Cryptocurrencies Sharia Compliance Issues-1

Cryptocurrencies: Sharia-compliance issues.
Cryptocurrencies Sharia compliance issues -

Thursday, November 18, 2021 1
anwarsubrah@hotmail.com
Trend of Peer-to-Peer transactions
• Crowd-funding: Peer to Peer project financing.
• Cryptocurrency: Currently restricted to peer-to-peer transfer of funds.

Perspectives of cryptocurrency
1. Nature of currency and role in economy.
2. Currency contractual transactions.

Government Parliament Central Bank
Official regulated
Currency issuance
and circulation
Currency issuance and Monetary Policy
Finance - Transfers

Government Parliament Central Bank
Cryptocurrency
circulation =
Peer to Peer
Currency issuance -Monetary Policy
Finance - Transfers

`
Transfer
Corresponding Deposit with yr act with us

bank Deduct from our act with u
KYC - AML
Transfer application
Cash payment or to account
KYC
AML
Signature
Purpose
Recipient

New authority for transfers: Peer to peer
Cryptocurrency Trading
Platform
First confirmation
50 bitcoins
General Ledger General
Transfer: Private Password Password
Acct (1) pays $100
To acct (2)
+ electronic
signature
Account 1 Account 2
Confirm signature
Confirm balance
Miner 1 Miner 2 Miner 3
Miner 4 Miner 5 Miner 5

Definition and characteristics of cryptocurrency
• Currency represented by encrypted electronic units that do not maintain any
physical or material existence presented based on encrypted data (codes), formed
by algorithms and mathematical models.
• All information are posted on a secured general ledger which is decentralized, and
the same information is made available at each user point, based on block-chain
technology, to replace third party validation, used to store and verify validity of
electronic transactions.
• Cryptocurrency transaction parties consider these units as virtual encrypted
currency.
• In this respect, cryptocurrencies have no intrinsic value like metal currencies, and do
not maintain official regulatory or governmental guarantee or cover like paper
currencies.
Price evolution of bitcoin
• 2008: Team leader Satocci Nakamoto (maintains 1mn units for
himself) and programmer Hal Vinnie.
• 2009: Bitcoin made available for exchange at unit price of $0.0001.
• 2011: unit value reached $35.
• 2017: unit value $1000.
• 2021: currently passed the $65,000.

Limited cryptocurrency supply
• Each transaction validation requires 10 minutes.

• 210K validations can be processed every four years.
• Reward for each validation during the first four years is 50 bitcoins.
• Validation (Mining) reward is diminished by 50% each next four years.
• 50….25….12.5….6.25….3.12……
• By the end of validation or mining, total rewards will be 21mn bitcoins.
• No mining or issuance of cryptocurrencies after final date.

Snapshot of Acceptance and Pervasiveness
• 2012: EU issues first license for bitcoin exchange entity.
• 2013: Texas court considers bitcoin as a type on money.
• 2013: German ministry of finance considers bitcoin as a type of private
money and imposes taxes on holding cryptocurrency.
• 2016: Switzerland accepts payment of governmental proceeds by
bitcoin.
• 100K merchant and point of sale accept bitcoin as payment currency.
• 2021: Cambridge University research indicates 135mn user of
cryptocurrency wallets, mostly bitcoin.
Obtaining bitcoin as reward for validation = (Mining)

Requirements for Mining
1) Highly sophisticated modern computers, with vast electricity consumption and maintenance
requirements, and may be shared by a network of users to analyze data.
2) Specialized software programs are required to analyze data algorithms and encrypted block-
chain data, and mathematical formulas.
3) Encrypted data of transactions are compiled in one block, not subject to change, made
available to participants for validation of electronic signature and recipient< and confirm that
the sender maintains enough balance to process a transfer, and confirm receipt by beneficiary,
through the electronic ledger using block-chain technology to solve groups of mathematical
formulations.

