- April 6, 2023
- Posted by: admin
- Category: BitCoin, Blockchain, Cryptocurrency, Investments
A look at cryptocurrency’s role in the world of Islamic banking and finance.
Islamic banking and finance is a system based on the principles of Shariah, or Islamic law, which, among many other things, prohibits the charging or paying of interest on loans and emphasizes ethical and equitable financial transactions.
One of the more notable traits of Islamic banking is its prohibition on charging or paying interest on loans, which is the basis of conventional banking.
Instead, Islamic finance is based on profit and loss-sharing agreements between the lender and the borrower. The lender shares the investment risk with the borrower, and both parties share the profits or losses.
Sharia law permits investment in intangible goods like stocks, bonds and digital assets like cryptocurrencies. Sharia-compliant assets do not have to be backed by physical goods as long as they have real utility. Additionally, Sharia only permits investments in businesses and projects that are not harmful to society (so no gambling, alcohol or tobacco).
Transparency is essential to Islamic finance, and all financial transactions must be disclosed to all parties involved. Islamic finance is also supervised by Shariah boards, which comprise Islamic scholars who ensure that all financial transactions comply with the principles of Shariah.
Islamic finance offers several products and services, including mudarabah, musharakah, murabaha, ijara, and sukuk.
What makes a Sharia-compliant cryptocurrency?
To develop a compliant cryptocurrency, a team of experts in Islamic finance and technology — including Islamic scholars, financial experts and developers — come together to determine the design and features of the cryptocurrency.
This team will ensure the coin is based on a profit-and-loss sharing system rather than interest-based lending. This means that investors share in the profits and losses of the business venture rather than receiving a fixed rate of return on their investment.
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Once the cryptocurrency is ready for issuance, a Shariah supervisory board must review and certify the coin before Muslim investors can start using it. This certification process involves a detailed review of the cryptocurrency’s features and design.
One example of a Sharia-compliant digital asset is Islamic Coin (ISLM), built on the Haqq Network blockchain. In June 2022, Islamic Coin gained a Fatwa (a ruling by Islamic authority) for its Sharia compliance.
Like many cryptocurrencies, it follows a deflationary model, preventing new coins from being created on a whim. In addition, whenever a new ISLM is minted on the network, 10% is sent to the Evergreen DAO, a decentralized autonomous organization that invests the proceeds into Islamic charities or online projects. The contribution of funds to charity follows zakat — one of the pillars of Islam.
Islamic cryptocurrencies need the right design
Sharia-compliant cryptocurrencies are a relatively new and evolving development in digital currencies.
While designed to comply with the principles of Islamic finance, they are not without controversy, and there is an ongoing debate among Islamic scholars about whether the cryptocurrencies are truly compatible with Shariah. Andrey Kuznetsov, a co-founder of the Haqq Network, told Cointelegraph:
“Developing a Bitcoin environment that supports Sharia law is also difficult. This involves forming alliances with financial institutions, states, and other parties to ensure that the coin is broadly recognized and can be used per Islamic ideals.”
One concern from the perspective of Islamic financial scholars is the issue of crypto as a speculative investment — which is not permitted as it contains “gharar” — meaning “uncertainty, hazard or risk,” or “the sale of what is not present.”
Mohammed AlKaff AlHashmi, a co-founder of Islamic Coin, told Cointelegraph, “Sharia prohibits and treats as void transactions that rely on chance or speculation rather than an effort to produce a return.”
However, he added, “This principle does not prohibit commercial speculation in a business or trading transactions, as Sharia laws are smart and flexible enough to adopt tech changes in every era.”
According to AlHashmi, a cryptocurrency can comply with Islamic law if “developed with the right intentions, for example, actual utility,” rather than “purely for trading or speculation.”
As such, whether a coin can be considered halal or permissible comes down to a matter of design, according to Kuznetsov. “The use and architecture of a cryptocurrency are the determining factors in whether or not it complies with Sharia law,” he said.
He pointed to cryptocurrency use cases, including payment or value storage, which could be more easily considered Sharia-compliant.
Stablecoins, for example, can be seen as a form of asset-based financing, which is a principle of Islamic finance. Stablecoins like USD Coin (USDC) and Tether (USDT) are backed by real-world asset reserves. Some cryptocurrencies have even been created specifically for Islamic finance, such as OneGram, which is backed by gold reserves.
Kuznetsov concluded, “While there are challenges to creating and adopting Sharia-compliant coins, we can overcome these challenges with the proper mix of instruction, legislation and technical ingenuity.”
Expanding access to crypto
When it comes to the benefits of Sharia-compliant cryptocurrencies, there is potential for attracting additional users from countries where Islam is the predominant religion since it would reduce any concerns religious investors may have about cryptocurrency.
AlHashmi said, “Increasing Muslims’ access to financial services is one of the possible benefits of cryptocurrencies that comply with Sharia law. In addition, sharia-compliant cryptocurrencies may provide a mechanism for Muslims who have been denied access to conventional banking to conduct financial transactions in accordance with their religious views.” He continued to say:
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“More capital investment in Islamic banking might also be a favorable outcome. To the extent that cryptocurrencies can be made Sharia-compatible, they may be able to entice Muslims looking for investments that respect their religious principles. Because of this, there may be greater progress and expansion in the Islamic finance industry, which is good for the economy as a whole.”
As the financial world continues to evolve and new technologies emerge, it will be important for Muslim investors to carefully consider the compatibility of these new developments with the principles of Islamic finance, and ensure that they align with this system’s ethical and social goals.
