BY AZLEENA IDRIS / Pic By BLOOMBERG
In February, Institute of Islamic Understanding Malaysia (IKIM) held a roundtable on this topic. Officiated by Datuk Dr Mohd Daud Bakar, who chairs the Shariah Advisory Councils at both Bank Negara Malaysia (BNM) and Securities Commission Malaysia (SC), the event drew strong interest from state religious departments, academia and the Islamic finance industry. I was told that they had to turn down participants! As presenter of the first paper, I was tasked with an unenviable role of helping set the context of the one-day event.
I was later asked several questions which led to this article. Just a day before the IKIM roundtable, BNM issued a policy document on digital currencies, more from the context of anti-money laundering and counter-financing of terrorism (AML/ CFT). This move is consistent with the cautious approach taken by some regulators across the globe on digital currencies and cryptocurrencies.
It is important to distinguish distributed ledger technology (DLT), blockchain, digital currency and cryptocurrency. Of equal importance is not to refrain from discussing this openly given the massive interest in investing in cryptocurrencies. Many are curious and invest without knowing the implications of such investments.
I will attempt to provide a plain version of the fundamentals (ie what is DLT, blockchain, digital currency and cryptocurrency), share the latest development globally on these areas, particularly in the regulatory front, and conclude with some considerations before we make any decision on any of the above.
Factors for Their Rise
The rise of social media and digital penetration has given rise to a new form of economy — the sharing economy where peer-to-peer (P2P) models emerge across multiple economic sectors.
In transport, it is in the form of ride-hailing (eg Uber, Grab and in Indonesia, Gojek). In accommodation, there is Airbnb and Flipkey. In financing, there are crowdfunding platforms like Ata-Plus, Ethis and Kapitalboost. In entertainment, reality television (TV) is losing ground to Facebook and YouTube’s user-generated contents. In fact, mainstream TV is now creating their YouTube channels and Facebook live feeds!
This disintermediation is enabled by technology. The usual limitations of factors of production like inventory, assets and other resources are no longer seen as barriers because they have been eliminated by collaborative models that enable those with inventory to meet those in need of inventory in a single platform. More importantly — technology builds trust.
Before Grab and Uber, would you hitch a ride in a car driven by a total stranger and pay for it? Would you let a stranger live in your house before Airbnb came along?
Technology has also enabled another form of economy to emerge — platform enterprises. Owners of platforms now become the facilitator by giving access to those in need and those having the supply in a cost-effective manner. Google LLC, Apple Inc, Facebook Inc and Amazon.com Inc, or GAFA, are prime examples of integrated platforms. There are also transaction, innovation and investment/financing platforms.
These platform enterprises are fast evolving into “Super App” mode — integrating chatting, social media, online buying and even P2P financing in the same app. One prime example is WeChat. Another is Facebook has the Irish Central Bank’s approval to remit payments. Apple is now expanding into payments via Apple Pay and, so has Google with Google Pay as well as Amazon.
DLT versus Blockchain
In a publication in April this year, the World Bank defined DLT as a form of P2P network using independent computers (referred to as nodes) to record, share and synchronise transactions in their respective electronic ledgers (instead of keeping data centralised as in a traditional ledger). Blockchain organises data into blocks, which are chained together in an append-only mode. So, blockchain is a form of DLT.
According to the World Bank, blockchains/DLT are the building block of “Internet of value”, and enable recording of interactions and transfer “value” P2P, without a need for a centrally coordinating entity. “Value” refers to any record of ownership of asset — for example, money, securities, land titles — and also ownership of specific information like identity, health information and other personal data. The term “smart contract” refers to transactions carried out using this mode — ie it automatically goes through if certain pre-defined requisities are met.
Digital Currencies versus Cryptocurrencies
Money used on the Internet which does not exist in physical form is referred to as digital currency. A good description of digital currency and cryptocurrency is the one offered by Cointelegraph.
Digital currency is where one can obtain, transfer or exchange it for another currency on the Internet. It can be used to pay for goods and services, such as mobile and Internet communications, online stores and others. Digital currencies don’t have geographical or political borders. Transactions might be sent from any place and received at any point in the world.
This is not to be confused with digital payments or cashless payments. It is perfectly legit in Malaysia and else-where, provided the currency is a legal tender. Digital or cashless payments is simply receiving and making payments digitally by transferring funds that are in actual currencies that exist in physical forms.
Cryptocurrency, on the other hand is an asset used as a means of exchanging. It is considered reliable
because it’s based on cryptography. It creates and analyses the algorithms and protocols, so no information is changed or interrupted during the conversation by third parties. Bitcoin, Ripple, Etherium and Litecoin are examples of cryptocurrencies. Cryptocurrencies use blockchain. It means that no supervisory authority controls all the actions in the net- work. This is where the concern of regulators lies particularly in AML/ CFT.
It is important to also note that cryptocurrencies are a form of token called coin token, in the sense that they are used on the Internet like currencies. There are also utility tokens (eg Steem, BAT and Siacoin) which allow the holder to use certain services or units of services on the Internet. Then, there are tokenised securities like Trust Token which recognise its holders as having ownership rights over a business — much like shares.
They can appreciate and depreciate in value depending on the under- lying business performance.
The growth of these forms of tokenisation gives rise to ICO – or initial coin offering. (I will save ICO for another day). Utility tokens and tokenised securities are generally not major concerns of central banks. Coin tokens keep them awake at nights. Securities exchange regulators are concerned with tokenised securities.
In the second and last part of this article, we will turn to the key concerns and approaches of the public sector and regulators.
- Azleena Idris, the general counsel/ head of legal at Kuwait Finance House (M) Bhd (KFH Malaysia), was a senior Islamic finance regulator for more than a decade prior to re-joining the private sector last year. The views in this article are of her own and do not represent that of KFH Malaysia and the editorial board.