Cryptocurrency account or address
• Upon loading the cryptocurrency program, the system generates an

address or account, to be used for sending and receiving cryptocurrency.
• Each account or address is managed by two keys: a private code used by
the account holder to transfer cryptocurrency, and the second is a
general key used by participants to validate the transaction and confirm
that the transferring party is the owner of the private key.
• If the account owner loses the private key, for any reason, the amount of
cryptocurrency owned will be lost.

Half of the truth

Basis for cryptocurrency approval
• From a Sharia perspective all transactions are permitted unless a specific text from Quran or Sunna
prohibits, and it is not forbidden to introduce new types of currencies that achieves transactional
interests.
• The principle of mutual acceptance between the transaction contractual parties to use
cryptocurrency is enough to validate the transaction, and it also represents private norm for
dealers, and it is accepted to be used for purchases; it is therefore, validated by Sharia.
• The process of mining verifies ownership of currency and the assigned asset, and transfer of
ownership.
• There is no clear evidence to restrict currencies in gold and silver, and that the valuation cause is
accepted on any currency accepted by the public, and consequently is subject to the rules of usury
and Zakat and the general rules of currency exchange.
• Mining is a specific legitimate job, which is validation of money transfer transactions in exchange
for a fee.

Sharia compliance verdict is
subject to visualizing the full
truth.

Sharia-compliance issues in cryptocurrencies

Absence of official regulatory permission & supervision
• Cryptocurrencies are issued by individuals or entities without
permission or authorization or licensing from official authorities such as
central banks.
• Official authorities cannot conduct any supervisory activities on the
cryptocurrency settings or transactions such as KYC & AML which may
be used in unlawful transactions.
• It is the government that authorizes the monetary authority to issue
currency because it is the basis for public wealth and transactions.

Absence of economic platform to support the cryptocurrency
• Currencies are accepted by the public due basically to their trust and confidence
in the issuer of the currency. To the contrary in cryptocurrency, the issuer is
granted trust because of the issued cryptocurrency, and is not supported by any
official authority.
• Cryptocurrency is not linked to any economic background or activity to generate
and maintain its value and is free from any basis of economic value or transfer of
wealth or exchange of benefits in exchange for a value.
• Cryptocurrency is a currency bubble that has no existence or reality and does not
represent any economic value and is subject to undeclared disappearance. Selling
assets for cryptocurrencies results in receiving an invaluable electronic advice in
exchange for real economic assets.
Islamic Banking
• Cryptocurrencies are virtual tokens that have no real existence or economic
support and background.
• Islamic banking is directly related to economic activity by its financing contracts
and does not provide business financing by loans.
• Murabaha sells assets, Ijara leases assets, Salam and Istisna finances production
od assets, Musharaka and Mudaraba results in new economic assets and wealth.
Sukuk and shares have the same reflections.
• No credit creation, no inflation, no speculation, but generating new economic
assets and wealth.
• If cryptocurrencies are accepted, this defeats the Sharia principles of Islamic
banking.
Changing the purpose of currency
• Changing the function of currency from medium of exchange to a commodity
and an investment tool, subject to speculation to achieve profits.
• Investment necessitates acquisition of income generating assets, which defeats
the purpose of currency. Consequently, trading cryptocurrencies is exchange of
money for additional increment of money based on speculation basis which is
Sharia non-compliant.

Excessive uncertainty (Gharar)
• “Gharar” is the case where the end-result is not established, or is redundant
between two results, most probable is the negative result.
• Excessive uncertainty regarding the continuous existence of the cryptocurrency.
• Issuer of cryptocurrency may, irrespective of the reasons, abandon it, or close the
cryptocurrency site, which results in the loss of public rights and wealth.
• Excessive uncertainty is that cryptocurrency is a virtual non-existing currency
which has no physical presence and cannot be controlled and is not subject to
any legal action based on current practiced laws in majority of countries.

