Cryptocurrencies are a reality that we neither can ignore nor avoid. This short article will not discuss the functionality of digital currency but provides a personal view from the Shari’a perspectives. To start with, few people understand the role of Shari’a in Islamic finance. In general, the Shari’a as a system of living has been revealed primarily to protect human well-being (maslahah) and this being one of the general objectives that it plans to realize, the Shari’a, therefore, aims to facilitate the realization of maslahah and the removal of hardship.
For instance, in financial transactions, it is realized by guaranteeing freedom of contract within an atmosphere of fairness, equity, justice and high morality. In other words, the Shari’a is designed at ensuring equal and fair business transactions and protects parties against exploitation, fraud, misrepresentation, explicit or implicit harm and injustice to anyone in the contract. The Quran (5:1), God says: “O ye who believe! Fulfil your undertakings.” Hence, the Shari’a regulates all aspect of life (social) and transactions (economic). Notwithstanding, in any transaction, money is the main consideration.
The history of money began well before the advent of Islam and Islamic civilization. Gold, silver and copper coinages were commonly used in pre-Islamic Arabia. Money while being widely discussed in Islam is a determining factor to mitigate whether a transaction is void, lawful or unlawful (Riba). Riba is also interpreted when money produces money, work is hindered, unemployment spreads, prices go up, money becomes monopolized by rich people, and the gap between the poor and the rich becomes wider.
Some examples of Money in the Quran are: God will ask man about money; how he earned it, and how he spent it (Quran 3:186) and God has made it clear that money is the essence of life and that people’s lives depend thereon [Quran 4:5]. This means that a person lives by it and if he loses it he will be lost. As life depends on it one should preserve it in order to fulfil one’s needs. Hence, preservation of wealth is strongly recommended in Islam (a topic which requires full research).
Having said that, Islam recognizes the importance of money and prefers the usage of money over barter system although it is permissible that capital can be contributed in the form of fungible assets. The characteristics of money therefore according to the Shari’a (unanimously agreed upon by majority of the Scholars) shall contain the following conditions which are derived from the “ruling of currency trading”.
- Money is a medium of exchange
- Money has a store of value, and
- Money is a unit of measurement
Similarly, money has no intrinsic value. Most currencies are issued by Central Banks and thus become legal tender. However, legal tender is not a Shari’a requirement on the basis that a currency is generally accepted by the public, fulfils the role of money irrespective of whether it is legal tender or not to acquire goods and services. This argument is based on the fact that there were many forms of unregulated currencies in the past and during the time of the Prophet Muhammad (pbuh). In the present day, it is argued by some scholars that the governments (central bankers) have a role to play in managing the demand and supply of money, including being the institution to endorse a currency as legal tender.
“LEGAL TENDER IS NOT A SHARI’A REQUIREMENT ON THE BASIS THAT A CURRENCY IS GENERALLY ACCEPTED BY THE PUBLIC, FULFILS THE ROLE OF MONEY IRRESPECTIVE OF WHETHER IT IS LEGAL TENDER OR NOT TO ACQUIRE GOODS AND SERVICES.”
Some have also claimed that crypto-currencies are not permissible due its volatility.
The issue of volatility is common to any currency and it is a human behaviour. The Shari’a does not interfere in demand and supply.
In the case of crypto-currencies, the sum is digitally transferred. The motivation of crypto-currency is about the shift from intermediaries and regulated currencies. Being digital in nature, it has two significant characteristics that our existing currency does not carry. First, crypto-currencies are borderless and second they are costless in the long run. It is clear that crypto-currencies issued by other than central bankers do not have seigniorage value – the cost of printing them and owning it are irrelevant in digital currency.
On top of the above, “Blockchain” is incomplete without digital currencies/cryptocurrencies. Blockchain has become a reality and a powerful digital platform that can be quickly and easily accessed and shared by many. It has various levels of transparency depending on application, immutable (you can only add to it – you cannot alter history) and cryptographically secured. Meaning to say that everything that we do in this world will be block-chained for the hereafter. The Quran 99:7-8 mentioned that “Then shall anyone who has done an atom’s weight of good, see it and anyone who has done an atom’s weight of evil, shall see it”. This is an example of the Quran does not only contain stories of the past, but speaks also about the future.
”THE MOTIVATION OF CRYPTO- CURRENCY IS ABOUT THE SHIFT FROM INTERMEDI- ARIES AND REGULATED CURRENCIES. BEING DIGITAL IN NATURE, IT HAS TWO SIGNIFICANT CHARACTERIS- TICS THAT OUR EXISTING CURRENCY DOES NOT CARRY.”
Finally, the future of crypto-currencies depends on regulators. Once regulatory standards are refined and adopted, crypto-currencies will play an essential part in our life. This will be the end of counterfeit notes in the market and transparency (enemy No.1) in the corporate world will be more prevalent.
In the Islamic finance arena, the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) has issued the first Shari’a standard on “Trading in Currencies” and recently the Shari’a Standard on Gold. Both standards could consider having relevant information on the Shari’a rulings relating to digital currencies. Any currency which is acceptable to any community, is a currency. It may be subject to the regulatory requirement but due diligence exercise of the mining and the operations are pre-requisite for Shari’a approval.
