Islamic legal perspectives on digital currencies and how they apply to Jordanian legislation

The idea behind digital currencies

Bitcoin has been described as a decentralized virtual currency. Virtual currencies, such as bitcoins, are both a form of money and a payment system. However, being a decentralized system, there is no central issuer, authority, or register-keeper.⁵ Bitcoin is unique, not because it is a virtual currency, but because it is a proof of concept for a decentralized, non-issued electronic currency.⁵ The regulation of virtual currencies is at a very early stage.⁵ Most regulatory systems need to be made to work well with this kind of payment system.⁵ Nevertheless, building and keeping trust is vital to regulating new payment services and getting people to use them.^3–5 Most agree that proper regulation is critical for encouraging people to use new payment methods such as mobile banking and payments.⁵ Side by side, Jordanian law still needs to develop modern laws to deal with digital currencies because they are still relatively new and depend on advanced technologies, which makes it hard for lawmakers to understand them or figure out their secrets. Also, Jordan does not have laws that directly deal with digital currencies.⁶ The lack of laws means that a legal framework needs to be made to deal with these currencies in a way that goes within Islamic law and is in line with Jordan's laws. This research adds to the literature on digital currency by looking at how it works and giving a clear plan for how it should be regulated. Also, it will show how Islamic legal principles can be incorporated into future or current Jordanian regulations about cryptocurrencies.

The notion of digital currency

Money is a cultural norm that helps sustain economic and social systems. Various exchange systems have emerged for centuries, including barter, precious metals, fiat currency, and, most recently, a distributed digital currency based on blockchain technology. As cryptocurrencies and stablecoins have become more popular, the world’s central banks have realized that they need to provide an alternative—or let the future of money pass them—by introducing virtual money backed and issued by a central bank called central bank digital currency (CBDC).⁷ Central banks worldwide would develop a global CBDC standard that is accepted everywhere. CBDC's potential implications on monetary policy and liquidity, as well as its technological and economic feasibility, have been the subject of much research.^8,9 To do so, Omar, M. N applied the “maqsid al-shar'ah” paradigm to CBDC and uses it to explain a central Islamic principle and discuss its ethical implications.¹⁰ The research results produce an ethical ecosystem that can be used to evaluate the potential of CBDC with specific characteristics and features. Such a moral environment can also be realized by basing the digital currency system's compliance elements on the Islamic monetary framework. When used in the financial sector, technology can be used to create innovative new services, such as FinTech. There is much talk about financial technology these days. Muslim nations are fertile ground for developing Islamic banking and financial technology.¹¹ FinTech is an industry buzzword that uses technology to improve financial services. Due to the widespread use of mobile and smartphone technology, Islamic banking and FinTech will do well in Muslim countries.^12,13 However, these opportunities are currently limited because they need to be protected by a legal framework. Islamic FinTech startups struggle with regulation and Sharia FinTech research. Islamic FinTech must keep up with traditional financial developments, maintain stability, and prevent fraudulent trade.^11–14 For electronic transactions to grow, many groups must work together, including the central bank, public policy, international and multilateral institutions, and Islamic banking itself (through the regulatory and supervision functions).

Digital currency is defined as “currencies that do not have a tangible physical entity or physical presence and are traded via the Internet and are not subject to control or control by a central bank or because it operates outside the traditional monetary system, it is also referred to as virtual money”.¹⁵ It is a digital representation of monetary value issued by entities other than the central bank of Jordan and credit institutions, and its value is generated by the voluntary acceptance of this currency.¹⁶ Therefore, in Al-Bahouth, A. and later Al-Najjar, A., they characterized digital currency as a nonexistent currency that is essentially dependent on encryption. It is a decentralized currency that is not issued by a central bank, administered by any government, or tied to any local or global currency. It is electronically mined and manufactured by computers, and it is used and shared through the Internet.^15,16

Bitcoin, a new monetary system for electronic payment, is without a doubt the nucleus of the emergence of digital currencies. This currency is based on encryption between the two parties and is built on an anonymous system of electronic transactions, with the aim of moving away from the centralization of major banks, as they are not monitored by different types of banks and bodies and are not subject to bank laws.¹⁷ The development of Bitcoin adds to our knowledge of monetary systems. The ongoing debate about how to pay for it demonstrates the value of this contribution. According to Bergstra, J.A. and Weijland, P., Bitcoin is categorized as a highly adaptable money-like informational commodity (MLIC), hence it is unnecessary to decide in advance whether or not it is a debt. By this definition, Bitcoin can start and finish its life as a non-money, with a period of “true” moneyness (as opposed to "money-likeness") in the middle.¹⁸ Innovations in microfinance distribution and repayment technology for the Islamic banking model have inspired research into a commercial bank-backed initiative to bring mobile banking to Malaysia's Islamic microfinance institutions.¹⁹ From the client's perspective, technological applications in Islamic microfinance organizations' payment systems and repayments present challenges.¹⁹

