Cryptocurrency: An Holistic and Contemporary Syariah Analysis (Part V)

This is the last installation in the Syariah Mind series. You can read the previous installations here:

Part I, Part II, Part III, Part IV.

________

Translated from the article:     Matawang Kripto: Satu Analisa Syariah Kontemporari dan Holistik (Bahagian V)  

We have looked at various issues and perspective on digital currencies and economy; both from the historical point of view as well as the more modern perspective. Some of the issues and problems discussed are still relevant to this day, and most likely will remain so in the future because people’s life are dynamic. The revelation texts are rarely given in detail and are provided in an elastic and cognitive form that is high-level and very subtle. These are intended, in my humble opinion, so that these texts will remain relevant throughout time and in any situation within the society across the world, regardless of the socioeconomic level and technology.

Before I summarize the cryptocurrency issue in the perspective of Syariah (as well as economic and modern finance management), please allow me to re-examine all the issues that are thought to be relevant in the context of cryptocurrency. The word ‘currency’ that I use here does not mean that I am of the opinion that money in the digital form represented by cryptocurrency in this context functions, or should function as a sovereign currency of any country and given the status of legal tender.

I use the term loosely, to align with what is currently used in the ecosystem, namely ‘digital currency’. As a matter of fact, I have a different opinion regarding the matter, which I will elucidate in a scholarly manner at the end of this discussion.

Will the issues arising from the perspective of Syariah or best practices in this discussion impact on the credibility of digital currencies? I will bring six (6) main issue into discussion, and we will look through this issues briefly so as not to drag this discussion longer than necessary.

First Issue: Legal tender status

The first issue frequently talked about by the community as well as ulama and finance experts is the fact that digital currencies or cryptocurrencies, are not endorsed by the government or in other words, are not legal tender that ensures that a country has fiduciary obligation to accept the form of money from its owner for whatever purpose including as payment or exchange.

Through the concept of legal tender, the country becomes the last party in the value chain of every transaction in order to accept the money given by anyone (except those who are proven to have procured the money from an illegal source).

Of course, most digital currencies are not concerned with legal status as they were created to provide a way of transacting that is free from the control of any authority. However, this does not mean that digital currencies could not be regulated by authorities, as the government is still responsible in ensuring the continuity of any form of financial transaction that can be considered a significant risk to the nation. The appearance of an increasing number of stablecoins, or digital currencies backed by a sovereign currency of a country, signifies that the technology behind digital currencies – anchored to cryptography and blockchain – can be adopted by any country if they wanted to.

On the other hand, in an Syariah analysis which is divorced from current law, there is no Syariah principles that mandates any currency used as a medium of exchange or al-thaman, must have endorsement from a country in terms of validation or Syariah recommendation. Any society can utilize whatever tools or instruments, including a digital code, as a medium of exchange among them. Therefore, the tool, instrument or digital code, can become a substitute for a sovereign currency in exchage for goods or services.

This scenario is already occurring within the society, an example being points accumulated in loyalty or airline rewards programs, that can be be used to buy other goods and services. In some countries, top-up or airtime or even data allocation in mobile phones can be used to redeem specific goods and services.

Despite that, the points or other instruments that can be used in real-life transactions are not considered a sovereign currency nor are they legal tender. They are only valid and used in the community within a certain context, to an extent. Furthermore, those who provide this kind of services have never suggested that their system can function as a sovereign currency.

Is this not similar to the features and function of cryptocurrencies in various dimensions?

Second Issue: The need for intrinsic value

The second issue is the understanding of a few ulama that currency in Islam requires an intrinsic value to be acknowledged as a legal currency in terms of syara’. This is a great logical argument that attracts a lot of people. Of course, this is expected if we were arguing about making gold or silver as the underpinning value of a sovereign currency.

As we very well know, gold and silver in their natural state possess value that follows their physical form, regardless of whatever happens to the world. When notes were first printed with gold and silver as the underpinned asset (such as in the early Islamic history that used gold and silver pieces of the Roman empire until they were converted in the early years of the Umayyah empire to dinar dan dirham), automatically they were assumed to have always had the underpinning value.

If we look from this perspective, there is no question that dinar and dirham (in the past) have intrinsic and underpinning value, not because they are currencies but due their unique features. However, in a Syariah discussion regarding the fiqh of currency whether in the past or contemporary, there is no mention of the requirements of a specific currency that abides with the Syariah law to be backed by gold or silver or other assets.

I was anticipating looking at various revelations text or even the opinion of ulama’ as a collective regarding the requirements put upon currencies. Sadly, there is none. Therefore, contemporary ulama’ as well as the whole majamik fiqhiyyah (the international fiqh research agency) do not have any objection against shillings or notes that are free from any form of gold or silver. In fact, they have impose a mandatory zakat and forbid riba’ on currencies such as these.

How does Syariah assess currencies to be abiding with the Syariah law? Any currency accepted and acknowledged by a community or a country or at the international level is a currency that abides with the Syariah law. It is assessed based on‘uruf which means the current habits and acceptance. ‘Uruf is a technique of forming a fiqh jurisdiction in Islam. The methodology and technique is widely used within current muamalah where there is no specific revelations text. For example, dividend payment based on the book value of the share and not market value as well as the issue of warrantees on specific products.

In cases such as these, Syariah minds must function as a whole, more than the public mind or personal biased minds. Every fiqh perspective must have its own epistemology or Syariah justification that is coherent and systematic.

Third Issue: The market price of cryptocurrency

The third issue is related to the cryptocurrency price phenomenon in the markets since its conception in 2009, particularly within the last few years. Due to the extreme volatility of cryptocurrency prices (based on its value denominated in USD), it is considered as gharar or uncertainties that can cancel a good or transaction in Islam. This will in turn affect the owner or seller negatively. Syariah is present to eliminate the uncertainties and negative impact within societies. Interestingly, this argument is brought forward by Islam scholars whom are respected across the world.

It is certainly true that the volatility of the price of goods, not to mention currency is something that is concerning. There are some sovereign currencies that have already lost their values, or at least fallen drastically. But this is all sunnatullah or things that may occur (as long as there is no interference from human through corruption such as what happened during the South East Asian financial crisis circa 1997). The price of something relates directly to the supply and demand (under the condition that there is no evil intention). This is outside the control of Syariah (as well as human). Syariah does not burden us in order to ensure the stability of the price of goods, including the price of gold and silver and oil.

What are the thoughts of Syariah minds on this matter? The price of a good or currency must be clear only during akad or contract. This is a requirement by Syara’ in order to eliminate the element of gharar or uncertainties. This is the accord of the Syariah minds since the past.

The difference in price of a good or currency after the contract has been made is not an aspect of Syariah that must be abided. It is a risk as well as opportunity to profit that is borne by both contracted parties. This phenomenon is known as khatar, which is the financial risk after transaction. It occurs in all contracts that abide by the Syariah law such as murabahah, mudarabah, stock investment and even purchase of gold and foreign currency exchange. This is a natural characteristic of businesses.

If this is forbidden or labeled gharar (by some contemporary ulama’), then not only is the purchase of cryptocurrency considered haram, but all goods and services that have very volatile prices are haram. Even if this is a valid Syariah argument (for posterity sake), how do we measure the volatility of prices in order to change the law from harus to haram? Do we refer to a difference of 50% from the original price or more, or less? It will be difficult to justify using Syariah.

In the study of Syariah law since 1400 years ago, in all the contracts that have been validated, the risk of profit or loss is not something that can decide whether a contract is haram or halal as long as there is no fraud (khilabah) or cheating. It is curious why some ulama’ and Islamic scholars are still confused between gharar and khatar in their articulation.

Fourth Issue: Cryptocurrency cannot be regulated

The fourth issue is a persisting perception that digital currencies cannot be regulated well. Consequently, it will open the doors to illegal financial activities, such as not abiding with the ‘know-your-customer’ policy, money laundering as well as funding terrorist organizations. Once more, the public believes that this is true and will endanger the financial ecosystem.

If the matter is true and certain, I would have of course left my research on cryptocurrencies as this will collapse everything we have built so far. We have to maintain the integrity and transparency of our financial transactions. We cannot tolerate nor can we compromise this principle. In fact, cryptocurrencies will be considered haram in this scenario.

However, is this perception true? It might be true if digital currency users did not want their system and operations related to the regulatory system of any country. Good news for everyone. Cryptocurrencies and its open and distributed ecosystem is more transparent than fiat currencies, where every transaction can be traced accurately and openly.

Any transfer, exchange and transaction related to digital currencies are done openly through a collective verification and validation system. Here, regulators can take part in the monitoring process as every transaction has to go through the internet.

This process does not necessarily happen in the transactions of fiat currencies, or if it does, executed very badly. Money fraud is still occurring in a wide scale within society nowadays, due to the fact that fiat money (illegally sourced) can be transacted outside of the purview of banking and financial systems. There are many ways to skin a dead cat, they say.

One good news is that this issue can be resolved if digital currencies are regulated in a country. It would be remiss not to mention that the method of using digital currencies as payment is closer to the concept of maqasid al-Syariah in fighting bribery and financial crimes in this modern times, compared to fiat money. It’s quite odd that fiat money is accepted as abiding with the Syariah law, even though it has been proven time and time again that most, if not all bribery or money laundering cases happened through the use of fiat money.

I would like to emphasise that in no way am I stating that when bribery or money laundering using a currency – be it fiat or digital or any other form – occurs, that currency is considered haram. It has no relation whatsoever with the legality of a currency. Bribery can also occur with currency backed by gold and silver.

This is all related to the criminal minds and evil intentions of humans. The sins and Syara’ law are not placed on the form of the currency, but rather the actions of humans. I raised this issue and argument such as these because I am disappointed that some ulama’ have used law infraction as justification for forbidding digital currencies, when the same infractions have been occurring in the usage of fiat money, and in fact, also occurred in the usage of dinar and dirham in the past.

Fifth Issue: Cryptocurrency fraud schemes

The fifth and sixth issue are closely related. There are Syariah minds that have strongly opined that digital currencies are feared to have open doors to fraud schemes (as this is a new area of study and a lot of people still don’t understand it), and consequently, more people are affected negatively from scams in digital currencies. Negative consequences are forbidden by Syariah based on the principles of sadd al-dharia’ah or ma’al al-tatbiq, which are the rulings of a matter or action must be looked at based on the final outcome although it may be that the form and characteristic of a contract is considered harus and free from Syariah’s prohibition. This is a Syariah argument that is relevant anywhere and throughout time to protect the public.

It cannot be denied that when a contract is not clearly understood, it is possible that many will be involved in scams that grow like mushrooms after the rain. Interestingly, this phenomenon occurs widely in other transactions such as stocks, gold, real estate as well as foreign exchange. These scams are still happening within the society, by those that are taking advantage of other people’s lack of understanding. The country’s laws must be more strict and exacting to punish criminals that prey on other people.

Despite scams occurring in this sector, Syariah bodies or agencies should not make a ruling that transactions related to gold, stocks, or foreign currency exchange are forbidden as a whole due to the fear of opening doors for scams. What happened in the past when similar cases occurred is differentiating between law-abiding transactions and those that are not. When a transaction does not abide with a country’s law, for example, there is no need for a Syariah argument as Syariah ruling is only necessary for matters or jurisdiction that are allowed by the country’s law.

In the issue of cryptocurrency, particularly matters that are thought to bring negative consequences based on the principle of sadd al-dhari’ah or closing the doors to harm, it would be great to focus on ways to prevent scams and other criminal activities related to cryptocurrency from happening. This is the better approach, as opposed to giving a Syariah ruling based entirely on the fear of being negatively affected by an event.

The fear of negative consequences are only assumptions that are neither relevant nor applicable only to cryptocurrencies, as shown in many examples of how crypto exchanges are hacked, and cannot be used as justification for forbidding the usage of digital currencies.

Though it might be true that exchanges are frequently hacked, however until now none of the reputable cryptocurrencies fitted with the most secure technology have been hacked. The use of exchanges as example in the argument of sadd al-dhariah is not accurate. The methodology of Syariah law in relation to sadd al-dhariah is that harmful activities should be prevented when the outcome is clear and not baseless assumptions.

Furthermore, in the Syariah law, there is a methodology called fath al-dhariah which means opening the door to good or in this context, doing something new that can bring benefits. Why can’t we consider digital currencies as the mechanism that can stop financial crimes as well as reduce the cost of financial management in many way and situations?

Summary

As a summary, I would like to state that digital currencies – with high technology features such as cryptography and blockchain – are a new form of financial transaction exchange for goods and services. The bigger question here is; whether it is a form of money that is considered as currency within the Syariah law (ahkam al-sarf) or a commodity or a medium of exchange to an extent.

Personally, I am of the opinion that each digital currency (excluding stablecoin that is also knows as digital fiat and digital currency backed by central banks) is not currency (al-naqd). It does not fulfil the necessary conditions to become a new currency in the modern world today.

If it’s not a currency, what is the true nature of the instrument known as digital currency? In this context, I will conclude that based on my personal opinion, it is a medium of exchange that is accepted and endorsed by certain groups of societies. However, its characteristic as a medium of exchange does not make it a currency that can store value or a unit of measurement. In technical terms, it is a medium of exchange but not amounting to money or currency.

For now, there are many other instruments – besides digital currencies – that are used as a medium of exchange for goods and services but they are not in the form of currency or money. This is a fiqh manifestation that is dynamic. A medium of exchange can be in the form of points, services, tokens, codes (like digital currencies) and many other possibilities that are accepted by society as a base to purchase goods and services.

This is my personal opinion at this time and place. It is possible that in the future, with full acceptance from countries and agencies around the world, certain digital currencies can be used as a proper currency and complementary to printed notes. When this happens, digital currencies will cease to become a commodity that can be used as a medium of exchange. At that point, it will become an official national currency that fulfils the conditions required.

Datuk Dr Mohd Daud Bakar

Note: The views and opinions within this article is personal to the writer and does not reflect any organisations that the writer is associated with.