Continue Gharar = defeat function of store of value
• Excessive uncontrollable fluctuation in the value of cryptocurrency which changes
with variable spread of several hundreds to thousands of dollars per day.
• Cyber attacks and hacking on cryptocurrency platforms and trading sites have
already resulted in multi-million losses to account holders, most of which are non-
refundable if not insured, and bankruptcy of some trading platforms.
• Loss of private key or password mostly ends in total loss, if recovery technology is
not possible.

Hacked Tokyo
cryptocurrency exchange
to repay owners $425
million
Reuters Staff
3 MIN READ
•
•
TOKYO (Reuters) - Tokyo-based cryptocurrency exchange

Coincheck Inc said on Sunday it would return about 46.3
billion yen ($425 million) of the virtual money it lost to
hackers two days ago in one of the biggest-ever thefts of
digital money.
FILE PHOTO: A man walks past a building where Mt. Gox, a digital marketplace operator, is housed in
Tokyo February 25, 2014. REUTERS/Toru Hanai

Limited supply and dealing
• Cryptocurrency has no physical existence made available to public use but is restricted
to account holders who have the capability to deal in cryptocurrency by using modern
electronic devices and special software.
• Cryptocurrency is therefore not pervasive and not available to the general public but
restricted to “wealthier” tier of society. From a Sharia perspective, it is a condition that
the currency is pervasive and always abundantly available for general public to be
recognized as transactional debt and a tool to settle debts.
• Current practices in cryptocurrency restricts availability to a limited group which defies
the principle of just distribution of wealth, and non-concentration of wealth in the
possession of the rich. The underprivileged tiers will not have access to this
cryptocurrency even if they wish to do so.
Loss of control on monetary policy
• Official authorities, represented by central bank, controls money supply based on liquidity
requirements in the financial markets. This interference by regulatory authorities is denied
due to private access to the cryptocurrency without official access.
• At the same time, money supply control by financial instruments such as bonds and interest
rates are not available in this cryptocurrency sector. The effect of non-control on money
supply by regulatory authority may have severe monetary and economic negative effects.
• With limited supply of bitcoin (21mn) units what will be the value of bitcoin with expansion
of demand on the currency?!!

Ignorance of the transaction parties
• From a Sharia perspective, there are three basic pillars for a contract, in the
absence of which, the contract is invalid, namely: mutual agreement by offer and
acceptance, compatibility of contractual parties, and the Sharia-compliant
contract subject matter.
• Transactions are based on account numbers and addresses without disclosure of
the identities of the contractual parties.
• The nature and subject matter of the transaction is also encrypted and not
disclosed.
• Therefore, it is not sufficient to claim that mutual agreement exists between both
parties, but the identity of contractual parties must be disclosed, and their
compatibility must be verified.
Antagonistic to economic and environmental sustainability
• 2017: Mining consumed (6.6) terra watt per hour of electrical power for a period of one year.
• 2020: electricity consumption reached (67) tw/hr.
• 2021: electricity consumption reached (121) tw/hr. which is equivalent to electricity
consumption in Argentine, or Holland, or UAE.

Sharia compliance parameters to issue cryptocurrency

Issuing by official authority
• Cryptocurrency must be issued by an official regulatory authority such
as the central bank, or by any other entity authorized by the regulatory
authority.
• Cryptocurrency must be controlled, supervised, and controlled by
regulatory authority.
• Regulatory authority must maintain the capability to interfere in the
financial markets to regulate the value of the cryptocurrency to maintain
stability and trust in the currency.
Verification of Transactions
• Transaction values, counter-parties and subject matter of the financial
transaction must be supervised by regulatory authority to prevent illegal usage
of the currency.
• Instead of mining by individuals, which is verification of electronic signatures,
and availability of balances in accounts, all verification activity must be
conducted by central banks, and should include identity of transaction
counter-parties and subject matter of the transaction.
• Similar to the speed of mining activity by individuals, central banks can be
equipped with high IT capabilities to process this verification at the same speed
and maintain fee-free transfer transactions.

Pervasiveness to public use
• Cryptocurrency must be made available for use to all the general public
irrespective of their financial status or wealth. Otherwise, the currency
ownership and use will be unequally and unjustly available to the
wealthier tiers of society.

