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Crypto Shariah Status

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Crypto Shariah Status

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Shariah Scholars Opinion


Digital Assets from Shariah Perspective

Background

Digital assets as regulated under the jurisdiction of Securities Commission Malaysia (SC) consist of digital currency1 and digital token (Digital Assets). The definition and scope of digital currency and digital token which were defined as securities are as prescribed under the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019.2 Several issues from Shariah perspective in relation to Digital Assets were presented to the Shariah Advisory Council (SAC) of SC.


Issue

Since there are Digital Assets which are categorised as capital market instruments, the SAC had discussed the following issues from Shariah perspective:

  • Whether Digital Assets can be recognised as mal (asset) from Shariah perspective;
  • Whether Digital Assets can be classified as currency or`urudh (goods); and
  • How to determine the Shariah status of a digital token

  • Resolution

    SAC in a series of its meetings had discussed issues in relation to Digital Assets from Shariah perspective. The discussions on Digital Assets in the SAC meetings are limited to Digital Assets that are regulated by the SC. The SAC had, at its 233rd meeting held on 29 June 2020 and its 234th meeting held on 20 July 2020, resolved the following:

    1. Digital Currency
    2. Digital currency is recognised as mal from Shariah perspective. The SAC had viewed digital currency from two scopes, as follows:

      1. Digital currency that is based on technology without any underlying
      2. Digital currency in this form is categorised as `urudh and it is not a currency from Shariah perspective. Such digital currency is not categorised as ribawi items. Therefore, the trading of such digital currency is not subject to the principle of bai` al-sarf (currency exchange).

      3. Digital currency that is backed by ribawi items
        1. Digital currency that is backed by gold, silver and currency
        2. If a digital currency is backed by ribawi items comprising gold, silver and currency, it is categorised as a currency from Shariah perspective. Hence, the trading of such digital currency is subject to the principle of bai` al-sarf.

        3. Digital currency that is backed by ribawi items other than gold, silver and currency
        4. If a digital currency is backed by ribawi items other than gold, silver and currency, it is categorised as amwal ribawiyyah (ribawi items). Therefore, the trading of such digital currency is subject to the Shariah requirements of ribawi items.

    3. Digital Token
    4. Digital token is recognised as mal under the category of `urudh from Shariah perspective. In determining the Shariah status of a digital token, the following matters must be fulfilled:

      1. The proceeds raised from the issuance of the digital token must be utilised for Shariah-compliant purposes;
      2. The rights and benefits attached to the digital token must be Shariah-compliant; and
      3. In the event that the utilisation of proceeds under item (i) and the entitlement of rights and benefits under item (ii) above are for mixed activities of Shariah compliant and Shariah non-compliant purposes, the existing SAC resolution on utilisation of sukuk proceeds and the business activities benchmark under the Shariah screening methodology for listed companies on Bursa Malaysia are applicable.

    The Grand Mufti of Egypt Shaykh Shawki Allam has declared that bitcoin and cryptocurrency is HARAM. The Shaykh cites these primary reasons in his statement, among others:

    1. Bitcoin is easily used for illegal activities; therefore, people use Bitcoin largely for illegal and non-Shariah compliant purposes to avoid and hide themselves from governments and relevant authorities
    2. Bitcoin is intangible and can only be used through internet
    3. Bitcoin allows for money laundering and fraud
    4. Bitcoin has no central authority that monitors its system, but rather it destroys the control of central banks and governments to monitor and control the monetary system


    Concluding Remarks

    Based on many Shariah scholar viewpoint, we conclude that the Cryptocurrency activity and transaction is permissible with the strict ruling. The Cryptocurrency need to be valuable as our society value the assets same as a tangible asset. Until now, Cryptocurrency has been very valuable as can be seen on the market price reflected on many global exchanges. Furthermore, some of the Cryptocurrency have been accepted for payment in exchange for any goods through a variety of merchants.


    Shariah Screening Methodology

    Cryptocurrency must adhere our rules based on shariah perspectives that have been concluded:

    1. Cryptocurrency screening:
      1. Issuance of the coin was not for prohibited purposes such as gambling, conventional loan, derivatives, gharar, scam or any prohibited element.

      2. Consensus Mechanism that used by the coin's blockchain to issued/produce new block should be in permissible process that free from riba' element.

        Example: Proof of work is permissible

      3. Have a clear explanation in their whitepaper about their coin issuance. Otherwise, the coin will marked as grey status.

    2. Permissible Coin & Token criteria
      1. Legitimacy: The cryptocurrency must be legit and genuine to avoid scam
      2. Project: The project must adhere to Shariah ruling
      3. Financials: For equity backed token, the project must comply with Financial ratio benchmark.
      4. Token: The utility of the token must adhere to Shariah ruling
      5. Staking Method: Staking or block producement are free from Riba, Gharar and Maisir element

    Shariah Status on Cryptocurrencies



    Disclaimer:
    Please note that the Shariah status stated below is not officially issued by any authorities or Islamic Financial Institutions. Thus, we take this initiative to help people invest and trade according to Shariah Guidelines. Do not worry, our team consists of those who are qualified in Shariah and Blockchain Technology and already experienced in Shariah Stock Screening for US Stocks. The research for this work is fully done by our team.