Economic bubble or bubble gum?

By Jamari Mohtar

Across the Straits

Focus Malaysia | March 3, 2018

In late January, the price of Bitcoin, along with other cryptocurrencies, went into a tailspin. The value of Bitcoin fell more than 60% in early February – from its lofty high of about US$ 20,000 (RM78,341) in December to below US$8,000. The global mainstream media had a field day, and here are some samples of their headlines then:

“Bitcoin biggest bubble in history, says economist who predicted 2008 crash” – The Guardian, Feb 2.

“Bitcoin and other cryptocurrencies tank” – CNN, February 5.

“Here’s How Hard Bitcoin and Other Cryptocurrencies Are Crashing Right Now” –, Feb 6.

“ROUBINI: ‘The Mother Of All Bubbles And Biggest Bubble in Human History Comes Down Crashing'” – Business Insider, Feb 2.

Can you visualise the projected image of gloating gleefully in these headlines at the fate that befell cryptos, along with the fate of those deemed stupid and idiotic enough to ever engage in investing and trading in bitcoin?

If you think I’m too sensitive, then let’s see what happened in the past each time the prices of bitcoin and other cryptos nosedived:

“So, That’s the End of Bitcoin Then” – Forbes, June 20, 2011.

“Bitcoin Is Headed to the ‘Ash Heap’” – USA Today, January 16, 2015.

“The Death of Bitcoin” – The Daily Reckoning, May 5, 2017.

Attempted Murder

As reckoned by one expert, Bitcoin has been declared dead at least 171 times since 2011.

Newsletter writers, journalists, and academics have called it a “Ponzi scheme.” Even JPMorgan CEO Jamie Dimon – whose bank has been fined billions for financial abuse – calls Bitcoin a fraud whose value is “probably zero.”

These are nothing more than attempts to assassinate Bitcoin, which failed miserably because not only does it survive but becomes stronger after each attempted murder!

Guess who got to be featured in most of these hysterical articles?

The folks, especially the Nobel Laureate-type economic professors who seem possessed by the demon of the “fear of bubble syndrome”.

It’s in their body and soul such that they sometimes sounds rather incoherent.

Take for instance, Nobel Laureate and Yale University Sterling Professor of Economics Robert Shiller who was quoted in Fortune magazine on December 21, as saying: “It seems like the dotcom bubble all over again, or the housing bubble all over again.”

This prompted a rejoinder from the managing editor of CoinDesk who’s also a former editor-in-chief of American Banker, Marc Hochstein, who asked: “So: dotcom or housing? Pick one, professor. Because there’s a meaningful difference.

“Debt bubbles, like the one that overheated the US housing market in the 2000s and ultimately sparked a global financial crisis, leave behind encumbrances.

“Tech bubbles, like the 1990s internet mania, leave behind infrastructure.”

Or take the case of Nobel Laureate and professor of economics and international business at New York University, Nouriel Roubini.

Dubbed Dr Doom and credited with predicting the 2008 financial crisis, Roubini said a sharp fall in the value of bitcoin on February 2 was the latest proof that the cryptocurrency was the biggest bubble in history and destined for a crash “all the way down to zero”.

In the same manner that Marc Hochstein asked Shiller, I would also like to ask Roubini, “So: a one-day drop in value in Feb 2 of 12% or a two-month drop in value in Feb 2 of 61%? Pick one, professor.

“Because whether it’s a 12% or 61% fall, do you know professor that Bitcoin had already crashed 94% from June to November 2011 – from US$32 to US$2?

“Or that it crashed again at 85% in November 2013 to January 2015 from US$1,166 to US$170?”

And yet the “all the way down to zero” wish of Roubini seems to be something like striving for the goal of a receding or elusive end.

In other words, as you think your prediction is right, past events have already proven you wrong and you are not even aware that this is so.

And yet in another case, Nobel Laurete and Charles R. Walgreen Distinguished Service Professor of Behavioural Science and Economics at the University of Chicago, Richard Thaler, recently said “after taking a close look at the markets, cryptocurrencies are what “most looks like a bubble” and “the market that to me most looks like a bubble is that of Bitcoin and its sisters.”

But despite his analytical prowess, Thaler remains clueless in his inability to analyse when the bubble might burst.

The Nobel Laureates are just like your admirable tip-top surgeons in their younger heydays who, as they aged, failed to keep up-to-date with the latest state-of-the-art development in surgery.

Thus, they become a menace as their outmoded surgical techniques and outlook on surgery may cost the life of the patients who are under their knives.

If the Nobel Laureates had not remained content in being cocooned in their ivory-tower mindset, then they would have realised that the volatility in the price of Bitcoin is no big deal because here are the facts since 2011:

  • Crashed 94% in June to November of 2011 from US$32 to US$2;
  • Fell 43% in June 2012 from US$7 to US$4;
  • Crashed 80% in April 2013 from US$266 to US$54;
  • Crashed 85% in November 2013 to January 2015 from US$1,166 to US$170;
  • Fell 40% in September last year from US$5,000 to US$2,972; and
  • Crashed 61% in January from US$19,206 to US$7,500.

Bubble Gum

By the middle of February, when Bitcoin fell below US$6,000, it looked dead set that these Nobel Laureates finally got it because it looked so realistic then that the crypto will go all the way down to zero.

But just a day after this precipitous fall, Bitcoin shot up from below US$6,000 to US$8,000 plus just in a single day.

As I began to write this article in the wee hours of Feb 18, bitcoin was trading at just over US$9,700, based on data from

About four hours later, and by the time I had written more than 50%, Bitcoin traded at just over US$11,000.

And finally when I had completed the first draft of this article some two hours later, Bitcoin was trading at US$10,549.04.

And yes, by the time this article is published, if the price of bitcoin were to go down the drain, the Nobel Laureates will have the last laugh, right?

Wrong! I will be the one who will have the last laugh because in all of my articles I have never for once said that cryptos are not in a bubble or the crypto bubble will never go bust.