Maintain the functions of currency
• Functions of money: medium of exchange, store of value, value of
commodities, accounting unit. Currency has no intrinsic benefit in itself,
therefore it is not a commodity.
• Cryptocurrency must be supported by economic factors to reflect its
value.
• Value of cryptocurrency is still established based on paper currencies for
speculation which results in converting cryptocurrency from a currency
to a commodity.

Contractual Sharia compliance formulas
• Assets + Risks = Profit or loss (Trading)
• NO Assets + Risks = Gambling (Insurance, Lottery)
• Asset sale contract with no delivery + Risks = Speculation.

Support for cryptocurrency
• Gold based cryptocurrency.
• Crude-oil based cryptocurrency.
• Economic-assets based cryptocurrency.

100 ‫ اآلية‬،‫سورة املائدة‬
َُ َ َ ْ ََُْ َ َ َ ْ َ ْ ََ ُ َ َ ُ َ ْ ‫ُ َ َ ْ َ ي‬
‫يث ۚ فاتقوا‬
ِ ‫الط ِيب ولو أعجبك كثرة الخ ِب‬ ‫يث و‬ ‫ب‬
ِ ‫خ‬ ‫ال‬ ‫و‬ِ ‫ت‬‫س‬ ‫ي‬ ‫ّل‬ ‫ل‬ ‫ق‬ ( •
ُ ْ ُ ُْ َ َ َ َ ْ َ ْ ُ َ َ َ
)‫اب لعلكم تف ِلحون‬ ِ ‫ّللا يا أ ِولي اْللب‬
• (Say, Not equal are the evil and the good, although the abundance of evil
might impress you. So fear Allah, O you of understanding, that you may be
successful.)

‫النقد في الفقه‬
‫ألن الناس إن ُرخص لهم ركبوا العظائم‪( ".‬األحكام‬‫الضرب‪ ،‬بإذن السلطان؛ َّ‬‫• قال اإلمام أحمد‪ ،‬رحمه هللا‪" :‬ال يصلح ضرب الدراهم إال في دار َّ‬
‫السلطانية ‪ -‬الفراء)‪.‬‬
‫ضرب الدراهم‪ ،‬وإن كانت خالصة؛ َّ‬
‫ألن ضرب الدراهم من شأن اإلمام‪( ".‬روضة الطالبية – النووي)‪.‬‬ ‫ُ‬ ‫• وقال اإلمام النووي‪ ،‬رحمه هللا‪ُ " :‬ويكره للرعية‬
‫َّ‬ ‫ُ‬ ‫َّ‬
‫ُ‬
‫لكرهتها أن تباع بالذهب والورق نظرة (أي بتأجيل سداد‬ ‫• قال اإلمام مالك‪ ،‬رحمه هللا‪" :‬ولو َّأن الناس أجازوا بينهم الجلود؛ حتى تكون لها سكة وعين؛‬
‫الثمن)" (املدونة – مالك بن أنس)‪.‬‬
‫• وكالم اإلمام مالك هنا قاعدة ‪ -‬في النقود‪ :‬فكل ش يء ‪ -‬حتى الجلود ونحوها ‪ -‬إذا قامت الدولة بسكه عملة‪ ،‬وراج تداولها بين الناس رواج النقود‬
‫ُ‬ ‫الذهبية والفضية‪ ،‬الطمئنانهم لحماية الدولة وضمانها لقيمتها؛ َّ‬
‫فإنها في هذه الحالة تعتبر نوعا من أنواع النقود‪ ،‬وتأخذ حكم النقد الذهبي أو‬
‫الفض ي‪ :‬الذي يحمل قيمة بذاته‪ .‬ومن ذلك‪ :‬أنه ال يجوز صرف بعضه ببعض نسيئة‪ ،‬وال صرفه نسيئة بأي نوع آخر من أنواع النقود‪.‬‬
‫• قال ابن تيمية‪ ،‬رحمه هللا‪“ :‬الدراهم والدنانير ال تقصد لنفسها بل هي وسيلة إلى التعامل بها‪ ،‬ولهذا كانت أثمانا بخالف سائر األموال‪".‬‬
‫ً‬ ‫وبهذا يتضح َ‬
‫أن الشرط اْلساس ‪ -‬في الشرع والقانون ‪ّ -‬لعتبار الش يء عملة نقدية‪ ،‬هو‪ :‬أن تعتمد الدولة ذلك رسميا؛ لتكون بذلك ضامنة‬ ‫•‬
‫ً‬ ‫ً‬
‫تمكنها من القيام بوظيفتها اْلساسية‪ ،‬وهي‪ :‬كونها مقياسا لقيم املق َومات‪ ،‬وثمنا للسلع‪ ،‬ووسيلة‬‫لقيمتها‪ ،‬ولتتوفر لها الحماية القانونية التي ِ‬
‫للوفاء بالديون‪.‬‬
‫‪Cryptocurrencies Sharia compliance issues -‬‬

