My Thoughts on Crypto-assets

by Mufti Faraz Adam, Amanah Advisors

from the book “Introduction to Islamic Fintech”

The Nature of Crypto-assets

My personal view regarding crypto-assets is that many can be deemed digital assets, whilst some have the potential to be even recognised as a medium of exchange for their specific networks only. To deny the existence of crypto-assets is clearly inaccurate; existence in a digital network cannot be quantified nor qualified with the same metrics as that of physical entities. Classical Islamic scholars frequently evaluated the nature of things by analysing the after-effects and outcomes of that thing. This enhanced the understanding of the reality of that thing before developing a Shari’ah ruling. Crypto-assets can undergo a similar evaluation where the utility of each crypto can be reviewed to understand the nature of the crypto-asset.

Many crypto-assets clearly have some utility in their ecosystem. Many tokens give the owners the right to ‘something’, ownership in an asset, a licence or access to a platform. Any sort of value can be integrated into a token. Therefore, it is very difficult to argue the non-existence of crypto-assets. Having a lawful utility is sufficient to regard something as Māl (property). As such, crypto-assets which have a lawful utility can be deemed as Māl and property from a Shariah perspective.

Can Cryptos serve as Currencies?

In regard to whether a crypto-asset can be a currency, what is absolutely clear is that anything can be used as a medium of exchange and a means of payment. If a particular crypto-asset is not deemed as currency, it can still be used as a medium of exchange and means of payment on account of it being Māl. It is not farfetched to consider payment tokens and currency tokens which have been designed to serve as a medium of exchange to exclusively serve as value-exchange mechanisms within a specific network. Based on the principles of al-Urf al-Khass (customary practice of a specific group), there is the possibility to consider something to be a medium of exchange and a means of payment within a specific network only. As such, those crypto-assets – which have been designed to serve as a medium of exchange – can potentially be considered as a medium of exchange within their particular ecosystem but not beyond. They are merely the way payment is made in that network. It may be premature to consider crypto-assets as universal currencies at present.

Shariah Screening of Crypto-assets

Since there are various types of crypto-assets, screening crypto-assets for Shari’ah compliance before investing is absolutely essential. The following screenings are reasonable for crypto-assets:

  1. Legitimacy screening – ensuring that the crypto-asset is a genuine project and not a scam.
  2. Project screening – ensuring that the project is Shariah compliant.
  3. Financials screening – ensuring that it meets the financial criteria for Shariah compliance if it is an equity-based token.
  4. Token screening – understanding the Shariah compliance of the token.
  5. Staking screening – understanding the Shariah compliance of the staking mechanism.

For a more detailed discussion – see my book ‘Introduction to Islamic Fintech’.