CRYPTOCURRENCY: AN ISLAMIC LAW PERSPECTIVE – PROF. ABDULMAJEED ALARO
ACCORDING to Prof Alaro, he said cryptocurrency has been a general issue to the world economy. Some countries accepted it as a legal means of exchange while others rejected it.
For example, Nigerian government made public notice that no Nigeria bank should accept crypto currency as a means of exchange or transaction while the United State has been using it as a medium of exchange.
There is confusion even at legal and shariah level for example Egypt, Turkey and Palestine declare it as haram while some Islamic countries declare it halal and also, planning to implement it into their law.
Secondly, about the size of crypto currencies in the market which is currently the most famous in the world now and also is capital rate is now one trillion dollar and that is very huge amount of money which may also affect Islam also crypto currencies in Nigeria is very important thing we must look upon because Nigeria is the largest economic trade in Africa and ranking number third among the country who are into trading crypto currency after United State and Russian
After a brief summary of the major reason why these topics needed serious attentions, he started is lecture with
Evolution and Revolution of money. He said after a period of change by barter the first means of exchange is commodity money (Gold and Slivers) for means of exchange, during the period of prophet Muhammed commodity money was used as a means of exchange, it as intrinsic value. Later on, humanity moved away from commodity money to Fiat money (coin and paper) which has no intrinsic values and still in existence up to today.
In 2008 a mathematical based money was introduced that is virtual currencies. crypto currency was in class of what is popularly known as “VIRTUAL CURRENCIES” An offshoot of fintech and manifestation of smart contract.
He said “in 2014 the European Banking Authority (EBA) defined virtual currency as a digital representation of values that is neither issued by a central bank or a central or a public authority, nor necessity attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or trade electronically.
Also, in 2016 the European Control Bank (ECB) while presenting its opinion on a proposal for an EU directive on the prevention on the use of the financial system for money laundering or terrorist financing (Directive2009/101/EC) Declare that given virtual currencies are not in fact a currency, it would be more accurate to regard them as a means of exchange rather as a means of payment.
The ECB further assert that
- Virtual currencies do not qualify as currencies from a union perspective, relying on the treaties and the provisions of Council Regulation (EC)No 974/98, It impractically stated the EU is the single currency of the unions economic and monetary unions.
- In other words, unlike fiat money virtual currencies are not legal tender, but are nevertheless accepted by members within a virtual commodity as a medium of exchange and as a unit of account.
He said ESB explained crypto currency in its own political and legal implication, for you to call crypto currency a currency you to change the law.
He further explained crypto currency as digital or virtual currencies that are encrypted (secured) using cryptography. They are created and stored electronically, it is a means of encoding and decoding. There are more than hundred (100) crypto in the world today in which people trade on but bitcoin is the most popular, well known and highly traded on by people. and it was the first to be created and has the highest values among them. Bitcoin represents the first decentralized currency and in fact the king of crypto currencies. It’s powered by a distributed ledger that records and validates all transactions chronologically called the BLOCK CHAIN.
His presentation focused principally on Bitcoin because it is the first and most valued and most traded among crypto currency in the world (other cryptos are not significantly different from Bitcoin in protocol and operations.
Features of crypto currency: They are digital fully electronic, they are private not issued by government or constituted authority, there is no centralized or regulating authority unit issued to decentralised groups users, is decentralised in nature, it has no intrinsic value, there is no physical existence also they are anonymity in crypto currency because you can buy and sell in billions without anyone knowing who you are.
Types of crypto currency: Alternative cryptocurrency (altcoin) and token
Alticion refers to coins that are alternative to bitcoin e.g, namecoin, peercoin, Litecoin, dogecoin and auroracoin they are all virant of bitcoin code. There are other bitcoins that aren’t derived from bitcoin open-source protocol; rather they have created their own block chain and protocol that support their native currency. eg etherium, ripple, bitshares, waves, OMN, NEO and counterparty
Token it a mere representative of a particular asset or utility that usually resides on top of another block chain. Token can represent basically any asset that are fungible and tradeable from commodities to the loyal points to even other crypto currencies or fiat currency, token is created and distributed to the public through initial coin offering (I.C.O) the majority of coin in existence is (close to 80%) are token, since they are much easier to create.
Historical development of crypto currency: the creation of bitcoin ushered in the birth of new currency known as cryptocurrency, bitcoin was invented in (2008) by unknown person or group of people using the name SATOSHI NAKAMOTO its implementation was released as an open-source software in (2009), the first bitcoin was successfully transferred from NAKAMOTO to HAL FNNEY in 2009. The first known commercial transaction using bitcoin occurred in 2010 when a programmer LAZSLO HANYECY bought two papa john’s pizzas for 10,000 bitcoins approximately 10 dollars in 2010. NAKAMOTO real name, identity and nationality remain unknown up till today. No country in the world, even with the highest levels technologies on forensic they have not able to trace his identity although he claimed to be a Japanese while he used a latin sign to design bitcoin logo, by he got people confused about his real identity, since his disappearance in December 2010 nobody held or asked of him
KEY CONCEPT: BLOCK CHAIN, PEER TO PEER, MINING, PROOF OF STAKE, DOUBLE SPENDING.
