CRYPTOCURRENCIES: A LEGAL CURRENCY OR LAWFUL ASSETS?

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Author: ALKHAZUR TAZBAEV

It would be like looking for a needle in a haystack to look for a person who, at least, hasn’t heard about cryptocurrencies or read and saw news about them. As cryptocurrencies belong to the financial sphere, which is a vital part of human beings’ welfare in addition to health and security, they are exponentially gaining attention and conquering space for themselves. Hence, despite being relatively new invention, cryptocurrencies became the new reality of the contemporary world. (As I am writing this essay, I just got the news that Salvador – a country in Latin America – became the very first state in the world to accept Bitcoin as a legal means of payment in addition to fiat money).

Although the very predecessor of cryptocurrencies, that is Bitcoin, was considered as a new and disruptive means of exchange, people lately are inclined to deem cryptocurrencies as investment opportunities. They even grant them a status of digital gold, to be an alternative to the well-known chemical element. As a result, the question of Sharia compliancy of cryptocurrencies arose from the beginning of their early life. Mainly, there are two different approaches among Sharia scholars regarding the cryptocurrencies appraisal. Some contemporary Sharia scholars state that cryptocurrencies should be prohibited from the Sharia perspective. In addition to legal and regulatory challenges, cryptocurrencies represent a highly volatile asset, this volatility is caused by speculation.. Moreover, some researchers refer to the issues of illegal use of cryptocurrencies, like terrorism funding and violating of anti-money laundering acts and regulations. All of these disadvantages of cryptocurrencies are sufficient, from this perspective, to not give cryptocurrencies a status of Mal in Sharia. (Mal means property, asset or wealth, and once an item receives the status of Mal, it becomes a lawful item). Consequently, as long as cryptocurrencies are not Mal, that means they are not lawful items that can be owned, stored or sold and bought.

On the other hand, a significant portion of Sharia scholars disagree with this conclusion. Referring to the legal maxim of Sharia that states: The basic rule for all things is that they are halal (permissible), except that which has been explicitly prohibited in the authentic texts, this group of scholars argues that cryptocurrencies generally have the status of Mal since people have an inclination to use them and derive benefit from them. Furthermore, cryptocurrencies can potentially be a type of legal currency, especially those which have been designed to serve as a medium of exchange. This statement is based on the fact that cryptocurrencies originally were established as a peer-to-peer payment system and used as such from and to the outset. When it comes to the risks and regulatory issues and other related intricacies, all of them are subject to finding a solution. Risks can be mitigated, like it’s done in other similar financial instruments. Regulatory issues can be solved by enacting laws and incorporating an effective policy towards the crypto industry in general and cryptocurrencies partially, and so on. Thus, the Sharia status of cryptocurrencies may stay on its general permissibility.

Surprisingly and remarkably, a third compromising way came into view through the Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC). In a resolution titled ‘Digital Assets from Shariah Perspective’, the Sharia Advisory Council recognized Digital Currency generally as Mal. After that, it was split into two categories:

  • Digital currency which is merely based on technology without any underlying. Although this kind of digital currency is recognized as Mal (a lawful asset), however, it’s not considered as a currency from Shariah perspective. Instead, it is categorized as urudh (goods), meaning that this type of digital assets can be traded without considering the Sharia requirements of Ribawi items. This implies that, for instance, Bitcoin, Etherium and all alike cryptocurrencies can be traded not on spot and in different amounts internally.
  • Digital currency which is backed by Ribawi items, such as gold, silver and fiat currency. This type of currencies are considered as a legal currency from Shariah perspective. This includes, among others, CDBC – a universal and sovereign Central Bank-issued digital currency, similar to Cash/Fiat.

Having said that, it’s good to mention that the resolution does not include digital currencies which are outside the jurisdiction of the Securities Commission Malaysia.

Personally speaking, despite being very impressed by the pro-active and top-notch characteristics of SAC SC Malaysia and its resolution on digital assets, I am still sitting on the fence regarding the question of whether Bitcoin, Etherium and similar cryptocurrencies are considered as a currency or as assets and goods.

References:

Blockchain, Fintech and Islamic Finance, Hazik Mohamed and Hassnian Ali

Beyond Islamic Finance, Hazik Mohamed

Introduction to Islamic Fintech, Musfti Faraz Adam

Islamic Legal Maxims & Their Application in Islamic Finance, ISRA

Pictures: Unsplash

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