Sifting Through The Crypto Junk

According to CoinMarketCap’s data, there are nearly 20,000 cryptos in circulation and 527 exchanges[1]. Based on this data, an average of 22 cryptocurrencies entered the market daily to date[2].  Many of the crypto-assets that are being released seem to be emulating established crypto-assets such as Bitcoin and Ethereum, with a few cosmetic changes. A lack of regulation, abundance of jargon, useless coins saturating the markets, information asymmetry between various stakeholders, artificial hype and greed, Shariah non-compliance, leveraging, Riba-based activity and uselessness has resulted in a perfect storm in the Cryptoverse.

From a Shariah perspective, there seems to be sufficient room and a baseline to allow experimentation and ideation with crypto-assets. Experimentation allows growth and the best ideas to rise to the top in an unmanipulated market with low barriers to entry. But this experimentation has its boundaries and clear goals. Not everything and anything is acceptable, and not everyone should be testing or experimenting. That is where it is key to distinguish between intrinsic matters of debate with crypto-assets and extrinsic matters. Of course, the increased scams and dubious practices are all impermissible, but these are practices of people and not inherent to only crypto-assets. The same manipulation, fraud and deception has been practiced across the spectrum of assets. Thus, these are extrinsic matters to crypto-assets. Similarly, greed, a lack of analysis, being naive or amateur are behavioural issues and not asset-related matters. Intrinsically, there is room to test and sandbox crypto-assets on a very foundational Islamic legal maxim, which states:

“Permissibility is the state of all things by default.”[3]

With other criteria being met, such as qualifying as valid property and wealth (Maliyyah) in Shariah, lawful operations and use cases, and a Halal ecosystem, some tokens can be deemed acceptable when they authentically serve a utility and purpose. That is the baseline. They may be a means of governance and voting on a blockchain, designed to add value to people’s lives and actually solve a problem that exists, not just a hypothetical problem. Similarly, they may function as utility tokens which genuinely provide utility. Or they may be tokenised assets that facilitate investments, markets and liquidity. Genuine projects can fail. Something being potentially acceptable in Shariah to invest in, trade or save in does not mean it is guaranteed to be successful or immune from failure.

There is a spectrum of views on the acceptability of crypto-assets from qualified scholars. All such views and opinions are welcomed when researched and presented in an academic manner. This only adds to the body of knowledge creation and should always be welcomed. Views and opinions can eventually turn out to be inaccurate or off the mark in the future, and that is okay. Alternatively, scholars may change their conclusions as time passes, that is also okay. Retractions in Fiqh and changing of views is commonplace in Fiqh and a natural development.

But what scholars from different positions on that spectrum may potentially agree on and query is the abundance of useless coins. What is highly questionable and borderline junk are the many tokens which are issued, launched as ‘currencies’ and sold to people. From a Shariah perspective, something does not become a currency by a private company or bedroom programmer simply issuing it as one and people buying it in hype. A currency needs to become a ‘currency’; something which people agree and use as a payment mechanism and as a medium of exchange. Something only becomes a medium of exchange when it serves monetary functions. As such, there is an argument that can be made whether the plethora of junk tokens that have been released as ‘currencies’ are even currencies. Whether trading on exchanges purely to make a quick profit from the price fluctuations of such coins and mere speculation because of FOMO qualify as social acceptance of it being a currency, is highly debatable and I am more inclined to it not being so. I mean, you cannot have 15,000 coins all being currency, and all trying to solve the same problem at once, many will not be doing anything at all! Arguably, only a handful of crypto-assets potentially demonstrate and act as a currency, with Bitcoin being the most notable. Whereas the other endless list of useless coins have no such adoption or widespread use and acceptance. Without any reasonable adoption of the currency in the real economy and in the sale of goods and services, such coins are not a medium of exchange whatsoever.

There is much analysis and discussion on cryptos being used as a medium of exchange, but much of the focus in such discussions revolve more on the “exchange” part and may fall short of understanding the word “medium”. Currency plays a role as a medium of exchange, and a medium of exchange entails that currency is a ‘bridge asset’ to solve the issues caused by the barter system. Currency results in an indirect exchange; where people are happy to exchange their sale item with this currency, to then exchange the currency they have received with another sale item they desire, thereby side-stepping a direct barter trade. That is why it is called a ‘medium’. Money is a bridge and the ‘middleman’ to solve the issues that manifest in a barter system.