BLOCK CHAIN: A digital ledger of transactions distributed and duplicated across the entire network of computer systems. Information on transaction records on the block chain are recorded in a way that makes it difficult or impossible to alter, reverse or hack. CRYPTO CURRENCY relies 100% on a particular transaction which is (Block Chain).
Peer to Peer (p2p): no central server, every client can be a server, no intermediary or direct transaction.
Mining: Bitcoins are created as a reward for a process known as MINING on first performed, first rewarded basis. The currency is created in cyberspace when miners use the power of their computers (nodes) to solve complex algorithms that serve as verification for bitcoin transactions.
The computer used when solving the algorithm is not just an ordinary one and also the electricity power involved in solving mathematics is enough to supply thirty-one (31) houses for 24 hours in the United State. For a coin to be created the task is not easy at all, for every transition is counted there must be a same ledger authenticating and validating, the first person to solve the algorithm correctly a new coin will be given to such person.
Proof of Work (POW) it’s the rewards the miner received for solving complex equations and creating new blocks and Proof of Stake (POS) that is the next block is created based on how much the miner has staked. Both are consensus mechanisms but while miners get rewarded with a new coin in (POW) what contributors to the (POS) system get is simply the transaction fee. Hence, they are called “FORGERS” POS is faster and consume less electricity.
DOUBLE SPENDING: many years double spending has become a major problem because a person can trade using one single coin for different transactions. It’s not easy in fiat to use a single coin for different transactions but in digital it is very possible until Nakomoto brings solutions to double spending with block chain technologies we can now only spend one coin at once.
SHARIAH ISSUES IN CRYPTOCURRENCIES
During his lectures he focused on three (3) things i.e; Trading and Investment, Mining and Means of Payment (payment system).
Trading and Investment has two (2) juristic views
HARAM: these are mainly official with iftaa bodies they represent the official shariah body of their country e.g Egypt, Turkey, Palestine and some notable individuals.
HALAL: mainly from respected jurists such as Prof Ali El Gari (Saudi Arabia), Dr Daud Baker (Malaysia), Dr AbdulBari Mishal, IEF (USA) and Mulfl AbuBakar (South Africa).
International Islamic Faith Academy (IIFA) has postponed insurance of resolution on this, they have not issued any resolution yet. So Far they are just organizing seminars upon seminars and still gathering facts from Islamic scholars.
TRADING ON CRYPTO IS HALAL
THE juristic also have different approach on this, some said Is halal because they are not even currencies so the rules of exchange do not involve, such as (do not sell what u don’t have, the quality and quantity of such transaction must be spell out and there must be mutual agreement between the two parties). While the other jurists believe that crypto are currency and they can be used as a means of exchange like other currency and they possess the same function of money (unit of account, storable and also medium of exchange) in this all function of crypto currencies also have all elements of currency. That is the rules of exchange must be applied and they are principles that govern exchange THE RULES OF SARF (exchange) shall be applied.
No Riba al fadl (RIba in exchange contract)
No Riba nasiah (Riba in loan/debt contract)
That is if you are exchanging old currency to a new one there must not be an extra fee charged on it and it must be exchanged at that particular time but if the currencies are not the same (dollar to naira) you have to follow the rules guiding the currency. anything prohibited in normal currency should be prohibited in crypto currency.
His opinion on this juristic viewed is stated below (CRYPTO AS HALAL)
Current status of crypto is not as simple as projected, before we can call something sharia it must be society acceptable.
Rawaj (wide acceptance) not necessary as a legal tender
It has high volatility rate, it increased from 0.06 USD to 55000 USD from September 2010 to march.2021 (38 million % surge in ten years as compared to gold’s 55.67%)
Limitation in quality, only 21 million Bitcoin has been programmed to be created by (2141) for a coin to be created there must be a successful mining produced.
CRYPTO AS ASSET is an asset but widely used as a currency
TRADING IN CRYPTO IS HARAM VIEWS
Its risks to trade in currency that has no intrinsic values and his high volatility rate help in culminating excessively and uncertainty, also in high risk that is akin to gambling. No link to real economics (just like bubbles ready to burst). CRYPTO are also used for illicit activities, ambiguity and anonymity even the identity of the investor is unknown, not issued or regulated by any constituted authority.
Cryptocurrency should not be seen as an illegal currency rather to be seen as a societal problem and solutions to such problems. (there are some countries that accept the use of crypto but if they have to trade on it must not be anonymous, it can as well be used for legal activities, there is no haya or verses in Quran that say it halal or haram. According to sharia, if the benefit of a thing is more than the harm it should be accepted and if the benefit costs more pain, we should find a solution before we put into sharia law.
Fiat money has no intrinsic values, the high volatility in crypto is a really a major concern but that may not be peculiar to it alone may not be enough for is invalidity also problem with the link to economy may be solved through non-permissibility of derivatives and speculation in cryptos. Other currencies are also used for illicit activities but if that becomes the major use then it can trigger a sharia issue. Disclosure of identity is not a sharia requirement while the nature of block chain technology (which records all transactions) provides confidences of traceability if necessary. Scholars have argued that non constituted authority can issued currency if is widely accepted in the community.
CRYPTOCURRENCY IS A VERY RISKY VENTURE IF YOU WANT TO INVEST ON IT YOU NEED TO EXERCISE MORE CAUTION.