All I said is that it is a pain in the neck for anyone to repeat ad nauseam that they are in a bubble because anyone with a modicum of intelligence knows it is.

The difference with the Nobel Laureates is that they believe a bubble must necessarily be a negative economic phenomenon.

But the hard facts have proven time and again that a bubble can span for so many years without any discernible damage to the economy until it burst.

Hasn’t the term soft landing ever occur to them? When the property market in Singapore overheated some years ago due to asset price bubble, the city-state introduced several rounds of cooling measures to either postpone the bursting of the bubble or avoid a hard landing when the bubble burst.

With a brilliant mind and perhaps a good funding in hand, the Nobel Laureates could contribute immensely to mankind if they embark on a research to better the science of forecasting the probability of when exactly a bubble will burst (within a statistically acceptable margin of errors of course!) instead of wasting time pronouncing crypto is a bubble.

As for me, I view crypto bubble like a piece of bubble gum.

When it burst, it does not metaphorically explode right in my face to cause more than bodily harm.

Rather, it just literally sticks to my face – an inconvenience, no doubt, but the sort I can easily manage and come to term with!


Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments:


A sordid tale of love and hate

By Jamari Mohtar

Across the Straits

Focus Malaysia | Feb 3, 2018

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On January 15, the head of the Monetary Authority of Singapore (MAS) expressed the hope that the technologies underpinning cryptocurrencies such as blockchain would not be undermined by an eventual crash in the virtual currency. “I do hope when the fever has gone away when the crash has happened, it will not undermine the much deeper, and more meaningful technology associated with digital currencies and blockchain,” said MAS’ managing director, Ravi Menon, at a UBS Wealth Insights event in Singapore.

That statement of Menon has kept me thinking hard on the relationship between cryptos and the underlying technology behind their creation, the blockchain.

While some business leaders, bankers and regulators talked in a schizophrenic manner as if the two (cryptos and blockchain) are unrelated in the sense of professing their deep love for blockchain and, at the same time, their equally deep disdain for cryptos, regulators like Menon and his counterpart in Britain, Mark Carney, are very much aware of the obvious relationship between the two.

How can you condemn cryptos like bitcoin as a fraud and at the same time, absolve the blockchain technology behind their “fraudulent” creation as a blessing, like what Jamie Dimon of JPMorgan did way back in September? By the way, last I heard he has repented. Good of him to repent!

Work in progress

What many seem not to realise in their love affair with distributed blockchain ledger technology (DLT) is that it can’t, as yet, prove as a disruptive technology that will change positively and productively the way we do things now, as it is still a nascent technology.

You can’t even quote any of its use-cases being translated in the realm of reality now, as they are all works in progress.

But it is sufficient for me that the technology is promising when many Fortune 500 companies are beta-testing its use-cases in various aspects of life such as finance, trade and registry.

MAS and the Bank of England (BoE) are involved in extensive research on DLT because they see the systems and technologies underlying cryptos, as an “active area of interest”.

Addressing British parliamentarians, Carney said work undertaken by the BoE’s financial technology accelerator shows the potential value of DLT on a systemic level.

“You get those benefits by stopping at a level much higher than the retail level. You don’t end up with those financial stability risks, you get financial stability benefits. And you save huge amounts of computational energy intensity.”

Despite this, both the BoE and MAS are not in a hurry to embrace the new technology. Speaking for BoE, Carney said: “We’re also disciplined. If we’re going to apply something to the core of the system, it’s going to need to meet five sigma quality rating.”

Sigma rating – the highest being six sigma – refers to a set of techniques and tools for process improvement in the quality of output by identifying and removing the causes of defects and minimising variability in manufacturing and business processes.

Introduced by engineer Bill Smith of Motorola in 1986, Jack Welch made it central to his business strategy at General Electric in 1995.

Using a set of quality management methods – mainly empirical, statistical methods – sigma rating creates a special infrastructure of people within the organisation who are experts in these methods by following a defined sequence of steps with specific value targets. These include reducing process cycle time, pollution and costs, and increasing customer satisfaction and profits.

But Carney also issued a disclaimer on his views on a fast-evolving blockchain technology when he said: “What I say on this topic today will be outdated six months from now because things are moving so rapidly.”

Herein lies what many fail to grasp: Because the use-cases for DLT are evolving at a fast pace and haven’t even had the chance yet to emerge as disruptive applications in the real world, the stage is set for the volatility of cryptos in general especially bitcoin, the most famous cryptos of them all.

This accounts for the speculative nature of crypto trading but do you blame cryptos alone for this speculation? The hypes surrounding blockchain technology especially about its disruptive use-cases, which hasn’t emerged in the realm of reality yet, and due to its decentralised and public nature in the known domain, had fuelled the speculation on the value of the digital tokens supporting the blockchain.

This speculation – excessive or not – will abate once the “alleged” disruptive nature behind the use cases of DLT technology become real – as in being applied in the real world.

So where does this schizophrenic logic lie in loving blockchain and hating cryptos in this sordid love-hate affair? It reminded me of the love-hate affair between Malaysia and Singapore under former premier Tun Mahathir Mohamed, which the current premier, Datuk Seri Najib Razak, has decided to consign it to the dustbin of history.

Fundamental of Blockchain

Digital tokens especially cryptos represent a consensus mechanism. They are the means by which the public participates in public blockchain protocols.

If the blockchain protocol becomes valuable due to its promising potential applications in real life, then the digital tokens, through which one participates in it, accrue value.

In this sense, one can view cryptos as having intrinsic value by virtue of being backed both by technology and the use-cases the technology will make possible once the beta testing stage proceeds smoothly.

If the outcome of the beta testing proves to be a failure, then the cryptos that are being supported by the technology will go down in value.

Network effect

The other element fuelling the speculative nature of cryptos is the network effect, defined as a phenomenon where bigger numbers of participants improves the value of a product or service.