‫‪Thursday, November 18, 2021‬‬ ‫‪39‬‬
‫‪anwarsubrah@hotmail.com‬‬
‫المخالفات الشرعية‬
‫• ‪ .1‬جهالة اْلطراف املتعاملين‬
‫ّل يوجد أي علم بالشخصية الحقيقية للمشتركين والتعاملين في عمليات التبادل والتحويل‪ .‬والتشفيريستر شخصية املتعاملين‪ ،‬ويجعل جهالة أطراف‬
‫التعاقد مبطلة لعقود تبادل العملة املشفرة‪.‬‬
‫• ‪ .2‬جهة اإلصدار‬
‫ّل َبد أن يصدر النقد أو العملة عن جهة تنظيمية رسمية معلومة ومحصورة فيها هي الدولة‪ .‬وفي حالة َالعمالت املشفرة‪ ،‬فهي صادرة عن جهة خاصة‪،‬‬
‫وّل تخضع للسلطة التنظيمية الرسمية القانونية الالزمة إلصدارها‪ ،‬أو جهة إشر افية لرقابتها‪ .‬ولو تخلت الجهة الخاصة عن العملة املشفرة وأوقفت‬
‫العمل بها‪ ،‬يفقد الناس أموالهم وحقوقهم دون إمكانية املالحقة‪ ،‬وعدم ضمان الدولة لقيمتها‪.‬‬
‫• ‪ .3‬الغررالفاحش‬
‫ً‬ ‫ً‬
‫• ‪ .3.1‬العمالت املشفرة هي عمالت افتراضية وهمية ليس لها وجود مادي يمكن حيازته وقبضه ماديا‪ ،‬فهي ّل تمثل العمالت املشفرة أصوّل أو أرصدة‬
‫حقيقية‪.‬‬
‫• ‪َ .3.2‬يتعرض موقع العملة لالختراق والهجوم اّللكتروني التي تؤدي إلى خسارة العمالت املشفرة في حسابات أصحابها دون إمكانية متابعتها أو استعادتها أي‬
‫إنها يمكن أن تؤدي أكل أموال الناس بالباطل‪.‬‬
‫• ‪ .3.3‬خسارة اْلموال في الحساب نتيجة فقدان املفتاح الخاص‪.‬‬
‫• ‪ .3.4‬يعتمد التعامل بالعمالت املشفرة على تو افر أجهزة الحاسوب للمستخدم والهواتف الذكية في ظل اتصال دائم بشبكة اّلتصاّلت والكهرباء أو‬
‫الطاقة دون انقطاع‪ ،‬وهو متعذرفي العديد من البلدان ولكثيرمن املشتركين في كل الوقت‪.‬‬
‫ً‬ ‫ً‬
‫• ‪ .3.5‬عدم خضوع العملة املشفرة للرقابة يجعلها تتعرض لتقلبات فاحشة في قيمتها‪ ،‬بينما من املفترض أن تكون العملة مخزنا للقيمة بوجود نوعا من‬
‫حدية تقلبات قيمتها‪.‬‬
‫الثبات في قيمتها مع عدم ِ‬
‫‪ .4‬التعدين من امليسر‬
‫ً‬ ‫إن عملية تعدين العمالت املشفرة يختلط فيها امليسر َ‬ ‫َ‬
‫ْلن املشترك ّل يبذل أي عمل أو خبرة‪ ،‬ولكن اْلجهزة هي التي تعمل الكترونيا بموجب‬
‫ً‬
‫برمجياتها على فك الشيفرة للمعامالت‪ ،‬ويحصل املشترك على العملة املشفرة لقاء فك شيفرة املستندات التي ّل عالقة له بها أصال‪ .‬وإذا‬
‫ً‬ ‫ً‬
‫كان املشترك يدفع رسوما لالشتراك في موقع العملة املشفرة‪ ،‬فيصبح حصوله على مكافأته من العملة املشفرة قمارا‪.‬‬
‫‪ .5‬تحديد حجم إصدارالعملة‬
‫تصدر جهة خاصة العملة وتتحكم بكمية إصدارها‪ ،‬على أن يتوقف اإلصدار عند مبلغ محدود‪ ،‬دون علم الدولة أو رقابتها أو إشر افها‪،‬‬
