendor acceptance, user acceptance and innovation. Hence, in terms of the nature of money, Bitcoin is accepted as money, with notes: it is trusted, accepted as payment and becomes an alternative in this current internet-fueled global market. Cryptocurrency in legal perspectives Referring to He et al. Referring to Proctor , the legal concept of money is broader than the concept of currency.
Money can be created by a private party not only paper and coin money but also demand deposit , but it should be denominated in currencies that are issued by the central bank and should be accepted as a medium of exchange within the country. Hence, referring to the legal concept, Bitcoin is not acceptable as money. Although Bitcoin is accepted as a medium of exchange by thousands of merchants throughout the world, some countries have issued the regulation to ban Bitcoin and other cryptocurrencies due to bypassing of the central bank authorities.
Bangladesh, Bolivia, Ecuador and Kyrgyzstan have made a clear decision that Bitcoin is illegal. In the meanwhile, other countries that do no state that Bitcoin is illegal still review regulatory implications. Table II shows the regulation implication of Bitcoin acceptance. The UK has commissioned the Treasury to conduct studies on cryptocurrencies regarding their role in the UK economy. Palestinians and Russians have also started to develop their own cryptocurrencies.
In the case of Palestine, cryptocurrency will be the answer for the scarce of money printing. In Indonesia, the legality of cryptocurrencies as a currency will be defined on the basis of the President of the Republic of Indonesia In Article Number 1 and 2, the following is stated: The currency shall be the money of which issued by the Unitary State Republic of Indonesia of which hereinafter referred to as Rupiah.
Money shall be the legal payment instrument. Furthermore, under Article 21 on the Use of Rupiah Paragraph 1, it is stated that Rupiah shall be used in the following cases: each transaction whose objective is for the payment purpose; settlement of the other obligation that has to be settled using money; and other transactions that are performed in the territory of the unitary state of the Republic of Indonesia.
Related to Article 21 paragraph 1 above, Article 33 paragraph 1 on Criminal Provision stated that anyone who does not use the Rupiah: each transaction whose objective is for the payment purpose; settlement of the other obligation that should be fulfilled using the money; and other financial transaction as set forth in Article 21 section 1 shall be subjected to sentence with imprisonment for not less than 1 one year and subjected to sentence with fine not less than Rp.
Referring to the Law on Currency Act above, the Government of the Republic of Indonesia strictly stated that the only legal payment in the territory of the unitary state of the Republic of Indonesia is only Rupiah. Furthermore, related to Bitcoin, Bank Indonesia held the Press Release regarding Bitcoin and other virtual currencies, referring to Law Number 7 the Year on Currency Act, and stated that Bitcoin and other virtual currencies are not valid currencies or payment instruments in Indonesia.
Since the Currency Act did not strictly state the legality of Bitcoin, the popularity of Bitcoin was booming in Indonesia. The users of Bitcoin in Indonesia were around one million. Surprisingly, the number surpassed the investor numbers in the capital market, which was around , investors.
Virtual currencies mentioned in BI Regulation above are the digital currencies that are not issued by any monetary authority and are obtained by the way of mining. The Governor of Bank Indonesia stated that the main reason for prohibiting the virtual currencies is to implement prudential principles, safeguard business competition, risk control, consumer protection, and also to prevent crime, such as money laundering, terrorism financing, and maintain the sovereignty of the rupiah as a means of legitimate payment in Indonesia.
The result of the BI regulation enforcement is a decrease in Bitcoin users, which is around , users nowadays. Cryptocurrency in economic perspectives From an economic perspective, this paper analyzes whether cryptocurrency will fulfill the characteristic of a successful currency. It should have the functions as a medium of exchange, an account unit, and a store of value.
Table III consists of the comparison among the currencies. Currently, the cryptocurrency does not fully meet the three characteristics of a successful currency. A function as a store of value is limited by high price volatility.
After five months, the price rocketed to USD 19, per Bitcoin. In five months, it reached percent growth or percent per month. In six months, the price declined to USD 6, per bitcoin or dropped to 11 percent per month. In Figure 3 , the high volatility of Bitcoin price compared to gold is shown.
Therefore, it is clear that Bitcoin does not meet the store of the value function. Phillip et al. The second characteristic is as unit of account functions. Referring to Yermack , Bitcoin does not seem to establish itself as an account unit or a store of value. But currently, there is a piece of evidence that cryptocurrencies are used as a unit of account. The mechanism is by valuing the goods and services based on cryptocurrency exchange rate. For example, sellers who accept the cryptocurrency payment will quote a price in fiat currency, with prices in cryptocurrency based on exchange rates at a given point in time.
The third characteristic is as medium of exchange functions. Since cryptocurrency is not a legal tender, the transactions that accept cryptocurrency must involve two parties that have an agreement regarding the acceptance of cryptocurrency. Cryptocurrency in Sharia perspectives In general, Sharia scholars have two different opinions. The first group argues that cryptocurrency is prohibited by Islamic Law haram.
Another group has opinion that it is permissible in Islamic Law halal. The main reason of their statements are as follows: The negative publicity that cryptocurrency is easy to use for illegal activities; hence, they buy it in order to avoid and hide from government or authorities.
Cryptocurency is intangible and only available on the internet. Cryptocurrency has no central authority to monitor and audit its systems; hence, it is not a legal tender. Cryptocurrency transaction is open to speculation excessive gharar. The miners of cryptocurrency are based on zero sum game. If the miners succeed to solve mathematical puzzles, they gain cryptocurrency, otherwise they get nothing.
