When the history of the first two decades of the 21st century is written, along with the paradigm shifts caused by 9/11, the Arab Spring and the Great Recession there will be noted a new-found appreciation for decentralized systems and, in particular, the cryptocurrencies they spawned.
There is some merit to the argument that the rise of Bitcoin, and a multitude of other cryptocurrencies, was a direct challenge to the centralized financial systems that failed to curb the abuses, greed and negligence that led to the 2008 financial crisis.
A few months after the financial meltdown, the Bitcoin network emerged, prefaced by media headlines mocking a centralized financial system that had failed catastrophically, plunging the world into a punishing recession and a painfully slow recovery, with developing nations particularly badly affected. Within four years, Bitcoin had established itself, with thousands of merchants accepting the cryptocurrency as a form of payment. In 2013, governments began to take notice and rushed to classify the cryptocurrency, creating or enforcing finance, tax and other laws to control its rapidly growing popularity. Germany’s Finance Ministry, for instance, declared Bitcoin to be a “financial instrument,” while a US federal judge in Texas ruled that it was “a currency or form of money” and so US federal securities laws apply to it. The People’s Bank of China, on the other hand, banned Chinese financial institutions from using Bitcoin.
These differing approaches to regulating cryptocurrency were indicative both of its speculative nature and the high risks associated with it, and the lack of trust in the technology behind it. Conventional wisdom had always emphasized the importance of centralized financial systems with central banks that supported a “securitization chain” connecting individuals — through the use of bank accounts, securities, insurance, loans, credit cards and mortgages — to commercial banks, financial firms, investment banks, credit-rating agencies and securities traders.
But the rapid expansion of cryptocurrency suggests that as the world economy ground to a halt, it became much easier for people to place their trust in a decentralized, peer-to-peer-backed, highly secure medium of exchange that has a fixed supply, rather than the centralized systems that were reeling as the financial crisis deepened.
That’s right, a fixed supply. There can only be a maximum of 21 million Bitcoins in circulation and more than 17.5 million have been mined so far.
In any case, Bitcoin and the plethora of cryptocurrencies spawned in its wake have managed to gain market capitalization of more than $200 billion. Bitcoin accounts for more than half of that, about $110 billion.
But behind the many news stories, blog posts, social-media content and insistent urging to either invest in or not get involved with cryptocurrencies, what exactly is a Bitcoin? A cursory search on Google offers little in the way of a simple explanation. The answer to the question is highly technical and complex, beyond the limits of this article. Suffice it to say that it is a highly speculative tool that is still not backed in any real sense by sovereign authorities.
What does all of this mean for the Arab world? In a region known for oil production and the rapid development of advanced, world-class cities, there is much economic potential, especially given the anemic private sector, high youth unemployment and bloated public bureaucracies. The region is ripe for wide-reaching reforms aimed at harnessing untapped potential, particularly in intraregional trade and economic cooperation. However, the effects of the global slowdown are still present, worsened by the unfamiliar circumstances most countries find themselves in after the Arab Spring. Additionally, the shifting geopolitical tides have failed to find tenable solutions to the problems in Yemen, Libya and Syria. There is marked discomfort when it comes to financial innovation, especially given how unregulated derivatives trading contributed to the 2008 financial crisis and the subsequent recession. There is also the troubling aspect of the cryptocurrency industry still being in its infancy, and an extremely steep learning curve when trying to maximize returns on investment.
There are a few factors affecting the adoption, growth and development of cryptocurrency, as well as the resultant decentralized technologies, in the Arab world. The main limitation so far has been disagreement between leading Muslim scholars about whether cryptocurrencies are compatible with Shariah. The wide swings in the value of the leading cryptocurrencies, as well as the convoluted basis for such a decentralized system, is anathema to the Islamic principle that stipulates economic activity must be based on tangible assets and not speculation.
On the face of it, therefore, speculation-based crypto assets such as Bitcoin appear to be non-compliant with Islamic tenets, or haram. Among faith leaders, though, opinions have varied.
Most recently, a white paper was published in Indonesia by the chief Shariah adviser to investment company Blossom Finance that argued Bitcoin “fully meets the definition of Islamic money, under certain conditions.”
The future of these new technologies and financial instruments is still not certain — but keeping an eye on how things develop is definitely a good strategy.
This article was published on Arab News on September 8, 2018; click here to read it in full.