To investigate the relationship between financial inclusion and Islamic financial services in Muslim countries, Zulkhibri M., took a qualitative approach that has shown there have been improvements in the financial infrastructure of many Muslim countries over the past few decades, but this has not reached most of the population.²⁰ Only 27% of people and businesses in Muslim countries have access to formal financial services, well below the average of 51% in emerging economies. Disadvantages include money, time, distance, paperwork, distrust, and religious beliefs.²⁰ Although it represents only 0.5% of global microfinance, Islamic microfinance is small and insignificant since it does not use a cost-effective service paradigm. This research suggests that 40 million people currently excluded from the formal financial system due to their religion, can be included if Islamic wealth redistribution techniques such as awqaf, qard-al-hassan, sadaqa, and zakah are implemented.²⁰ The Islamic financial services industry has a long way to go in many Muslim countries due to its small size and inadequate infrastructure.²¹ Crypto assets such as Bitcoin (digital money) are intriguing in Indonesia, because they have the potential to affect the global economy. Today, trade is conducted primarily via the Internet (digitalization).²⁰ There needs to be regulatory certainty for crypto investments in Indonesia. In Jubaedah et al., they used Islamic law and creed philosophy principles to examine crypto assets held for trading purposes in Indonesia. Information on laws, government regulations, the Fatwa DSN MUI, and the Islamic tenets of creed, witness, and shahadah is culled from scholarly library collections for the study.²¹ This rule is only in effect for those who are open to and able to use cryptographic assets like Bitcoin.²¹ In Indonesia as well as Jordan, it is against the law to invest in bitcoin.^6,21 The use of cryptocurrency as a medium of online exchange represents a novel and sustainable contribution to the growth of Indonesia's economy. Particular guidelines are required for the use of cryptography.²¹

There are about 1300 other cryptocurrencies on the digital currency market, such as Ethereum, Ripple, NEM, and LitCoin. On the other hand, Bitcoins are the most sought-after cryptocurrency on the market.²² The fact that it cannot be traded like other electronic currencies has made investors curious about it.¹⁶ In general, understanding money means understanding objects approved by the community as an intermediary tool for conducting exchanges or trade. What is meant by “approved” in this definition is that there is an agreement among community members to use one or several objects as an intermediary tool in exchange activities. Bitcoin, also known as “BTC,” is a digital currency not issued by any institutions, organizations, or governments. Bitcoin utilizes a peer-to-peer network as a distribution medium using advanced cryptographic protocols.²³

Legal status of digital currency

Understanding money's role is essential for establishing whether or not digital currency may be considered legal tender. In forms such as paper money, money is a means of trade and a measure of the values of products and services; therefore, it has buying power.²⁴ Maurer delved into the burgeoning topic of “mobile money,” or value transfer and storage systems that are facilitated by mobile phones and are often hailed as a “signal intervention” to increase financial inclusion and bank the “unbanked” in developing countries. He discusses how economic techniques and social narratives about markets—specifically, narratives about the opportunities for profit and financial inclusion in the “payments space”—format a consumer market for mobile money and focuses on the stories that circulate in the emerging network of expertise that is calling “mobile money” into being. More importantly, he speculated on the possibility of a new form of money by asking if consumers' usage of mobile money and airtime as currency.²⁵ In conclusion, services may be used as a kind of payment, a means of saving, and a means of protecting one's capital.