The internet is a good example of the network effect. Initially, there were few users of the internet, and it was of relatively little value to anyone outside of the military and a few research scientists.

As more users gained access to the internet, adding more content, information, and services, there were more and more websites to visit and more people to communicate with. The internet became extremely valuable to its users.

Some experts view bitcoin as a social network and that 94% of bitcoin’s price move is explained by Metcalfe’s Law that says the value of a network is the square of the number of its users. It’s an equation that shows as more people join a network, the more valuable the network becomes.

Valued in the billions

Network effect is why Google, Facebook, and Alibaba are worth US$689 bil, US$500 bil, and US$450 bil, respectively. When a network becomes valuable, it attracts even more users.

Ether’s rise to fame (and volatility of course!) is driven by the network effect of the Etherium Protocol, which features a smart contract. To use the Etherium Protocol to write and execute a smart contract, participants in the transaction must have an ether stake in that protocol.

More smart contract-based blockchains have emerged now, with different cryptos such as Cardano, Neo and Cindicator, breaking the Etherium Protocol “monopoly” on smart contract.

Hence, those networks that are best designed for executing smart contracts will get more popular. And the more popular the network, the greater the rise in the value of the network’s cryptos.

However, there are vested interests which realise their businesses or position will become obsolete once the use cases of blockchain technology emerge in the real world.

Negative spin

And these are the vested interests that had, have and will always spin a negative take on cryptos ala divide and rule by hailing blockchain technology as a game changer and pouring scorn on cryptos and crypto trading, when the two are actually very much related and move together in unison.

Their negative spinning on cryptocurrencies is the cause for all the crypto fears to be born – the fears of the FOMO, FOLO and FOB.

To recap FOMO stands for Fear of Missing Out, FOLO is Fear of Losing Out and FOB is Fear of Bubbles.

Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments:

Crypto stabilisation policy

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By Jamari Mohtar

Across the Straits

Focus Malaysia | Jan 19, 2018

We have seen in the crypto mania of last year, the emergence of FOMOs who were folks that have a fear of missing out on the cryptocurrency boom. In turn, the FOLOs are those fund managers and editors of investment advisory newsletters who have a fear of losing out on clients and subscribers to the crypto cheer-and-boom fund managers and newsletters.

Meanwhile, the FOBs are folks who have a fear of bubble syndrome. I have touched on the first group of FOBs – the Nobel Laureate economic professors and the second rate economic professors without a Nobel Laureate.

The other group of FOBs that I will elaborate on now is the regulatory authorities. They are concerned that the FOMOs and FOLOs will get buried under a mountain of debris of non-existent metallic cryptos, should they continue with their speculative investment in the digital tokens.

Among the notable exception (not a FOB) is the head of Bank of England, Mark Carney who told British parliamentarians that bitcoin’s meteoric price gains do not pose a threat to global financial stability.

Although Carney said the upward trajectory in bitcoin’s price is “significant” and more like an “equity-type risk”, he nevertheless does not view bitcoin as a “financial stability issue”.

Another exception is the Monetary Authority of Singapore (MAS) whose cautionary statement issued on Dec 19 did not have a single word of ‘bubble”.

MAS is just concerned with four areas of crypto investment:

  • The probability of a high occurrence of fraud in an unregulated area of the economy, absent the regulatory safeguards for the investors;
  • The spectre of an unprecedented rise in money laundering and terrorism financing;
  • The real possibility of hacking; and
  • The uncertain outcome of excessive speculation.

These are valid concerns because they may result in the crypto investors losing everything, as emphasised by MAS. Put it differently, MAS wants crypto investors to be “mature” enough to take ownership of the risks in their crypto investment and not to blame regulators when their investment goes awry.

Although the concern of the regulatory FOB folks is genuine, yet they seem to be clueless on the consequences of their refrain not to invest in cryptos becoming a self-fulfilling prophecy.

When the majority of all crypto investors listen to them and simply give up on investing in cryptos, the outcome could give rise to a spectre of the global economy being caught in a deep recession.

This could happen because massive fiat monies end up being locked up in computer networks in the form of cryptos because investors simply do not care about withdrawing their cryptos to fiat monies in obedience to the refrain of the regulatory FOBs.

Crypto policy, here I come …

Taking a leaf from both monetary and fiscal policies where they are being utilised by policywonks to fine-tune the economy for stabilisation, allocation, distribution and growth objectives, a crypto policy can be devised as an additional tool to fine-tune the economy.

We know from standard macro-economic textbooks, during a recession, an expansionary approach can stimulate the economy by increasing the money supply and/or decreasing interest rate, and lowering the tax rate and/or upping targeted government expenditures on infrastructure development and social spending.

An example of the former is the spending to develop the East Coast Rail Line, while the latter could include cash benefits and direct in-kind provision of goods and services that are targeted at low-income households, the elderly, disabled, sick, unemployed, or young persons such as BR1M.

An expansionary crypto policy could also be devised as an additional tool of fine-tuning the economy via suspending the deposit service of crypto exchanges and allowing their withdrawal service.

When deposit service is suspended, it means money, which is already in short supply during a recession would not be reduced further by being sucked inside the computer network of cryptocurrencies. Allowing withdrawal service implies money supply receives the needed boost when investors withdraw their cryptos for fiat monies.

The effect on the economy will be the same as increasing the money supply, which in turn could boost consumption and investment that will help to steer the economy away from a recessionary spell.

Once the economy has recovered, the continuation of expansionary policies will result in the overheating of the economy, causing inflation to rear its ugly head in the form of asset price bubble.

In this case, a contractionary approach will help the economy to cool off via contractionary monetary and fiscal policies when money supply is reduced and/or interest rate is increased, and tax rate is raised and/or government expenditures is reduced.

Again, a crypto policy can be handy but this time, a contractionary one to help cool off the economy by allowing deposit service of crypto exchanges to operate to suck in the excess money supply, while their withdrawal service is suspended so that the overheated economy won’t be flooded with monies.

