Dr. Hazik Mohamed, Fazrihan Duriat, Syed Muhammad Alsagoff & Ilham Sanusi
- Money comprises of three basic functions: a medium of exchange, a unit of account, and a store of value. In comparison currency is but a circulated medium of exchange (eg: legal tender). Its core function is to serve as a customary accepted form of payment by the people in exchange for goods and services. However, unlike money, it lacks intrinsic value. Currency is instead backed by money which can be done via gold, silver, commodities, or the government . In fact, fiat money used in global economic systems today is considered a currency, and this includes the emergent use of plastic and digital currencies.
- In order for currency to effectively perform its role as a medium of exchange, it requires relative stability, which can be done via government or sovereign monetary regulation.
يَـٰۤا أَيُّهَا ٱلَّذِينَ ءَامَنُواْ إِنَّ كَثيرًا مِّنَ ٱلْأَحْبَارِ وَٱلرُّهْبَانِ لَيَأْكُلُونَ أَمْوَالَ ٱلنَّاسِ بِٱلْبَـٰطِلِ وَيَصُدُّونَ عَن سَبِيلِ ٱللَّهِ ۗ وَٱلَّذِينَ يَكْنِزُونَ ٱلذَّهَبَ وَٱلْفِضَّةَ وَلَا يُنفِقُونَهَا فِى سَبِيلِ ٱللَّهِ فَبَشِّرْهُم بِعَذَابٍ أَلِيمٍ
“O you who have believed, indeed many of the scholars and the monks devour the wealth of people unjustly and avert [them] from the way of Allah. And those who hoard gold and silver and spend it not in the way of Allah – give them tidings of a painful punishment.”
[Surah Al-Tawbah 9:34]
- In Singapore, the sovereign currency, Singapore legal tender, or the Singapore Dollar (SGD), is issued by the Monetary Authority of Singapore (“MAS”), which serves as the nation’s central bank, for use by the public to facilitate daily economic transactions and activities.
- Cryptocurrencies bear some similarities to regular currencies. Unlike regular currencies, cryptocurrencies are purely digital assets, supported by blockchain enabled encryption techniques, using cryptography to secure transactions, control the creation of additional units and verify the transfer of assets. The critical difference between the two is that cryptocurrency can be created independently of central banks and can be used independently of typical regulated financial intermediaries (such as banks).
- In addition, there are significant limitations to the use of cryptocurrency in comparison to regular currency as it has yet to be widely accepted. If someone acquires cryptocurrencies in the form of equity, security or utility tokens, these tokens cannot be traded as a commodity or treated as currency because its purchasing power and right of exchange is limited to the specific asset, product or service for which the token is issued. The token would typically have to be monetized for fiat or regular currency in order for broader access to other assets, goods and services.
- In its current state, cryptocurrencies are mostly used as a medium of exchange (utility tokens) in lieu of regular currency, to make payments for certain assets, goods and services where the seller or service provider expressly accepts the cryptocurrency as payment. Further, cryptocurrencies are then floated in crypto-exchanges (public exchanges for cryptocurrencies) and are often acquired as an asset for speculative purposes as the value of cryptocurrencies can rise to earn the holder profits.
- A number of countries have banned the use or holding of cryptocurrencies for various reasons including the protection of investors (given the volatility of prices) and lack of regulation (resulting in cryptocurrencies being the choice for online illicit activities mode of payment). It is important to note that most of these fiqh rulings are on the basis on protecting the ummah, and not on the legitimacy of the cryptocurrency itself.
- In general, currencies or wealth (mal) should benefit human beings without harming the integrated global economic and financial systems. This is the essence of the Islamic moral economy. There should be an element of profit and loss sharing in Islamic transactions (mu’amalat). Speculative behaviours have an element of gambling (i.e. maysir) in them where the gain is not what you have earned through effort, and the profit/loss based on mere chance, or the Greater Fools Theory. Widespread speculative behaviours have been blamed for the global financial crises of 2008 and in most previous financial crises. Hence, Muslims are advised to stay away from speculative practices because, although it may bring quick profits initially, the gain is not sustainable and will eventually crash and bring harm to the speculator and possibly affect a wider participating community.
- Where cryptocurrencies have either been pegged or backed by gold in order to fulfill the condition of mal (wealth or property), it is advisable to understand how the assets are being used as reserves to back up the cryptocurrency. For example, gold reserves being locked in a vault to back gold-backed cryptocurrencies can potentially violate the Shari’ah ruling on hoarding.
- In view of the fiqh understanding of the Shari’ah, it is mandatory that such issuances of digital currencies be clear in its use case and purpose of issuance in order to remove uncertainty (gharar).
The use of the token has to be specified clearly — currently, tokens usage have been as an Equity Token, Security Token and a Utility Token. Each token is treated differently according to the Shari’ah as well as the regulatory authorities because of its nature and usage. Due to this, its treatment by the regulators as well as the Shari’ah will be in accordance to its nature and usage.
- As such, based on our analysis:
- Utility tokens are used as a means of exchange and hence it will be categorized as a currency. Shari’ah rules on currency will be applied to utility tokens.
- Equity and security tokens should be categorized as mal (wealth) as they have a store of value, just like other forms of equities (shares, stocks, etc.) and other forms of securities. Shari’ah rules on equity and securities will be applied to them.
RELIGIOUS GUIDANCE ON ICOs
- An Initial Coin Offering (ICO) entails the creation and issuance of a new digital coin or token by a company looking to raise capital for their venture. In general, the company announces a specified amount of funds that it wants to raise, and the fundraising continues until that amount is reached. ICOs are conducted online, and purchasers use fiat currency, or other cryptocurrencies, like Bitcoin and EtherCoins, to pay for the new tokens.
