Salam aleikum
What factors determine that a currency/ token is halal or haram? so a newbie can look by himself
Walaikum Salam. We have a robust writeup on this but isnt ready to be published just yet. Islamic Finance offers a methodology that can be adapted and applied to cryptocurrencies. Here’s a rough outline of key things to consider:
Nature of the Business Activity
- Underlying Technology: Assess if the technology behind the cryptocurrency (like blockchain) is used for permissible activities. Cryptocurrencies involved in prohibited sectors (gambling, alcohol, etc.) would not be Shariah-compliant.
- Purpose and Usage: Determine the primary purpose and usage of the cryptocurrency. If it’s primarily used for speculative purposes, it might conflict with Shariah principles which discourage excessive uncertainty and gambling.
Monetary Characteristics
- Currency vs. Commodity: Evaluate whether the cryptocurrency is treated more like a currency or a commodity. Shariah principles have specific rules for trading currencies and commodities, especially concerning the immediacy of transactions (to avoid Gharar, or excessive uncertainty).
Investment and Trading Practices
- Speculation and Volatility: High volatility and speculative trading practices in cryptocurrencies might be seen as conflicting with the Shariah principle against excessive uncertainty (Gharar).
- Interest (Riba): Any interest-bearing aspects related to cryptocurrency holdings or transactions would be non-compliant.
Transparency and Compliance
- Regulatory Compliance: Ensure that the cryptocurrency operates in a manner that is transparent and compliant with legal regulations, as Shariah also emphasizes adherence to the law of the land.
- Smart Contracts: If the cryptocurrency uses smart contracts, assess whether these contracts meet the requirements of Islamic contracts in terms of clarity, fairness, and the absence of uncertainty.
Shariah Board Review
- Given the complexity and newness of cryptocurrencies, a review by a qualified Shariah board or scholar is advisable to determine compliance.
Key Considerations:
- Nature of Cryptocurrency: Unlike stocks, cryptocurrencies don’t represent ownership in a business, so the focus is more on the nature of the currency and its usage.
- Speculation and Uncertainty: The speculative nature and high volatility of many cryptocurrencies might conflict with Shariah principles.
- Lack of Precedent: As a new asset class, there’s less established guidance on cryptocurrencies in Islamic finance, making scholarly interpretation crucial.
While the principles of Shariah compliance for stocks provide a framework, applying them to cryptocurrencies requires careful consideration of the unique aspects of digital currencies, including their purpose, usage, and the nature of their trading practices. This goes a lot deeper with our latest methodology where a score is applied for almost every aspect mentioned above and many more not mentioned like staking, founders, investors, governance, operational transparency, tokenomics etc, which are then compiled to provide an objective score representing how halal a cryptocurrency may be.
May sound odd, but there is a lot of gray area here so we intend on providing as much clarity to help users make informed halal investments. Hope this helps for now, and will publish more soon iA