Of course, textbook recipes are simplified model made under a ceteris paribus (everything else remain constant) assumption and often did not take into account the trade-offs in term of the four objectives mentioned earlier.

So the policymakers will have to use their brainpower to decide on a mix of all policies to be implemented to help in the recovery of an ailing economy suffering from either a recession or inflationary pressures.

Official appointment of crypto exchanges

Malaysia is in the very best position to implement the crypto policy above, judging from the statement made by Second Finance Minister, Datuk Seri Johari Abdul Ghani who on Jan 2, announced “plans to recognise regulated digital currency exchanges (DCEs)” by appointing them officially as a recognised DCE.

“The appointments will only be done with the proper cryptocurrencies regulation in place,” he said.

Although the regulation will model the measures taken by regulators in Australia and China recently, Malaysia is one step ahead because none of these countries have ever talked about the official appointment of DCEs by the authorities.


Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments:

Riba in the Forex Market

By Jamari Mohtar

Jan 16, 2018


IT WAS some 35 years ago that I learnt in detail about Riba (usury) as an economics undergraduate at the International Islamic University Malaysia.

One particular course, Fiqh For Economist, had me riveted on the juristic discussion on Riba, while the course on the Evolution of Western Economic Thoughts gave me, among other things, a good grounding on the various theories justifying the existence of interest in the economy.

Some of the takeaways from these two courses that are still etched on my mind are:

  • Riba and interest are both prohibited in Islam because both pertain to the receipt of, or payment for, something that involves an unjustified countervalue;
  • Usury (excessive amount of interest) is riba, but riba does not necessarily mean usury. There is no English equivalent to the Arabic word, “riba”;
  • The absence of interest in an Islamic economy doesn’t mean that capital (as in one of the factors of production in an economy) is free. The rate of return becomes the pricing mechanism that allocates the efficient use of capital;
  • While interest is an institutional reality, rather than an economic necessity, rate of return is both an economic necessity and an institutional reality;
  • As borrowing-lending relationship is an exchange process that does not create surplus value, as opposed to a production process that creates one, the payment or receipt of interest in a borrowing-lending relationship is unjustified.
  • Trading is also an exchange process, but unlike the exchange process of borrowing and lending, trading creates surplus value because what is being traded (exchanged) consists of either intermediate goods or finished goods that have undergone a production process. Moreover, there is then the value-added process to market and sell the goods. Thus, seeking profit via trading is permissible.
  • In order to make borrowing-lending relationship permissible in Islam, one could either demand just the principal amount at the end of the relationship, or one could convert the relationship into a trade through an equity relationship via partnership (syirkah) or joint venture (mudarabah), or through other instruments of Islamic financing that are also equitable such as murabahah (cost plus mark-up), ijarah (leasing), wakalah (agency), etc.; and
  • Riba can be present in both loan and trading transactions.

Contradictory classifications

To refresh my mind on the topic of riba, and keep up with the recent development on the issue, I did some research on riba and found two contradictory classifications of riba.

The first classification in simple schematic diagram is shown below:

class1The diagram below is the second classification:

class2The two diagrams above show glaring contradictions in that the neat division of riba into interest in loan (anNasiah) and interest in trade (alFadl) in the first diagram is rendered chaotic by the second diagram when both anNasiah and alFadl come under alBuyu (interest in trade).

So the big question – is anNasiah an interest levied on loan or trade? After all these years of Islamic banking and finance experience, I’m surprised that no one attempts to reconcile this contradiction.

Let’s get to the crux of the matter.

Riba anNasiah

Going by the primary sources of Islam, the classical jurists are unanimous in saying that anNasiah is the riba mentioned in the Quran, while alFadl is mentioned in the Ahadith.

That is why anNasiah is also known as the Riba of the Quran or Riba alJahiliyyah because the Quran refers to anNasiah as the riba practised during the Jahiliyyan period (Age of Ignorance before the advent of Islam). So, Riba alQuran and Riba alJahiliyyah and for that matter, Riba alQardh and Riba adDuyun are all synonyms of Riba anNasiah.

Why then do you sub-divide anNasiah into all these synonyms as a sub-classification when they are all the same thing, as seen in the first diagram or sub-classifying adDuyun into alQardh and alJahiliyyah, as in the second diagram? It is superfluous to have a sub-classification on the basis of synonyms because there is really no different among them to justify a sub-classification.

It makes more sense to sub-classify anNasiah into just Riba alJali (obvious interest) and Riba alMubashir (direct interest) in the first diagram. In alJali, “obvious” is a new element in the synonymity, while in alMubashir, “direct” is the new element.

Riba alFadl

 The above riba is mentioned in the Ahadith of the Prophet (peace be upon him). As such, Riba asSunnah or Riba alBuyu’ are synonyms of alFadl that do not justify a sub-division, simply because they are all the same thing.

Riba alGhayr (indirect interest) and Riba alKhafi (hidden interest) are sub-division in the first diagram that is acceptable because the new elements of synonymity are “indirect” in the former and “hidden” in the latter.

Excess in countervalue

I had a problem grasping the concept of a countervalue during my varsity days but the concept is actually very simple to understand.

When you buy a 2kg sugar from your grocer costing say RM 5, you hand him a 5-ringgit note (the medium of exchange) that you have to part away with, and in return you get a just countervalue, which is the 2kg sugar.

Similarly when someone lends you RM5, he had to part away with his 5-ringgit note but at a time mutually agreed by both, you’ll return him the 5-ringgit which is a just countervalue for the lender. If the countervalue becomes more than RM5 at the agreed time of settlement, this is an unjust countervalue because the excess amount cannot be justified.

The element of interest on excess countervalue is both present in interest in loan and interest in trade. So strictly speaking, sub-classifying riba on the basis of excess in countervalue for trade, which gives the impression that such element is not present for loan is not that accurate as depicted in the first diagram.