- Companies using ICOs as a capital-raising method have generally been companies that use blockchain technology as part of their business model to provide a particular service or product. These companies disseminate the new ICO tokens to buyers via blockchain. Potential purchasers in an ICO do not receive a prospectus; instead, issuers often publish a white paper describing the ICO.
- The initial idea was to give greater financial access — blockchain technology could be used to issue new cryptographically secure “tokens” or “coins” that are easy to transmit peer-to-peer — without a central authority. The coins could be sold to fund open-source software projects and other services that people find useful but are hard to finance with traditional structures. They could even function as shares and thus allow companies to finance themselves far more efficiently, from a broader range of people, and without the intermediaries that take fees and require a drawn-out process. Or the “coins” could represent some unit of utility, such as a means of exchange within the issuing entity, gigabyte of storage or access to a network.
- However, some ICO issuers might lead buyers to believe that they can expect a return on their investment or otherwise be able to participate in a share of the returns provided by the project. Buyers also might be told that there will be an opportunity to sell the tokens on a secondary market or an online virtual currency exchange, although such secondary market liquidation venues are not guaranteed.
- Initial Coin Offerings (or ICOs) have become a popular way of raising capital for businesses, particularly start-ups, with the ability to raise large amounts of capital in a very short period of time.
- The public is often subjected to opportunists who may use religion or (unrecognized, faulty, flawed) faith-based arguments to legitimise their profit-driven intentions. Possibly, the opportunists may not even know that they may be violating permissibility rules of the Shari’ah, based on fiqh This religious guidance is issued to safeguard the unknowing or uninformed public, and not to be presumptuous of the intentions of the ICO issuers.
- The public is thus advised to check the professional background of the individuals involved in the offering using Monetary Authority of Singapore (MAS) directories and verified lists of issuers, wherever possible. They should also check the validity and credibility of the Shari’ah Advisors behind the ICO issuance.
يَـٰۤا أَيُّهَا ٱلَّذِينَ ءَامَنُواْ إِن جَاۤءَكُمْ فَاسِقُۢ بِنَبَإٍ فَتَبَيَّنُوۤاْ أَن تُصِيبُواْ قَومَۢا بِجَهَـٰـلَةٍ فَتُصْبِحُواْ عَلَىٰ مَا فَعَلْتُمْ نَــٰدِمِينَ
“O you who have believed, if there comes to you a (disobedient/wicked/undetermined) person with information, investigate, lest you harm a people out of ignorance and become regretful over what you have done.”
[Surah Al-Hujurat 49:6]
- Tokens offered as securities, require investment professionals to be licensed and registered under MAS securities regulations.
- Tokens offered as a utility need to have clear rights and benefits to be used for either goods or services that the company provides.
- The rights and benefits of ICO tokens will vary depending on the offering. Tokens in an ICO might not represent an ownership stake in a company, i.e. they are utility tokens and not equity tokens.
- It is important to know what you are receiving in exchange for your investment, including liquidity issues as it is possible there will not be a market to sell or exchange your ICO tokens.
- It is also important to note that new regulations may be imposed on cryptocurrencies since the regulatory environment is quite dynamic.
In conclusion, we would like to advise all Muslims be thoroughly informed before they enter into any investment offer/program, especially when the offer is too good to refuse. It is better to remain safe and miss out on a seemingly good investment opportunity, than to lose halal and hard-earned income and savings.
In view of this, we urge the Muslim to observe the Shari’ah principle of sadd al dharai (blocking the means that can lead to evil), so that a Muslim’s mal may remain protected from injustice and free of unlawful income.
Despite this document being explicit, those who are still unclear on the religious position of these issues, please refer to qualified religious authority with relevant economic, financial and technical capability at Financial Shariah Advisory & Consultancy (FSAC) of PERGAS Investment Holdings (PIH).
 Fazrihan Duriat is a Shariah consultant in PERGAS Investment and an advisor to Islamic Business & Finance Society of Singapore Management University. He can be contacted at email@example.com.
 Known as Al-Thaman al-Khilqī. In the kitab Ihya Ulumiddin, Imam Ghazali (r.h.) refers to gold and silver, both of which have all the qualities of money as mentioned in the primary sources of religion i.e. Koran and Sunnah.
 Known as Al-Thaman al-‘urfī. Based on majority of scholars, value of such monies is extrinsic as they are issued under authoritative decree of a country (i.e. made legal tender) and the value is based on supply and demand and affected by monetary/fiscal national policies.
 أُولِي الْأَمْرِ مِنكُمْ
 The Islamic theory of profit dictates the following legal maxims in trade and any contract of sale (al-bay): “al-ghorom bil ghonm” (no reward without risk) and “al-kharja bi daman” (in any benefit lies a liability). Taken from Mahmood Mohamed Sanusi, Islamic Banking and Finance Shari’ah & Legal: Issues and Challenges, pg. 75.
 The idea that someone more foolish than the initial buyer will buy their shares/tokens/etc. for more than what they paid.
 An ICO white paper is a technical paper that essentially describes the start-up/company’s business plans. It typically includes the problem they are trying to solve, the solution and product/service, its token implementation (how the token works with the product, economics and technical aspects), the team that will be carrying it out, the token deployment and market capitalization plan.
 Shari’ah experts who are actually adept in economics, finance and technology on top of having Shari’ah or fiqh expertise. Having only Shari’ah expertise is not enough. Most religious-based tokens have compliance that are weak and usually not widely agreed on by majority of the Islamic jurists and scholars.