Regulating Digital Currency: Taming the Unruly

Pages265-280
DOIhttps://doi.org/10.1108/978-1-78973-545-120191021
Publication Date26 Aug 2019
AuthorSyed Fadhil Hanafi,Syed A Rahman1
Chapter 15
Regulating Digital Currency:
Taming the Unruly
Syed Fadhil Hana Syed A Rahman1
Abstract
Regulation of digital currency is still at its infancy as authorities around the
world grapple with its mechanics, and study its impact and the best method
to regulate it. Signicant increase in the use of digital cryptocurrency based
on Blockchain technology post-Bitcoin phenomenon had challenged the con-
ventional idea of central bank monopoly in currency issuance. This had also
raised concern that digital currency being used as an instrumentality of crime
given its anonymity feature that allows for the ow of funds without tracing
and the fact that it is built on trustless system that provides security of transac-
tion. This concern, plus other consideration including the prospect of issuing
central bank digital currency, had driven some authorities around the world to
adopt countermeasures either via an outright ban or a regulatory regime that
suits the nature of digital currency, which is purely virtual and anonymous.
However, in coming out with an appropriate legal regime, authorities faced
multiple difculties especially when the pace of legal development does not
sync congruently with the rapid progress of technology. In addition, given the
growing prominence of Islamic nance around the world, questions also arise
pertaining to the legality of digital cryptocurrency from the Islamic perspec-
tive. Through a qualitative study of relevant literatures as well as legislations
in different countries, this chapter discusses the various categories of digital
currency, its position from the Islamic perspective, regulatory regimes of digi-
tal cryptocurrency in selected jurisdictions and challenges faced by authorities
around the world in regulating this new medium of exchange.
Keywords: Digital currency regulation; virtual currency regulation;
cryptocurrency regulation; Blockchain; distributed legder;
medium of exchange
1This chapter represents the author’s personal views.
Emerging Issues in Islamic Finance Law and Practice in Malaysia, 265–280
Copyright © 2019 by Emerald Publishing Limited
All rights of reproduction in any form reserved
doi:10.1108/978-1-78973-545-120191021
266 Syed Fadhil Hana Syed A Rahman
Introduction
Digital currency is not a novel invention today but had existed for quite some time,
among others, in the form of loyalty or credit card points, and money in video
games. In these forms, digital currency usage is limited to certain purposes deter-
mined by its issuer. However, technological advancement had enabled digital cur-
rency to escape from its conventional form and purpose. The emergence of digital
cryptocurrency based on Blockchain technology pioneered by Bitcoin, which usage
is no longer restricted to limited purposes, had drawn wider attention to its poten-
tial and moved digital currency into a wholly new dimension. This is so especially
when digital cryptocurrency has become an alternative to at currency and offers
additional features which are not available to at currency, that is, the distributed
ledger that provides anonymity and security of transaction while transacting online.
Digital currency was introduced as a nancial innovation and an alternative
payment method for consumers. It can strengthen nancial efciency by ensuring
secured, faster and cheaper transactions. However, the use of digital cryptocur-
rency as a universal medium of exchange challenges traditional dominion of cen-
tral bank in currency issuance. While the value of at currency is backed by the
creditworthiness of the government and its central bank, digital cryptocurrency’s
value is not backed by any person but merely derived from demand (Committee
on Payments and Market Infrastructures, 2015) and expectation that it may be
used and valued by its participants (He et al., 2016).
Despite presenting several disadvantages for users including high reliance on
IT and networks, anonymity and extreme volatility which lead to various risks
associated with the anonymity of the payee, investment fraud and exchange rate
risks, some of these disadvantages are also advantages for those who intend to
transact but remain anonymous, hoard funds in untraceable place and make
quick prot from the exchange rate volatility. Further, the anonymity feature of
digital cryptocurrency which enables complete direct peer-to-peer transaction in
a secured environment without central registry’s involvement has been exploited
by criminal enterprise for tax avoidance and as a means of laundering proceeds of
illegal activities and channelling monies to fund terrorism activities and crimes.
This concern coupled with other factors including the prospect of central bank
issuing digital sovereign currency had driven authorities around the world to
adopt suitable countermeasures, including regulation of digital cryptocurrency.
Apart from that, given the growing prominence of Islamic nance around
the world, questions also arise regarding legality of digital cryptocurrency as a
medium of exchange and investment tools from the Islamic perspective. These
include whether the rule of riba (usury) which is applicable to gold, silver and at
currency is also applicable to digital cryptocurrency.
Premised on the above, the objective of this chapter is to identify various
categories of digital currency, its position from the Islamic perspective, regula-
tory regime of digital cryptocurrency in selected jurisdictions around the world
and common challenges faced by authorities in regulating this new medium of
exchange via qualitative studies of local and international literatures and legisla-
tions in the respective jurisdictions.

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