Similarly, to say that delayed-payment interest is present in interest in loan as in the first diagram is also not accurate as delayed-payment interest can also be present in interest in trade.

The only sensible thing in the first diagram is its neat division of riba into interest in loan and interest in trade.

The second diagram too has a neat division like the first diagram i.e. Riba adDuyyun (interest in loan) and Riba alBuyu’ (interest in trade) but it becomes problematic when it puts Riba anNasiah as interest in trade while the first diagram puts anNasiah as interest in loan, leading to the contradiction I mentioned earlier.

I also notice in my research that the division of riba into anNasi’ah and alFadl is the approach favoured generally by the professional Islamic bankers and Muslim economists, while the sub-division of Riba alBuyu’ (interest in trade) into anNasi’ah and alFadl is generally favoured by the fuqaha (jurists).

And both are sitting together in Syariah supervisory board of Islamic financial institutions. I just hope that they can reconcile this glaring contradiction.

Foreign Exchange Market

As a matter of general principle, since trading in a forex market is a worldly affair that has nothing to do with rites of worship (ibadah khusus), it is permissible to trade there unless there is a nash (primary evidence) from the Quran and Sunnah expressly stipulating that trading in a forex market is forbidden.

There is no such nash in forbidding the trading simply because the forex market and all the sophisticated techniques of trading in it are a modern invention.

“Thou knowest best thine own worldly affair”, says a Hadith of Prophet Muhammad (pbuh). (Soheh Muslim)

Let’s now dissect the various transactions in a forex market.

First, you have margin trading, which is basically your financial broker advancing you some monies for you to trade in the forex market.

This is a loan transaction where it is not permissible in Islam if the repayment involves interest (Riba anNasi’ah). But this does not negate the permissibility of trading in a forex market because margin trading is not an integral component of the forex market. You can do away with margin trading. If you don’t have enough money to trade in the forex market, then don’t trade there.

Next, the trading of currencies itself in a forex market.

In my term paper while taking a course on International Finance in my final year at the IIUM, I proposed that trading in the forex market involves Riba alFadl. I have lost the term paper but from what I can recall here was my argument.

Riba al-Fadl, which is interest in trading, occurs when you exchange goods of the same genre, as seen in the Hadith below:

From Abu Said al-Khudri: The Prophet (pbuh), said: “Do not sell gold for gold except when it is like for like, and do not increase one over the other; do not sell silver for silver except when it is like for like, and do not increase one over the other; and do not sell what is away [from among these] for what is ready.” (Soheh Muslim)

In that term paper, I argued that it doesn’t make sense for one to engage in barter trading involving the exchange of say, 8kg of gold for 8kg of gold. Might as well, you don’t trade. So why is the Prophet (pbuh) advocating such a trade?

Then comes the following Hadith:

From Abu Sa’id: “Bilal brought to the Prophet, peace be on him, some barni [good quality] dates whereupon the Prophet asked him where these were from. Bilal replied, “I had some inferior dates which I exchanged for these – two sas (quantities) for a sa.” The Prophet said, “Oh no, this is exactly riba. Do not do so, but when you wish to buy, sell the inferior dates against something [cash] and then buy the better dates with the price you receive.” (Soheh Muslim)

In the above Hadith, which is a case of trading goods of the same genre (dates versus dates) but with different quality, it is still riba alfadl if the amount traded is not equal, but the Prophet (pbuh) taught us how to avoid riba alfadl by advocating the use of a medium of exchange (monies).

What this implies for the forex market is, since the trading of currencies falls under trading of goods (or entities) of the same genre i.e. currency versus currency, Riba alFadl is obviously present.

If one wants to argue that the trading in the forex market is that of trading same genre entities with different quality in the sense that the Ringgit is obviously of a different quality from the US Dollars, then it is still Riba alFadl if the trading is done on the basis of a different price, as in 1RM is equal to USD0.253 as my currency conversion app shows.

As it does not make sense to trade on the basis of 1RM is equal to USD1 unless economic and political developments in Malaysia comes to a stage where there is parity between the Ringgit and the US Dollar, it simply means trading in a forex market involves Riba alFadl.

Unless; one sells the ringgit for some medium of exchange (?), and with that medium of exchange (?), one then buys the USD. This is taking the cue from the Hadith about trading of dates of different quality.

I pose a question mark in bracket because in the case of trading goods of the same genre with different quality, the medium of exchange is money (currency).

But in the case of trading a pair of currencies with different quality, the pertinent question to be asked is what is the medium of exchange for currencies? To make it more enigmatic, the question can be rephrased as: what is the medium of exchange for mediums of exchange?

I remember vividly ending my term paper with the following challenge: Until and unless Muslim economists and the fuqahas can create or devise a medium of exchange for currencies, then I’m afraid trading in the forex market will always involve Riba alFadl.

Before I end, I would like to make two additional remarks:

The first is using a medium of exchange is just one condition to avoid Riba alFadl in a transaction involving same genre entities with different quality. The Hadith below specifies another condition – it must be hand to hand i.e. a spot transaction as opposed to a delayed payment or credit transaction:

Ubaida b. al-Simit (Allah be pleased with him) reported Allah’s Messenger (pbuh) as saying: “Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.” (Soheh Bukhari).

The second remark, which I also included in my term paper, is the genuine disadvantage for traders and businessmen involved in international trade who are faced with a risk exposure to movement of currencies on a daily basis such that they need to engage in the forex market for hedging and arbitraging purposes, otherwise their business will be ruined.

In such a case, there is a maslaha (public interest) principle for allowing them to hedge or arbitrage in the forex market under the Islamic principle of darurah (dire need).

The same goes for the government, which needs to hedge/arbitrage against risk exposure of currency movements that will disadvantage the country. As pointed out by Second Minister of Finance Johari Abdul Ghani, this is not the same as gambling in the forex market.

Wallahu musta’an.