‫ودون إمكانية تعقبها‪.‬‬
‫‪ .6‬عدم رواج العملة املشفرة بين الناس‬
‫ً‬
‫شائعا بين الناس ويحظى بالقبول العام وأن َي ُروج تداولها بينهم‪َ ،‬‬
‫ْلن فيه أرزاق الناس‪ .‬وفي حالة العمالت املشفرة‪،‬‬ ‫ُيشترط أن يكون النقد‬
‫فإنها محصورة في عدد محدد من الناس‪ ،‬وّل يستطيع أكثرهم الحصول عليها‪ ،‬وعدد محدد من الدول فال يمكن تداولها بحرية‪ ،‬وتفقد‬ ‫َ‬
‫ً‬
‫وظيفتها بأن تكون قيمة للثمن ووسيطا للتبادل‪.‬‬
‫‪ .7‬املصافقة (املضاربة على العمالت) على العمالت املشفرة‬
‫ً‬ ‫َ‬
‫إن الهدف الرئيس ْلغلب املتعاملين بالعمالت املشفرة واملشتركين في موقعها هو املضاربة تحقيق الربح بين سعر شرائها وبيعها ّلحقا‪ ،‬أو‬
‫الهروب من العمالت الورقية اْلخرى التي تتقلب قيمتها في السوق‪ ،‬دون اّلعتبارإلى استخدام العملة نفسها في املشتريات والوفاء بالديون‪.‬‬


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Cryptocurrencies: Sharia-compliance issues.

Cryptocurrencies Sharia compliance issues -

• Crowd-funding: Peer to Peer project financing.

• Cryptocurrency: Currently restricted to peer-to-peer transfer of funds.

Cryptocurrencies Sharia compliance issues -

1. Nature of currency and role in economy.

2. Currency contractual transactions.

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Corresponding Deposit with yr act with us

Cash payment or to account

Cryptocurrencies Sharia compliance issues -

Miner 1 Miner 2 Miner 3

Miner 4 Miner 5 Miner 5

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

• Each transaction validation requires 10 minutes.

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

• Upon loading the cryptocurrency program, the system generates an

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

TOKYO (Reuters) - Tokyo-based cryptocurrency exchange

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

• Assets + Risks = Profit or loss (Trading)

• NO Assets + Risks = Gambling (Insurance, Lottery)

• Asset sale contract with no delivery + Risks = Speculation.

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

Cryptocurrencies Sharia compliance issues -

‫‪Cryptocurrencies Sharia compliance issues -‬‬

‫‪Cryptocurrencies Sharia compliance issues -‬‬

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