In my view, cryptocurrency is nothing but a token

By HYLMUN IZHAR / Pic By BLOOMBERG

This article is an attempt to investigate the possible DNA of cryptocurrency. In the first part (published last week), we looked at what cryptocurrencies are. We analysed whether cryptocurrencies could qualify as being wealth (mal), currency, an asset or a security.

In this section, we will deliberate upon the finding of possible new DNA of cryptocurrency and its potential interconnection with Islamic finance.

In the literature of classic jurisprudence, what the modern society calls now as money was at that time termed as nuqud or ‘umlah.

While nuqud refers to money being widely accepted by a large society, the specific meaning of ‘umlah is a type of currency that is only valid in a certain jurisdiction and may not be widely accepted (see a detailed discussion on this distinction by Hasan Mahmud al Shafii in “al Umlah wa Tarikhuha” on page 197).

The principles of the monetary economics theory on money suggest that anything considered as money or currency should fulfil the following primary functions: Unit of account, medium of exchange and store of value.

While at the outset different types of cryptocurrency — such as bitcoin, etherum, etc — may fulfil these functions, such currency lacks the fourth fundamental customary condition, namely a legal tender issued by a government or financial authority such as a central bank.

This fourth condition, coincidentally, is also put forward by Muhammad Rawas Qal’ah Ji in his book “al Mu’amalat al-Maliyah al Mu’ashirah fi Dhau’ al Fiqh wa al-Shar’iyyah” on page 23.

Interestingly, traditional jurists state that for anything to qualify as money or currency, it must have a thamaniyyah component that covers dual functions, namely an independent standard of value and unit of account.

On this note, it is argued that the current phenomenon of cryptocurrency demonstrates that it does not serve as an independent measure of value. Rather, it is the value of fiat currencies that is being used to determine the value of any form of cryptocurrency.

Hence, cryptocurrency does not fulfil a thamaniyyah condition that requires a currency to have an independent reference of value.

Is it an Asset?

An asset may be divided into fungibles (mithliyyat) and non-fungibles (qimiyyat), and into movables and immovables. An asset is owned as either ‘ayn or dayn. ‘Ayn is a specific existing thing, considered as a unique object and not merely as a member of a certain category. Dayn is any property, not an ‘ayn, that a debtor owes, either now or in the future; or it can refer to such property only when due in the future.

Some would argue that a mithliyyat product possesses a certain degree of thamaniyyah component due to its nature in potentially creating debt (dayn) when being transacted on a deferred method.

This is a unique feature that a qimiyyat product does not possess. Consequently, a subtle characterisation of mithliyyat comes along — ie, it cannot be leased out since the nature of its material is perish- able or consumable.

Having described what constitutes an asset, one would immediately notice that a profound feature of an asset is that it should possess an intrinsic value from which people can directly benefit. And cryptocurrency, in any of its forms, fails to fulfil this condition.

While no court or government agency has yet opined on whether cryptocurrency is a security, based on an analysis of case law applying the definition of “security” under the US’ Securities Act of 1933, it appears that cryptocurrency is not a security.

Let us take an example of bitcoin, which does not fall within the definition of any common type of security. In addition, bitcoin does not appear to fall within the broad definition of “investment contract”.

A sale of bitcoin is not an investment contract because a purchase of bitcoin is not an investment in a common enterprise, and purchasers should not expect to receive profits from their purchase based on the efforts of the seller.

In a nutshell, a cryptocurrency transaction does not reflect an ownership right that can be enforced, over which future economic benefits may flow to the owner.

From the fiqh muamalah point of view, a technical detailed analysis in what constitutes financial securities, commercial paper and investment contracts, readers are advised to consult AAOIFI’s (Accounting and Auditing Organisation for Islamic Financial Institutions) Shariah Standards No 16 and 17.

A New Era: Tokenisation

So, what is the DNA of a cryptocurrency then? In my view, cryptocurrency is nothing but a token; it is created through a process called tokenisation. So essentially, cryptocurrency is none other than a platform.

Tokens have no representation of an asset, either physical or intangible, and are by definition confined to the chain in which they exist. I wouldn’t come up with a final statement, let alone a verdict with regard to investing in cryptocurrency, as I am not in a position to do so. But I must admit that I failed to find an argument supporting it from the Shariah point of view.

The prime example of this is bitcoin. When we own bitcoin, we do not own any claims on anything that belongs in the non-digital world. There is no collateral behind each bitcoin, we cannot redeem them for an underlying asset and it does not give us any rights to claim anything against it.

Yes, we may be able to use bitcoin to purchase a cup of coffee, but the merchant accepts your bitcoins at their own discretion since they have no legal obligation to take our bitcoin and give us coffee. Bitcoin, therefore, is a soft token as it is confined to its own chain and has no rights outside the blockchain.

With the way current cryptocurrencies are structured right now, coupled with the exuberance in investing in them, I am afraid this would worsen the debt creation culture that has overwhelmed the financialisation of our global economy.

As the digital economy era is increasingly embraced by larger societies, what if cryptocurrencies are also gaining its momentum and eventually are accepted to become means of payment? Could we in the future consider cryptocurrencies as a currency? The answer is: It is possible of course. Nonetheless, its trading will be guided by the rules of sarf.

What about trading in cryptocurrencies with a main objective of taking advantage of their price differences? As I stated earlier, I wouldn’t be convinced with its permissibility from a fiqh muamalah stand point.

As it is now, the fiqh-compliant twist would perhaps be to find a way to demonstrate that the values of cryptocurrencies represent the values of tangible assets, usufruct or ownership over projects.

• Dr Hylmun Izhar is a senior economist at the Islamic Research and Training Institute, Islamic Development Bank Group. This is the final of a two-part series on cryptocurrencies.