Meet the FOMO, FOLO and FOB

By Jamari Mohtar

Across the Straits

Focus Malaysia | Jan 6, 2018

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The crypto mania of 2017 has spewed a number of interesting acronyms and terminologies. Here’s my version with a twist of humour.

Enter the FOMOs…

First, you have the FOMOs – the folks who have the fear of missing out on the cryptocurrency boom. They were initially fence sitters who didn’t believe in cryptos because they were very much influenced with the talk of an epic bubble that’s about to burst.

When bitcoin hit a new high of USD 1,400 (RM5,627) in May, and then USD 2,000 by month-end, followed by USD 3,000 a few weeks later, the fence on which the FOMOs were sitting began to shake uncontrollably.

But very soon, the movement of their fence stabilised when during one of the correction windows, bitcoins dropped by more than USD 300 in just one hour (some smart alecs then thought it was a drop to USD 300).

By the time the bull’s summer of content set in, when bitcoin rocketed to USD 8,000, the FOMOs had already fallen off the fence and were embracing the midsummer crypto love affair.

They demanded an explanation from their advisors who were the fund managers and editors of investment advisory newsletters on why they failed miserably to recommend them to add cryptocurrencies on their menu of investment portfolios.

Here Comes the FOLOs…

This gave rise to the FOLOs – the fear of losing out folks comprising fund managers and editors of investment advisory newsletters who then started to run helter-skelter to include cryptos in their investment coverage after gloatingly expounding on the gloom and doom of investment in bitcoins.

The fear of losing out their clients and subscribers to the cheer-and-boom crypto fund managers and newsletters has forced these FOLOs to make a U-turn on bitcoin by ramping up the virtues of the underlying distributed blockchain technology behind the creation of bitcoin, as the reason for the meteoric rise in the price of cryptocurrencies. I thought only well-known politicians are famous for making a U-turn.

One Singapore-based FOLO, after poking fun in July on Bitcoin as being no different from his own brilliant money-making idea of baking special recipe cookies that are unique and impossible to replicate because it’s handed down through the generations via some sort of cryptic codes, had to admit in November that investments in cryptos have returns far higher than stocks in 2017 alone, perhaps even better than the return on his coded cookies.

A mad rush to issue special reports on cryptocurrencies ensued among these FOLOs, which was actually a sale gimmick to introduce crypto funds to prevent the exodus of their clients and subscribers to the cheer-and-boom crypto fund managers and newsletters.

And what they have to offer via these crypto funds is some sort of derivatives with cryptos as the underlying asset, which seems far riskier than investing directly in cryptos.

Remember the sub-prime mortgage – the housing loan derivatives that had brought the US economy to its knees and spread to all part of the world, igniting the Great Recession of 2008? It seems that the lessons of 2008 didn’t sink in with these FOLO folks.

By early December, the bull’s summer of content became the winter of content when Bitcoin hit one mighty high after another – from USD 10,000 to USD 15,000 and finally USD 20,000 in a flash of lightning.

This was quickly followed within a few days later by the emergence of a bear’s winter of discontent when bitcoin fell to below USD17,000 and then USD12,000 and finally USD10,000, all in quick succession.

The result: Both the FOMOs and FOLOs are now contemplating joining the FOBs and the FOMS-es. After all, if you can’t beat them, join them!

Epic bubble of the FOBs

The FOBs are folks that have a fear of bubble syndrome. One group of FOBs is the Nobel Laureate economic professors. This also includes the second rate non-Nobel Laureate professors whose pronouncement on cryptos sounded as if they too have a Nobel Laureate.

They seem to forget that what is important is not so much the bubble, which can stretch for a number of years without any damage to the economy but rather only one particular year when the bubble will burst.

Hence, they should revisit the drawing board and come out with a better forecasting technique to determine the year the bubble will likely burst, instead of being a pain in the neck of the FOMOs by their premature repetition ad nauseam of the word “bubble”, thus depriving the FOMOS the opportunity to improve their financial condition through a small, decent investment in cryptos.

I would suggest the following pointers to the FOB folks:

  • Go back to the economic history book to discover that the first bubble ever recorded in history – the tulip bulb mania – occurred when futures trading made its debut in the sale of tulip bulbs. About a year or so later, the bubble burst.
  • In the second case – the dotcom mania – talk of a bubble gained momentum in 1997 and over a period of three years, shares of internet companies continued to reach new highs (on average an increase of 500%), until they reached an all time high in late 1999. Then the bubble burst. For companies that survived the crash, Amazon for instance, the all time high of USD106.69 on Dec 1999 was only repeated and breached 10 years later in 2009.

In the case of bitcoin, talk of a bubble gained momentum in 2013. But 2013 was not the equivalent of 1997 for the dotcom bubble due to:

  • Bitcoin reached its then all time high of USD 1,200 in Dec 2013 – the same year bubble-talk gained momentum, not two years later as in the dotcom mania when the ultimate high was reached.
  • In May 2017, this all time high was repeated and breached – in 4 years’ time not 10 years as in the dotcom crash.

Thus, the crypto bubble did not burst after 2013. It was just a major correction of bitcoin from 2014 to 2016. The fact that bubble-talk gained momentum again in 2017 reinforced the notion that the bubble-talk of 2013 was premature. So it’s 2017 that can be considered as the equivalent of 1997 in the dotcom bubble.

This would mean bitcoin price will continue to rocket in the next three years until it reaches the ultimate all time high of a 500% increase in price by 2019.

With the current price at about USD14,000 on New Year’s Eve, an increase of 500% over the next three years means bitcoin would have had to reach for the ultimate all time high of USD 84,000 in 2019 before the bubble burst.

This is a simplified attempt to arrive at a ballpark price where a bubble will burst. The Nobel Laureates with superior resources and funding can do better, including improving the accuracy of the margin of error in their forecast.