Cryptocurrency is not backed by anything. Even Bitcoin is invented by an entity or a real person. The consideration is that cryptocurrency meets the criteria and definition of property mal and money because of the following reasons: treated as valuable thing among people; accepted as a medium of exchange by a group of people; it measures a value; and has a unit account functions.
Referring to the consideration of Sharia scholars, there are some subjects that can be analyzed in terms of Sharia Law. Basically, the Sharia scholars argued regarding cyptocurrency for following items: Whether cryptocurrency is a property mal?
Whether cryptocurrency is a currency? Cryptocurrency as property Referring to Hanafi scholars, there are two attributes to consider something as mal or property: It would be desirable for a human being. It would be capable to be stored over time.
The current market capitalization of Bitcoin is around USD16bn, with average volume transaction per day being ,04m. The high demand of Bitcoin indicates that Bitcoin can meet the desirability criterion. The question is not a technological one but a legal one. Legal monetary systems explained In the modern monetary system, money is a legal debt created by borrowing. This applies theoretically to cash: the banknote is a debt represented in a piece of paper and owed by the central bank to the respective holder.
It also applies in very real terms to the economically far more important bank money, which is the money held in the accounts of commercial banks. Bank money is created by granting a loan to the bank customer, either through an individual loan agreement or by using a credit card. The sum granted is credited to the customer's account being a "Janus-faced" debt. On the one hand, the loan remains a debt of the bank customer because the bank does not give anything away, but lends against interest and can sue and enforce this debt.
On the other hand, the credit sum becomes a circulating credit, i. The seller can then use the sum received for another purchase. The creation of Bitcoin is not only ecologically disastrous, Bitcoin is also reminiscent of an old-fashioned gold-backed currency with its technological limit of just under 21 million Bitcoins. Andreas Rahmatian University of Glasgow If the bank customer pays off his loan in full, he technically destroys money because he repays the debt that the money represents - not specifically the sum he uses in order to buy the car, but in macroeconomic terms.
Legally speaking, the buyer pays a purchase debt with another debt. It is the law that says this counts as payment. If a customer withdraws all his deposit in his account to obtain cash, the bank's debt to him is repaid and the bank money is converted into cash. The bank must ultimately acquire the cash from the central bank and minimise its credit balance on its central bank account by the amount of cash withdrawn the central bank's debt to the commercial bank therefore becomes smaller.
This is another reason why commercial banks are interested in cashless payment transactions. What counts as money and who can create it? This mechanism of the monetary system is in itself independent of the technology used because the system is a legal construct. What is important is what counts as money and who is allowed to create and issue it. This is ordered by law. Accordingly, cash can certainly be electronic because the central bank's debt does not have to be represented by a banknote but can exist as a computer record.
This is always the case with bank money; no bank today still writes its accounts in paper books with a fountain pen.
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0X CRYPTO LAUNCH
July 28, , PM UTC Bloomberg The International Monetary Fund published a blog post Monday warning that the risks and costs that come with making cryptocurrencies legal tender outweigh the benefits. Elevating a cryptocurrency to the status of national currency could harm macro-financial stability, financial integrity, consumer protection, and the environment, the note said.
Digital currency could provide cheaper and faster payments, bring unbanked people into the financial system, and improve cross-border transactions, the authors wrote. At the same time, virtual currency could cause problems due to price fluctuations , difficulty setting fiscal policy, and negative environmental impacts. Legal issues could also come along with making cryptocurrency a national currency, the note said. Bitcoin, however, is still by far the most popular with a market share around five times the size of its nearest competitor.
Cryptocurrency is bought, sold, and transferred online and held in digital wallets. Digital wallets can be hosted by an exchange or other financial service that handles cryptocurrency payments, purchases, and sales. Digital wallets can also be unhosted, enabling the owner to send cryptocurrency payments directly from one party's wallet to the other. There are no banks , or other financial intermediaries involved in unhosted transactions and the transactions are largely anonymous. Investors can hold cryptocurrency directly in a digital wallet, or indirectly by purchasing a security like the Grayscale Bitcoin Trust.
In the wake of the attacks on the World Trade Center, U. Treasury agency responsible for administering the Bank Secrecy Act and collecting and sharing financial-crime intelligence. FinCen issued guidance in to include cryptocurrency exchanges places where you can buy and sell crypto within the definition of a money transmitter, making them subject to BSA and Patriot Act rules.
In December of , FinCen proposed new rules aimed at cryptocurrency money laundering. The proposed rules are very similar to the rules for bank wires. The Biden administration has frozen all pending rule changes, so there has been no further action on the FinCen proposal. Attorney General's cyber-digital task force report identified three areas of concern with cryptocurrency use: Direct use of cryptocurrency commit crimes and finance terrorism Using cryptocurrency to launder money and evade taxes Cryptocurrency theft and investment fraud.
In general, a common legal concern about cryptocurrency is the certain level of anonymity cryptocurrency can offer because they create a perfect environment for criminal activities. Cryptocurrency developers are now offering anonymity enhanced cryptocoins AECs like Monero, Zcash, and Dash specifically to make tracking transactions more difficult.
Silk Road One of the most well-known examples of how cryptocurrency can be used to commit crimes is the infamous dark-web marketplace Silk Road. The site operated from to as a marketplace for drugs, forged documents, ransomware, and other illicit goods and services. The site was specifically designed to use bitcoin as the means of payment in order to hide user identities.
Cause for Caution With Crypto Investing The same features that make cryptocurrency so attractive are also why investors need to be cautious. The anonymous nature of transactions can make cryptocurrency exchanges a target for hackers because it is difficult to track and recover bitcoin if it's stolen.
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