From “Unbanked” and “Unbitcoined” – Impact of Terrorism Financing Regulations and the opportunity for Sharia-Compliance

From the start, digital currencies like BitCoin, Ethereum and others have gained the attraction of bad guys for their illicit businesses. We have seen the examples of Silk Road (United States Versus Ross Ulbricht) and Terrorism Financing (Long Island Versus Zoobia Shehnaz). The free and unchecked flow of digital currencies in and out of a country poses a security risk for the country in particular and for the world in general. Terrorists can use it to channelize their funding campaigns and attract new recruits by paying them anonymously. Since digital currency remittance can come from any part of the planet, it would create a global risk.

There is also the possibility of tax evasion by corporates or ordinary citizens of the country who wish to send their black-money off-shore to hide it from tax authorities of their respective governments. We have seen this practice again and again; it was the reason behind the big political uproar recently after the Panama Papers leak.

Then there is “Hundi” or “Hawala” scheme, where one person would send remittances’ reference to some other country without following the legal procedure or transferring any money through the banking channel; the receiving party would receive it in digital currency and cash it out in the local market, thus affecting the flight of money in and out of country and bypassing the current money caps and limits we have for foreign and local reserves.

Digital currencies can also aid regulations arbitrage, when one takes the money for something that is illegal in one jurisdiction and allowed in another. For example, selling of marijuana would be considered perfectly fine in Germany while it is a crime in Pakistan. People can use the free flow of digital currencies remittances for a country to make it the financial hub of crypto-crimes all over the world in no time.

Situations like these call for strict rules and regulations which manifest in the form of anti-money-laundering (AML), counter-terrorism financing (CTF), and know-your-customer (KYC) laws. It has the ability to suffocate day-to-day financial operations and free will of customers of a given country. Governments all over the world are campaigning for cashless societies and “banked-population” to have greater visibility of day-to-day financial affairs of their citizens.

On the other hand, approximately 38% of the world’s adults, i.e. 2 billion people, do not have bank accounts for various reasons. All these people, primarily, and many other “banked” people frequently do their daily transactions in cash. India, China and Indonesia account for 40% of the “unbanked” population while another 17% comes from Sub-Saharan Africa.

Globally cash transactions account for 63% ($11.84 trillion) of overall transactions. The cash-less electronic transactions in OECD countries are close to 67% while in South Asia it is only 14% of total transactions.

There are several reasons for dealing in cash. Cash requires no paperwork while doing transactions and therefore is very fast. It also provides anonymity, a prime requirement for illicit activities like drug, human and sex trafficking. One study finds 90% of currency notes in circulation in America with traces of drugs on it. Criminals and war lords move approximately $2 trillion across borders in cash every year.

Cash has its own set of problems. First it is highly insecure, once you lose it or it gets snatched from you, there is very little hope to retrieve it back. It is heavy for large amounts – a million dollar can weight up to 22 pounds in weight. And more often than not, it attracts criminals. The cash economy is largely un-documented, making it very hard to access, plan, budget and forecast. How do governments plan for financial well-being of its citizens when they do not know the size of the total market? Cash economy also deprives governments for their due share of taxes that can be then used for public goods, infrastructure and defense needs.

Financial inclusion through banks comes with its own challenges like lengthy paper work and hefty fees for financial services. Mobile banking or digital financial solutions come in handy and provide the best of the both worlds – on the one hand, they provide a documented way for the economy to be monitored, grow and forecast, and on the other hand it requires very less paperwork (as most countries already have KYC and AML measures in place for issuance of mobile SIMs), making it possible for all individuals with mobile bank account and their transactions to be traced back. Digital currencies can also provide a complete ledger of all the transactions back and forth for the currency in question.

Countries have been trying to get rid of the cash economy all together. There are a few economists in America lobbying to remove $50 and $100 notes from general circulation. Singapore eliminated the $10,000 note in 2014. Sweden is gradually removing ATM machines from rural villages. South Korea is all set to make the country cash-less by 2020. France has banned any transactions in cash for more than 1,000 pounds. Venezuela has removed the 100 bolivar note and Europe is going to kill their 500 pound note from this year. Greece has banned all citizens from keeping more than 15,000 pounds cash in their possession.

United Nations, with the support of Bill and Melinda Gates Foundation, Master Card, Citi Bank, Ford Foundation, Omidyar Network, USAID and others, has launched BetterThanCash Alliance and the United Nations Capital Development Fund has been working on MM4P (Mobile Money for the Poor) initiative to bring cashless transactions to two billion unbanked adults in the world.

Access to financial instruments will bring trust, equal opportunity, gender balance, employment, health and literacy to the poor people of the world and will restrict criminal activities.

The same laws and regulations for identity requirements that are restricting people to use traditional banking services are in practice to push them away from digital currencies in one form or another, for better or worse, for the exact same reasons – to barter their financial privacy against banking services.

Islamic banking can fill this gap and offer a principle-based ethical alternative.

There are 1.6 billion Muslims in the world. Muslim countries contribute about 9% of the global GDP and Islamic banking assets are close to US$3 trillion. Islamic banking is functional and thriving in 60 countries worldwide. Islamic banking progress is steady and did not collapse with global financial crisis of 2008. Anything that would attract the attention of these people and financial institutions would guarantee some portion of success.

Islam does not allow the functions of banking that rely on Riba (Interest), Gharar (Uncertainty or Excessive Risk), or impressible businesses like alcohol, sex, drugs and gambling etc. Cryptocurrencies are based on consensus algorithms (PoW, PoS, PoST etc.) instead of centralized-interest-based fiat.

Cryptocurrencies are closer to Islam than fiat. Sharia-compliant cryptocurrencies would attract the religious and practicing Muslims worldwide to benefit from this new form of money and the underlying distributed ledger technology.

Due to legal boundaries set by Islamic principles of banking and businesses, it is very costly and laborious to form the agreement among various parties. Moving everything on blockchain-based smart contract would save time, resources and simplify the process of Islamic banking manifolds. Islamic smart contracts are the need of the time for Islamic finance that solve the exact problem that Islamic banking has been struggling with for decades.

The concept of sharia-compliant cryptocurrencies will take its time to go mainstream. Islamic banking is a very small portion of the global banking system. However, we can see some recent progress like IMF adopting the core principles of Islamic banking, adding it to their 2019 reporting category, SettleMint helping Islamic Development Bank, or blockchain adoption inside UAE, but the claim that sharia-compliant cryptocurrencies can speed up the progress as if on steroids is a tall one.

Cryptocurrencies, by virtue of their programmability, provide an added and somewhat historically missing element to the concept of money. Money is (just) a medium-of-exchange, it does not understand or complain when put to bad use like assassination, drug, sex and human trafficking, ransom or war etc.

Islamic law is more concerned with the morality of financial transactions rather than the form and shape of the money being used. Where the token is driving its value from is more important in Islamic jurisprudence than the token itself. If the “value” is driven from permissible means and functions in Islam, it is valid, if the “value” comes from function or processes deem forbidden in Islam, it is impermissible. With the evolution of cryptocurrencies we can have ethically aware, conscious money where the Islamic principles of its usage can be coded inside the money.

Sharia-compliant cryptocurrencies would not only increase the market share of crypto users but also can provide an alternative way to move people from “unbanked” to “banked” and from “unbitcoined” to “bitcoined” while keeping the law of the land intact through its principle-based architecture and design.

I’ve recently published a book — Introduction to Blockchain with Case Studies and it’s available from Amazon worldwide, Gufhtugu Publishers in Pakistan and here is my Urdu Book (بٹ کوائن، بلاک چین اور کرپٹو کرنسی) on the subject as well.