But all bets are off if bitcoin repeated its 2013 pattern, which means the ultimate all time high of USD 84,000 could arrive much earlier as in this year. It is not for nothing that I have often said bitcoin and cryptos are new animals.

In my next article, I will attempt to elaborate on how cryptos could play a stabilising role in the economy. I would also reveal who the other group of FOBs is and who the FOMS-es are.

Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments:

Extra-territoriality of ICOs

By Jamari Mohtar

Across the Straits

Focus Malaysia | Dec 15, 2017

Under its guidelines on digital token offerings issued on Nov 15, the Monetary Authority of Singapore (MAS) says a trading platform like Luno, which is a cryptocurrency exchange, will not be regulated in Singapore unless it introduces the trading of securities tokens.

Securities tokens are digital tokens that can be construed as capital-market-like products based on the commonalities with the products of a capital market in their structure and characteristics, says a MAS guide on digital token offerings.

Luno Pte Ltd, a Singapore registered company, has a subsidiary incorporated in Malaysia – BitX Malaysia Sdn Bhd – that runs the only cryptocurrency exchange in Malaysia which deals with the exchange of bitcoin to ringgit directly through a bank account. It also accepts deposit in ringgit directly from your bank account in order for you to trade in bitcoins. Last month, it introduced the trading of the cryptocurrency ether.

An online trading platform like Luno that deals in secondary trading of cryptos like bitcoins and ether will remain unregulated in Singapore, as these are not considered securities tokens and hence, the republic’s Securities and Futures Act (SFA) does not apply.

However, MAS intends to regulate the activity of exchanging virtual currencies to fiat currencies on trading platforms under a new payments framework that “will include rules to address money laundering and terrorism financing risks relating to the dealing or exchange of virtual currencies for fiat or other virtual currencies.”

The financial regulator considers trading platform as one of the two intermediaries that facilitate the offering or issuance of digital tokens in ICOs. The other intermediary is a primary platform on which one or more issuers of digital tokens may make primary offerings of the tokens.

Both kinds of intermediaries “will be required to put in place policies, procedures and controls to address such risks”. These will include conducting customer due diligence, monitoring transactions, performing screening, reporting suspicious transactions and keeping adequate records.

The moment a trading platform that trades in cryptos introduces the trading of securities tokens including futures contracts, it may come under the SFA, as the operator of such platform is seen as establishing or operating a market.

Such operator who “establishes or operates a market, or hold himself out as operating a market” needs the approval of MAS as an approved exchange or recognised by MAS as a recognised market operator under the SFA, unless exempted.

This has the following implications:

  • An existing crypto exchange which wants to expand its trading business by introducing securities tokens or crypto-based derivatives or other capital-market-like products may be subject to regulation under the SFA.
  • Similarly, an operator of a primary platform which deals with securities tokens may be considered as carrying on business in one or more regulated activities under the SFA, and thus must hold a capital markets services licence for that regulated activity under the SFA.

Such operators will also have to contend with the provision of the Financial Advisers Act (FAA) pertaining to financial advisory services, which require a financial adviser’s licence, as an authorized provider of financial advisory services.

Moreover, they have to be mindful too of the extra-territoriality of the SFA and the FAA. The implications are as follows:

  • Operators of a primary or trading platform, whose operation is partly in or partly outside of Singapore, or outside of Singapore, may have the requirements of the SFA applicable extra-territorially to their activities under section 339 of the SFA.
  • Where they are based overseas and engage in any activity or conduct that is intended to, or likely to induce the public, or a section of the public, in Singapore to use any financial advisory service provided by them, they are deemed to be acting as a financial adviser in Singapore and thus, may come under section 6(2) of the FAA.

MAS highlighted the following case in which capital markets services licence under the SFA and a licence for financial advisory services under the FAA are a must:

  • A firm in the business of developing properties and operating commercial buildings plans to raise funds to develop a shopping mall by offering digital tokens to any person globally, including in Singapore. The tokens are structured to represent a share in the firm and will be a digital representation of a token holder’s ownership in that firm. The firm also intends to provide financial advice in relation to its offer of the tokens.

Since the tokens will be a share, they constitute securities under the SFA and thus, the firm will need to comply with the prospectus requirements under the SFA.

The firm will likely require a capital markets services licence for carrying on business in the regulated activity of dealing in securities under the SFA. To provide financial advice in relation to the offering of its digital tokens, the firm will need 
to be a licensed financial adviser under the FAA.

MAS also highlighted the case of extra-territoriality in the following example:

  • A Singapore-incorporated firm with operations in the city-state intends to offer digital tokens to members of the public, but not to persons residing in the country. It will pool the funds raised from the offer and use the funds to invest in a portfolio of shares in fintech start-up firms. It will manage the portfolio of shares. Token holders will have no power relating to the daily operations or management of the portfolio of shares. Profits arising will also be pooled and distributed as payments to token holders. This enables token holders to receive profits arising from the portfolio of shares.

Since the tokens offered will only be made to persons based overseas (i.e. it will not be offered to any person in Singapore), Part XIII of the SFA will not apply to the offer.

But the firm may nevertheless be carrying on the business of fund management in Singapore ala collective investment scheme (CIS) if it operates the management of portfolio of shares in Singapore. If so, it will require a capital markets services licence for carrying on business in fund management. As the firm is not providing financial advisory service in respect of the tokens issued, the FAA will not apply.

It looks like the end for any firm, especially start-ups, to apply technology in an innovative way through the issuance of securities tokens via ICOs to fund the project, but a way out is through applying for the regulatory sandbox administered by MAS.


Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments:











New lease of life for ICO

By Jamari Mohtar

Across the Straits

Focus Malaysia | Dec 1, 2017

 A new lease of life is in the offing for the Initial Coin Offering (ICO) market when it got a wake-up call from Singapore’s financial regulator on Nov 15 in the form of a detailed guideline on digital token offerings.

 This followed from the Monetary Authority of Singapore’s (MAS) announcement in August that it would consider some digital tokens as capital-market-like securities.

