Classification of Cryptocurrencies as an Asset Class
Cryptocurrency or ‘crypto’ is a class of digital or virtual assets created using encryption algorithms which makes it nearly impossible to counterfeit. Crypto-assets come under many names and are used for various purposes. For example, Bitcoin was developed primarily to be a form of payment that isn't controlled or distributed by a central government. Ethereum lets developers build automated applications in what has become known as Decentralized Finance. While tether is a stablecoin whose value is pegged to the U.S. dollar. These are referred to as private crypto projects with privately issued digital currency.
In Islamic Jurisprudence, the jurists say: “a judgment can only be passed on something when a prior conceptualization of that thing has been embedded in a person”.
This enhances the understanding of the reality of that thing before developing a shariah ruling.
As an example, when fax machines were introduced and revolutionized the transmission of mail, Islamic scholars had to first understand the way transmission of the data was done using telephone lines before issuing a shariah ruling to reach a conclusion on the permissibility of the fax machine.
Crypto assets need expertise, insight and accurate knowledge. In order to determine if there are prohibited elements or features attached to crypto assets, an analysis of their function and characteristics is important, starting with a detailed look at their classification. Crypto assets can be divided into four broad categories: 1) coins and altcoins; 2) stablecoins; 3) tokens; and 4) non-fungible tokens.
Coins and altcoins
A coin represents a digital form of currency and is created using its own blockchain such as Bitcoin and Ethereum. Coins function as a medium of payment and store of value. A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. A medium of exchange is anything that is readily acceptable as payment. Something that people hold because they plan to swap it for something else in the immediate future, to acquire goods and/or services.
The criteria for determining something as maal is not clearly defined in the texts of Shariah.
Ibn Taymiyyah states that the Shariah has not defined any specific condition nor definition for currency and money, and has instead left it to the "Urf’"and understanding of the people.
Imam Ahmad also opined that currency and money can be identified by the agreement of the people.
The European Central Bank explains virtual currency in its published document as "a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat money or currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically". Examples of virtual currencies include cryptocurrencies such as Bitcoin, Litecoin, Stellar and so on, but also include non-cryptocurrencies like in-game credits for massive multiplayer games such as World of Warcraft; advertiser-issued credits; and various other digital stored value systems.
Therefore, some Islamic economists are of the opinion that each virtual currency must be defined according to a specific network or ecosystem it is used on, as to whether it is a medium of exchange or not.
Al-Zarkashi states that an asset in Shariah is that which has utility and benefit. Moreover, a recent ruling has been issued by one of the eminent scholars, a Member of the Saudi Council of Major Scholars, which states that it is permissible to deal and transact with digital currencies, such as Bitcoin, just like any fiat currencies as long as there is no apparent evidence that it is ‘Haram’.
Stablecoin
Stablecoins can be categorized as an asset since the value of these cryptocurrencies is derived from the value of an external asset. For example, USDC derives its value from the US dollar which is currently the case with fiat money all over the world. Gold GLC is tied to the value of gold. Commodities can also be used to settle a transaction.
In order to check whether it is Shariah-compliant or not, the underlying assets of each stablecoin need to be investigated.
Abojeib stated that to reach a ruling on some cryptocurrency, its software infrastructure must be reliable and secure. It is necessary to check on the background project of cryptocurrency and its financial data to ensure its avoidance of forbidden activities in Islam.
Tokens
Tokens represent assets or various commodities that can be distributed, such as physical or digital assets, shares, votes, membership, loyalty bonuses and other utilities. Tokens are created through the smart contract platform that is built on blockchain technology used by other digital currencies, such as ERC-20, that can only be developed using the Ethereum blockchain. Shariah principles and rulings regarding utility, benefits, or future services are relevant to such tokens. Those principles and rulings should be adhered to for Shariah-compliant tokens in order to differentiate them from ungenuine tokens that have little to no actual use case or value, but are instead created solely for speculative purposes. While there are certainly some cryptocurrencies that fall into this category, there are also many legitimate projects with innovative technology and real-world applications. The cryptocurrency market is still relatively new and rapidly evolving, so it is important to approach each project on its own merits and consider factors such as its underlying technology, use case, and overall market demand before making any judgments.
Non-Fungible Tokens
NFTs are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Their architecture makes them suitable to endorse property rights, support creative and artwork ownership, validate and record real estate transactions and more. "Tokenizing'' these real-world tangible assets and transactions makes buying, selling, and trading them more efficient while reducing the probability of fraud. The conversion of a physical asset into a digital one also streamlines processes and removes intermediaries. NFTs can only be considered Shariah-compliant if their underlying object, project and their features are free from prohibited elements.
These principles safeguard and protect consumers from deception and manipulation. Investing in cryptocurrencies and NTFs is suitable for investors with sound knowledge of these classes of assets because of the risks involved. It is recommended for people who have a surplus to their basic needs and access to this complex technology.
The majority of Muslim scholars agree that most of the injunctions of the Shariah were revealed with certain objectives and reasons Maqasid Shariah, also referred to as “Al Darurat Al Khamsah” is to establish that which is beneficial and prevent that which is harmful.
One of these five objectives is the protection of wealth.
Acquiring property is a basic human ambition and right. Islam has ordered that no one should transgress and acquire the property of others without legitimate reasons and without a proper contract.
فَقَالَ تَعَالَى: "وَلاَ تَأْكُلُواْ أَمْوَالَكُم بَيْنَكُم بِالْبَاطِلِ وَتُدْلُواْ بِهَا إِلَى الْحُكَّامِ لِتَأْكُلُواْ فَرِيقًا مِّنْ أَمْوَالِ النَّاسِ بِالإِثْمِ وَأَنتُمْ تَعْلَمُون"
Allah Says (what means):: “And eat up not one another’s property unjustly (in any illegal way e.g. stealing, robbing, deceiving, etc.), nor give bribery to the rulers (judges before presenting your cases) that you may knowingly eat up a part of the property of others sinfully” [Quran 2: 188].
There are several ways of acquiring the property of others illegitimately. Among these are taking usury "Riba", cheating in transactions, breaking the trust in matters related to property, stealing the property of others and other similar means. The Shariah prohibits all these means.
During the first phase of Takaturn, we plan on using USDC and ETH.
The Ethereum Network allows anyone to deploy permanent and immutable decentralized applications onto it, with which users can interact. These are commonly referred to as Decentralized Finance (DeFi) protocols. ETH is the utility token that facilitates transactions on the Ethereum network. All of the programs and services linked with the Ethereum network require computing power, equipment, internet connections, and maintenance. ETH is the payment users give to network facilitators and maintainers for executing their requested operations on the network. The Ethereum Network is powered by the Ethereum Virtual Machine (EVM) and uses the Proof of Stake consensus mechanism (PoS), to create new blocks, as opposed to the PoW consensus mechanism, used by the Bitcoin Network.
Metaphorically speaking, it is more accurate to refer to ETH as the "gas" fee that powers the network. Gas is the term the Ethereum community uses to refer to the exchange of ETH for the work done to verify transactions and secure the blockchain.
Some Islamic economists believe that there is a possibility to consider something to be a medium of exchange and a means of payment within a specific network only.
Stablecoins can be categorized as assets, since the value of these cryptocurrencies is derived from the value of an external asset.
USD Coin (USDC) is a fully-reserved stablecoin running on many of the world’s leading blockchains. It is always redeemable 1:1 for U.S. dollars, because for every 1 USDC in circulation there is $1 USD held in reserve.
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