Based on the precedent set by the Faqih (Sharia jurisprudence), it is clear that virtual currencies cannot be considered legal tender or perform the functions traditionally associated with money.²⁶ The fact that digital currency only exists in cyberspace precludes it from being utilized as payment for physical goods and services.^27,28 Money (also referred to as the “money supply”) is anything that is created and commonly accepted as payment for goods or debt repayment.²⁹ Economists describe money as the frequently accepted (or generally accepted) medium of exchange.³⁰ The argument that bitcoin is not money is predicated on the notion that money serves as a medium of trade, a store of value, and a unit of account. Bitcoin partially satisfies the first condition.³¹ Money is efficient and effective if it is acceptable, divisible, homogeneous in value, durable, transportable, uncommon, and stable.³² Acceptable might be interpreted to suggest that money must have intrinsic value and be desired for its own sake. Due to the lack of intrinsic value of fiat currency, acceptance standards remain difficult. The second need is that money must be easily divisible into small quantities, allowing individuals to acquire goods and services at any price. For money to be easily divided, it must be uniform or homogenous. Durability, the final condition, requires that currency be durable, not easily destroyed, and portable. “Must be scarce” signifies that money must be relatively difficult to acquire or scarce, and its value must be relatively steady through time.³³ Virtual currencies have their own units of account, cannot be denominated in fiat currencies, and are convertible to variable degrees.³⁴

The value of digital currencies is not an independent standard; it requires a fiat currency equivalent. Referring to Adam, cryptocurrency can still be used as a medium of exchange.³⁵ Regarding legal tender, the government declares something to be a valid form of payment, and it must be issued by a central authority.³⁶ Bitcoin is created by no commercial legal entity, limiting its use to people who make payments.³⁷ To be referred to as “money,” an asset must fulfill the following functions: (a) average payment, (b) unit of account, and (c) store of value.³⁸ Bitcoin is still a long way from supplanting fiat currency as the predominant form of legal cash. Bitcoin unit accounts are ineffective because their prices are too high for retail transactions and their splitting fees are excessive. Frequently, the bitcoin pricing of retail goods requires a significant number of left-sided zeros, making it impossible for consumers to compare prices across products and services.³¹ Regarding the function of a store of value, the extreme price volatility of bitcoin is also a barrier to the steady storage of wealth.³⁹ In recent years, the price of Bitcoin, which can be compared to a fundamentally useless computer entry, has increased dramatically. So, cryptocurrencies are known for their high volatility, lack of buying power, and price changes in response to any technical or technological event. Moreover, they suffer from technical penetration or official legalization. Digital currencies are also unsuitable for delayed payments and cannot be used to pay off debts or loans because they are unstable and change with the market. As a result, they are unfit for use as a store of value or wealth.^27,28 Therefore, researchers have found that digital currencies are not the same as conventional money and cannot even replace it. This is because of the aforementioned significant variances. Additionally, digital currencies are not commonly acknowledged or utilized. As a result of the negative publicity it has received, several nations have also rejected cryptocurrencies.⁴⁰ For instance, the FBI closed the Silk Road case, which received considerable negative coverage.⁴¹ The Central Bank of China stated in December 2013 that virtual currency has no value and is not adequately protected by law.⁴⁰ Cryptocurrency is not an exception to Indonesia's monetary policy, which prohibits using any medium of exchange other than fiat money authorized for trade and payment.⁴² Due to negative headlines, speculation, and other hazards, cryptocurrencies, and bitcoin, in particular, are viewed as investments rather than currency.⁴³ Many countries do not use cryptocurrency because its value changes quickly; some have even made it illegal to trade it in their monetary systems and with their bankers.⁴⁴

Legislative provisions governing digital currencies

As we've previously mentioned, the majority of Islamic countries’ laws lack legal texts that address the subject of digital currencies.^11–13 As a result, we will discuss the regulations that apply to digital currencies by explicating the stance of Jordanian laws on dealing with digital currencies and the position of Islamic law on digital currencies, each in accordance with its own need.

The status of Jordanian regulations regarding virtual currency

The Jordanian legislator is concerned about the financial policies regulating digital currencies' economic impact. Jordan seeks to safeguard Jordanian assets against the hazards associated with digital currency. Due to a technical breakthrough or a dramatic shift in their market value, cryptocurrencies are susceptible to significant price fluctuations and the loss of their entire worth. Also, since these losses are not covered by any public or private organization known locally or globally, the person using these currencies is legally responsible for everything that happens. There will be no accountability for risk or loss.⁴⁵ As for national legislation, the Central Bank of Jordan responded to cryptocurrencies in Jordan beginning in 2014, when it issued its first circular prohibiting banks and all other financial institutions under its supervision, from engaging in any manner with cryptocurrencies, followed by the publication of two additional circulars in 2018 and 2019; to reinforce what was mentioned in the first circular.⁶ As such, the attitude of the Jordanian legislature is clear and unambiguous in its refusal to deal with any digital currencies.