The so-called ‘coins’, or junk coins which neither serve as a true and genuine medium of exchange by being accepted in lieu of real goods and services and are only traded on crypto exchanges, are questionable from a Shariah compliance perspective. What do they actually represent? Do they have any substance? Are they serving as a medium between goods and services, or only betted and speculated upon? If they are not valid currencies from a Shariah perspective, they are digital junk and digital waste. The illustrious Imam of the Hanafi school, Imam Muhammad al-Hasan al-Shaybani (d.189 AH) states that for something to be considered as currency, there must be widespread acceptance of it being a medium of exchange[4]. If it does not reach a critical mass, it cannot be deemed a currency. If a token is purely designed to serve as a medium of exchange and is not serving as a medium of exchange as described by the Islamic jurists, then it will not be a valid asset from a Shariah perspective as it serves no purpose whatsoever.

Being a medium of exchange is central to currencies. Saifedean Ammous states:

“Being a medium of exchange is the quintessential function that defines money—in other words, it is a good purchased not to be consumed (a consumption good), nor to be employed in the production of other goods (an investment, or capital good), but primarily for the sake of being exchanged for other goods.”[5]

It is among the primary principles of Shariah that only an asset that has a bona fide benefit and utility is traded. The Maliki scholar Imam Ibn al-Arabi (rahimahullah) mentions that an asset worthy of transacting and trading is that asset which people genuinely aspire, which is capable of being used for a genuine purpose and it is lawful to use from a Shariah perspective. The Shafi’i Imam al-Zarkashi (rahimahullah) states that an asset in Shariah is that which has utility and benefit. The illustrious Hanafi jurist Ibn Nujaym (rahimahullah) quoting from al-Hawi al-Qudsi states a similar principle that assets have been created for the benefit of mankind. The great Hanbali jurist Imam al-Mardawi (rahimahullah) states that assets that are lawful in Islam are those which have a Shariah compliant and valid use case. These descriptions stem from a Shariah concept known as Mal. Mal  is that thing which people incline towards. Generally, reasonable people are only inclined towards something when they perceive a benefit therein. And that is the essence of Mal, something that benefits. Anything that is beneficial and has a clear, Halal utility is Shariah compliant. Anything that doesn’t have a utility or does not have a Halal benefit, then it is not Shariah compliant.

The reason for this Shariah requirement is that Islam sees a transaction to be one where both parties are equal and have a level-playing field. As such, both parties should gain and benefit from a bargain and transaction. When one party is paying money or giving something of value with a clear use case, the counterparty must also deliver something of equal nature i.e. possessing value with utility and a clear use case. Furthermore, Shariah doesn’t recognise an asset that has no reasonable utility as a valid subject matter of the sale. The wisdom of that is clear, which is to prevent people from selling all crazy and useless items to those who are naive, gullible and not aware of what is going on. These principles safeguard and protect consumers from deception and being taken advantage of. The essence of Shariah is to establish that which is beneficial and prevent that which is harmful.

That which is artificial and solely inflated by hype without substance can never survive. It is the system of Allah that harm and negative forces are always flushed out sooner or later. He states a parable indicating to this phenomenon:

“He sends water from the sky that fills riverbeds to overflowing, each according to its measure. The stream carries on its surface a growing layer of froth, like the froth that appears when people melt metals in the fire to make ornaments and tools: in this way God illustrates truth and falsehood- the froth disappears, but what is of benefit to man stays behind- this is how God narrates parables.” [Qur’an 13:17]

Thus, market corrections occur, where the misallocation of capital is rectified. The rubbish is flushed out and that with a solid proposition and benefit remains. Generally, the purification leaves that which has long-term benefit and genuine utility.

The Shariah is about benefiting and the growth of positive values. Only that which genuinely benefits people, the economy and the society aligns with Shariah principles.

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[1] https://coinmarketcap.com/cryptocurrency-category/

[2] https://finbold.com/over-3500-new-cryptocurrencies-emerged-in-2022-despite-sloppy-markets/

[3] Ibn Nujaym, Z.A. (2011). Al Ashaah wa’n nadhair. Beirut: Al maktabah al Asariyyah

[4] Al-Babarti, al-‘inayah, Beirut: Dar al-Fikr

[5] Ammous, S. (2018). The Bitcoin Standard. New Jersey: Wiley