The Islamic world has a cynical attitude toward cryptocurrency, on account that it is not Shariah-compliant, and that the money is devoid of physical form and is not regulated by any central bank, triggering debates among Muslim scholars on its permissibility. However, Islamic financing tries to keep abreast with the latest trends in profitable investments, making the growing popularity of crytocurrency and the security of blockchain technology, extend to the Islamic world. With an estimated number of two billion people in the Muslim sector, this poses a positive outlook for cryptocurrency in cementing its position as a viable investment. ICICI Bank and Emirates NBD spearheaded the research in the benefits of blockchain in reducing transactional costs back in 2016. Emirates Islamic followed suit by using blockchain for financial security purposes in 2017.
The speculative nature of cryptocurrency has become subject to various interpretations in Sharia law. Some scholars reject cryptocurrency, while others declare it as compliant. Scholars giving it a positive view say that crytocurrency could prove beneficial in Islamic investments, as it could tap new investment opportunities and create new financial markets.
Adherence to Islamic financing policies often results in costly transactions. Contractual relationships are highly valued in Islamic banks, and this often involves multiple contracts and more than one party. This condition emphasizes minimizing risks like uncertainty, speculation, and interest. Doing so results in tedious legal and corporate processes that require higher costs. Still, most conservative Islamic investors would have it the traditional way, considering that some Islamic scholars have warned against the risky and speculative nature of investing in cryptocurrency.
Many Islamic scholars are not familiar with the complexities of blockchain technology and cryptocurrency. What they fully grasp is that the nature of business in Islam is that it prohibits the payment or collection of interest and that the creation of debt is permissible only when supported by goods or services. Transactions must have connections to tangible assets like gold.
Many Islamic investors still prefer that a digital currency is backed by a tangible asset, as mentioned that banks can only create debt when it is supported by goods and services. Some Islamic firms like OneGram and HelloGold have mandated that every cryptocurrency transaction must be supported by a specific equivalent in gold. This serves as a safety valve for the uncertainty of cryptocurrency, but it does not leave room for other options like futures or derivatives. This business model has been approved by Muslim scholars as Sharia-compliant. This framework may not be ideal for some small-scale investors, but the flexibility of this model might accept other tangible goods other than gold in the future.
While the central banks of Saudia Arabia and the UAE have warned about the risks of cryptocurrency, bans are not officially declared. This leaves Islamic investors to decide if they are willing to take that risk. For the more welcoming, they deem that blockchain technology and cryptocurrency could change and simplify their transactions and investments with the introduction of smart contracts, which will enable to automate contractual proceedings for Islamic firms, including terms and conditions. It is for this convenience that the Islamic Development Bank of Saudi Arabia forged partnerships with crypto firms in 2017. The convenience of automation that blockchain provides reduces the hassles of any transactional complexities.
The decentralization of banking is an ideal that helms the birth of blockchain technology and cryptocurrency–a principle facing tremendous odds given that traditional financial investments are accustomed to the use of physical currency and regulation of central banks. This decentralization is another stumbling block that makes it challenging for cryptocurrency to get legitimized.
Sharia law, which is tied to the tenets of Islamic faith, is an example of centralized authority. Islamic banking conforms to Sharia standards in implementing financial transactions. However, only 20 to 30 percent of banks in the Gulf and Southeast Asia strongly adheres to Islamic doctrines. Some Islamic investors opt for non-traditional approach to investing as modern technology offers practicality and convenience.
Islamic banking, for example, could yield benefits in legitimizing blockchain and cryptocurrency. With blockchain technology forging partnerships with Islamic banks around the world, it could well find its place in Islamic financing. To date, Islamic financial institutions are beginning to see the cost-effective benefits and flexibility of blockchain technology and cryptocurrency, reducing the hassles of excessive paperwork that goes with processing transactions.
Many scholars and speculators are still tagging a caveat on its potential risks. Islamic scholars have yet to rule if cryptocurrency is “real” money, and this is an important issue in inheritances and Islamic tax payments. More extensive research is required to reach a consensus. As for now, blockchain technology and cryptocurrency have been inching their way in Islamic investments.
Written By Dr A.J Minai