In accordance with Egyptian law, the Egyptian Dar Al Iftaa (the House of Islamic Legislation in Egypt) has issued a religious edict, saying that the circulation of electronic currency is unlawful in Egypt.⁴⁶ As was the situation in Algeria, where electronic money was forbidden under a law forbidding the acquisition, sale, use, and possession of the so-called electronic currency, and fines were levied for breaking these laws.⁴⁶ Though some countries, like Egypt and Algeria, have openly banned digital currencies, others, like Germany, have opened the door to trading in them.⁴⁶ Bitcoin is now officially accepted as legal tender in Germany.⁴⁶ This means that the German government must impose a tax on the profits made by companies dealing with Bitcoin, while individual transactions are exempt from taxation. Ohio, in the United States, has officially acknowledged electronic money but has imposed limits on it, such as requiring sellers to register on an official website. Additionally, New York also created the first regulatory framework for regulating electronic money operations.⁴⁷

The standpoint of Islamic law on the use of digital currency

The Islamic religion and the traditional economic system share the same vision of acceptable currency standards and their perceived economic functions. According to the two views, cryptocurrencies are illegal money even though they are an innovative way to pay for things and a tool for exchange and trading. This illegality is because they lack money's three most important characteristics: a medium of exchange and trade, a unit of account, and a store of value.⁴⁸

Although these three features are present in cryptocurrencies to some extent, they are not so obvious or inherent in them as to qualify them as valid currency. In the future, these currencies can develop and become globally recognized currencies and replace traditional currencies. However, this matter takes some time and requires appropriate governance measures to organize and subject them to supervision and control to avoid the significant risks and concerns associated with dealing in this currency.⁴⁹

Islamic and civil laws agree that Bitcoin is an unknown, unregulated digital currency not supported by any central bank and cannot be converted into physical commodities such as gold.^29–44 It relies on decentralized communications and encryption to keep its data secure.³⁹ Compared to traditional currencies and online payment services like PayPal, Bitcoin has a lot of people willing to buy and sell it, and it has low transaction costs. Also, Bitcoin could grow and become a legal currency used worldwide if it is accepted by governments everywhere and is subject to the proper rules and limits. In principle, there is no legitimate objection to creating new currencies, such as digital ones or cryptocurrencies, as long as they meet the legal requirements for legal currency.⁵⁰

Referring to the jurisprudential judgments on the legitimacy of transacting with digital currencies, most notably Bitcoin, we discover that Islamic Sharia scholars have divergent views on the actuality of encrypted currencies.⁴⁹ Electronic currency must adhere to the standards and provisions outlined by Sharia law. The popularity of electronic money may also depend on how much people want it and how useful it is. Avoid using Sharia e-money for usury transactions: The exchange rate between cash and Sharia E-Money must be the same. The exchange of cash value for Sharia E-Money value must also occur in cash. Avoid spending too much money, and do not use it to buy things against Islamic law.⁵¹

Buying Bitcoin, Dogecoin, and other digital currencies with fiat money is almost the same as buying currency with currency. There are two rules governing currency exchange: first, if it is the same type of item, the scale (quantity) must be the same, and payment must be given in cash. Digital money can be equated with money because it “has a price or value,” akin to gold, a valuable commodity whose price fluctuates, and the Jordanian dinar, which also has a value. However, the currency rate fluctuates as well. Then, buying and selling digital currency must follow the same rules, standards, and pillars as buying and selling physical currency.^51,52

To be compliant with Islamic law, a financial system must have the following requirements: It should be interest-free (Interest prohibition (IP), which implies neither interest on debt shall be requested nor paid. It should be transparent and straightforward (no misrepresentation) so as not to deceive their trading partners. Trade partners have the right to know what they're purchasing. Additional trading partners must be free to make their own selections. The financial system should utilize legal entities. Thus, transactions using currency must involve existent commodities and services (real entities), and gambling is prohibited (GP). Lastly, Muslims are required to provide a decent portion of their income to those in need.⁵³ Bitcoin is not recognized as a form of currency since it lacks a central issuing body, a legal framework, and a supervisory body. Furthermore, there are currently no guardian-type regulations in place in Jordan. If digital currencies fall under the supervision and control of the state, then Bitcoin would be deemed a kind of money, according to the most accurate interpretation of Sharia.