The city-sate is actually not the first country to make this announcement. In July, the US Securities and Exchange Commission (SEC) had ruled that some of the digital coins for sale in ICOs are actually securities and thus, subject to the agency’s regulation.

The SEC had even charged in September two companies running ICOs with defrauding investors and selling unregistered securities. The owner of the two firms, claiming his tokens were backed by real estate and diamonds, had raised $300,000 from investors by just putting a white paper on a website.

This case has opened a can of worms because many, especially those in the cryptocurrency and blockchain technology movements, are awaiting for a clearer guidance from the SEC on what are the factors that may constitute a digital token as a securities token.

Then there is also a court precedent to be reckoned with, known as the Howey test. In a 1946 US Supreme Court SEC v. Howey, securities is defined as a scheme, which “involves an investment of money in a common enterprise with profits to come solely from the efforts of others.”

This has galvanised the US legal fraternity, especially those associated with the crypto and blockchain technology movements, to come out with their own interpretations of what constitutes a token that is outside the purview of the securities laws. This, in turn, revolves around failing the Howey test for a token to be considered as not securities.

The simple agreement for future tokens (SAFT) framework engineered by a New York legal firm and firms with a vested interest to make ICOs compliant with US securities laws, for instance, argues that one way to fail the Howey test is tokens must be delivered to investors only after a functioning product or service is in place, that is, after having a utility value.

“The network and the token must be genuinely useful such that they are actually used on a functional network,” says SAFT.

Others feel this is not good enough since the tokens were issued before they have a utility or functional value. In this view, the tokens must be issued from Day One as possessing utility value.

What motivated SAFT to come out with this framework is the unlocking of a major source of liquidity (the US investors) to flow into these ICOs in view of the fact several major ICOs had excluded US individuals then for fear of breaching the securities laws.

While the US was “mired” in a court precedent to come out with a detailed guideline on whether an ICO is just like an IPO (Initial Public Offering), MAS has its work cut out in being the first to announce a neater, clearer and seamless guidelines on ICO, thanks to the city-state’s comprehensive securities laws.

All MAS has to do is to use the existing securities laws governing its capital market and then see whether the structure and characteristics of a token, including the rights attached to it, have some commonalities to securities under the republic’s Securities and Futures Act (SFA) and the Financial Advisers Act (FAA).

For the uninitiated, an ICO works the same way as an IPO in that it’s a way for a company to raise money from the public. In a typical ICO, which can last anywhere from a few hours to a few weeks, the company invites people to buy digital tokens to fund a project.

These projects involve blockchain software such as Ethereum, which runs across multiple computers in order to create a tamper-proof digital ledger. The software can also be programmed to do things like create smart contracts or make investments.

The issuance of MAS’ guidelines does not mean that it will regulate all ICOs. The guideline may affect only the offering of digital token that can be construed as a product of the capital markets regulated under the securities laws administered by MAS.

What constitute a securities token?

MAS has provided three criteria in which digital tokens can be construed as capital-market-like products based on their structure and characteristics, including the rights attached to the token. These are:

  • A share where it confers or represents ownership interest, liability of the token holder, and mutual covenants with other token holders in the corporation;
  • Debenture, where it constitutes or evidences the indebtedness of the issuer of the digital token in respect of any money that is or may be lent to the issuer by a token holder; or
  • A unit in a collective investment scheme (CIS), where it represents a right or interest in a CIS, or an option to acquire a right or interest in a CIS.

All requirements of an IPO under the SFA, including exemptions, may be applicable to such tokens in an ICO. This includes the issuance of “a prospectus that is prepared in accordance with the SFA and is registered with MAS”. A mere white paper of the issuer posted on its website may no longer be sufficient.

If you’re wondering why I use the words “may be applicable” instead of “will be applicable” or “is now applicable” since the SFA is an existing legislation, that’s because the MAS’ statement in the form of a paper on “A Guide to Digital Token Offerings” uploaded on its website has the following disclaimer:

“The contents of this guide are not exhaustive, have no legal effect and do not modify or supersede any applicable laws, regulations or requirements.”

Hint of a transition period

This actually means ICO and cryptocurrencies, like bitcoins, remain unregulated items in the republic for now. But the guide seems to be hinting at a transition period before these could be regulated – for now, it seems “MAS will examine the structure and characteristics of, including the rights attached to, a digital token in determining if the digital token is a type of capital markets products under the SFA.”

This cautious approach is understandable and admirable. Understandable because cryptos and ICOs are new “animals”; admirable since the underlying technology behind their creation and issuance is the distributed blockchain ledger technology (DLT) which is a disruptive innovation that has the potential for varied use cases that could reform our financial markets, supply chains, consumer and business-to-business services, and publicly-held register.

But as with all things, innovation has its downside too where it can lead others with a nefarious bent of mind to “improve” further on the innovation with the aim of taking advantage of the loopholes and lacunae, if any, in order to defraud and scam the investing public.

Meanwhile, the offering of utility tokens as opposed to securities tokens via ICOs will remain an unregulated item in the republic. Nevertheless, this offering will still be regulated by entities other than MAS in the areas of combating money laundering and terrorism financing.

MAS highlighted the case of offering digital tokens to raise funds to develop a platform that enables the sharing and rental of computing power amongst the users of the platform, as an example of utility token.

Since such token gives its holders access right to use the platform, along with the right to use the token to pay for the rental of computing power provided by other users, with no other rights or functions attached to it, the token “will not constitute securities under the SFA”.

This could well describe in essence such crypto tokens as golem – the global, open sourced, decentralised supercomputer – which is associated with a decentralized sharing economy that allows people to rent out their unused computing power, or in the case of another crypto token, filecoin, unused computer storage.

In the next issue of FocusM, I will touch on the fate of a trading platform like Luno – the only Malaysia-based crypto exchange in the world that deals directly with the ringgit in your bank account – under the MAS guidelines.

Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments: