Cryptocurrency lending has become increasingly prevalent in today's digital financial landscape, transforming how individuals and institutions interact with their digital assets. Platforms like Aave, Compound, and Celsius Network have emerged as popular venues for crypto lending, allowing users to earn interest on their holdings or borrow against their crypto collateral. These services have attracted millions of users worldwide, demonstrating the growing appetite for decentralized financial solutions. However, the rapid growth of crypto lending has also raised concerns, especially among Muslim investors. Questions arise regarding the compliance of these practices with Islamic financial principles. Based on recent Shariah judgements, there are important considerations for Muslims looking to participate in crypto lending while adhering to Islamic financial principles.
How does crypto lending work?
Cryptocurrency lending is a financial service within the decentralized finance (DeFi) ecosystem that allows individuals to lend their cryptocurrency holdings to borrowers in exchange for interest payments. This process can be facilitated through both centralized and decentralized platforms, each with its own set of mechanics and benefits.
Why do people lend crypto?
- Passive Income: Lenders can earn interest on their idle cryptocurrency holdings, often at higher rates than traditional savings accounts.
- Liquidity: Borrowers can access liquidity without selling their cryptocurrency, allowing them to retain potential future gains from their assets.
- No Credit Checks: Many crypto loans do not require credit checks, making them accessible to a broader range of borrowers.
Permissibility of Crypto Lending
Cryptocurrency lending is generally permissible from a Shariah perspective, provided certain conditions are met. Most cryptocurrencies are viewed as 'urudh (commodities) rather than traditional currencies in Islamic jurisprudence. As commodities, cryptocurrencies are generally not considered ribawi items, which are subject to strict rules regarding usury (riba). Due to this classification, cryptocurrencies typically do not need to comply with the principles of Bay' al-Sarf.
The key factor is the nature of the tokens involved in the lending transaction.
- Tokens Not Backed by Ribawi Items
When the cryptocurrencies being lent are not backed by ribawi items (interest-bearing assets) or non-Shariah compliant tokens, the lending activity does not raise significant Shariah concerns. In this case, the transaction does not need to align with the bay al-sarf principle, which governs the exchange of currencies in Islamic finance. This view is in line with the Shariah Resolution by the Shariah Advisory Council of the Securities Commission Malaysia (SAC-SC), which states that digital assets and digital tokens that are not backed by ribawi items do not need to comply with the principles of bay' al-sarf.
- Stablecoins and Tokens Backed by Ribawi Items
However, if the lending involves stablecoins or tokens backed by ribawi items, users must ensure it comply with the bay' al-sarf rulings. This principle requires that exchanges of the same type of currency must be of equal amount and handed over immediately.
To fully understand the implications of bay' al-sarf in crypto lending, it's important to delve into its key components:
i) Taqabudh (Immediate Transfer): This rule requires that there should be no delay in the transfer of the assets themselves. In the context of crypto lending, this means that the transfer of tokens should occur immediately upon agreement.
ii) Hulul (No Stipulation of Delay): There should be no condition, either verbal or written, that allows for a delay in the transfer of assets. In crypto lending, this would mean that the terms of the loan cannot include any clauses that delay the transfer of the tokens.
iii) Tamathul (Equality in Exchange): For assets of the same type, the exchange must be of equal value. In crypto lending, if lending the same type of stablecoin or token, the amount lent must equal the amount to be repaid (without any increase).
Failure to comply with these principles can lead to different forms of riba (usury):
- Non-compliance with Taqabudh results in riba al-yadd (hand-to-hand usury)
- Non-compliance with Hulul leads to riba an-nasi'ah (usury of delay)
- Non-compliance with Tamathul for same-type assets results in riba al-fadhl (usury of excess)
Critically, it must be emphasized that by nature, there are currently no stablecoin lending practices in the market that fully comply with Shariah principles.
- Caution with Non-Shariah Compliant Tokens
It's important to note that users are advised against engaging in buying, selling, or lending non Shariah compliant tokens. This guidance helps ensure that Muslims participate only in cryptocurrency activities that align with Islamic principles.
The Growing Halal Crypto Ecosystem
Cryptocurrency lending can be permissible for Muslims, but requires careful adherence to Shariah principles. The permissibility largely depends on the nature of the tokens involved. Lending cryptocurrencies not backed by ribawi items is generally acceptable, while transactions involving stablecoins or tokens backed by interest-bearing assets must comply with bay' al-sarf rulings. Muslims are advised to avoid non-Shariah compliant tokens altogether. As the crypto landscape evolves, it's crucial for participants to stay informed about evolving guidelines in this rapidly changing field.