By Emilio Escartin
FinTech technology and cryptocurrencies are part of the new era into the Islamic World. Bitcoin and Ethereum as a legitimate form of currency and investment in Islam. Shariah law emphasizes real economic activity based on physical assets and frowns upon pure monetary speculation. New cryptocurrencies are seeing the light getting the approval of GCC governments (as “Rain”, in Bahrain and other several shariah-compliant digital coins have been launched in the market). Since Islamic scholars around the world have mixed views on the use of digital currencies, the question now is, How these new cryptos or cryptocurrencies (or assets as new asset class) will affect the Zakat (the third Pillar of Islam) in the coming years.
FinTech and Cryptocurrencies into the Islamic Finance ecosystem
According to Don and Alex Tapscott “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value”
Blockchain is the name of a new technology. It is a sequence of blocks of connections that are chained together and distributed among the users (decentralized). It is an immutable record of transactions (although mostly economic you can stock any kind of information in the blocks so its applications and potential usages are immense ) as it is decentralized ledger and managed by P2P networks.
Cryptocurrencies (or Cryptos)
Cryptocurrencies (or Cryptos) also known as digital currencies represent a value that can be digitally negotiated. Blockchain is the technology behind Cryptos so when you speak about Cryptos you must have a brief introduction about Blockchain as well or at least Facebook is launching LIBRA with consortium of members from various facets of the industry. On this project (LIBRA) one can find companies such as, UBER, Coinbase, Lyft, PayU and many other large corporations. That means that changes are for serious. It will be a matter of time when this comes to reality. I do not want to explain much about the protocol of LIBRA Blockchain itself. I want to draw readers’ attention to the numbers and sizes of the founding partners on this new launching. This is something to be worried about, my guess is that this is a real threat for the conventional and traditional financial system since the number of active Facebook users we are talking about is much larger than we can contemplate: Over 2.4billion as of Q2 2019 (one third of the world population). If we include Facebook’s subsidiaries Instagram and WhatsApp potential application of LIBRA and its usages across the ecosystem has even higher value, that sets Facebook as the first social media network with an asset backed financial ecosystem in the world.
What would happen if companies such as Souq.com (now Amazon), ARAMCO, CrediMax issued Cryptocurrency of their own or become founding partners on different new launchings in the coming years?
Islamic Institutions are also collaborating with local entrepreneurs and new initiatives for launching new blockchain and digital financial projects to be more competitive on financial technology, smart contracts and Shariah Compliant ICOs (Initial Coin offering) backed by assets or having got the approval of local (GCC) central banks and regulatory authority.
In the following link https://tokentops.com/rating/, you can find the general ICO list where you can find all ICO projects that have been listed on Token Tops – with ratings, reviews and countdown.
When you are buying or investing in Cryptocurrencies (decentralized), there is no regulation about KYC (only in very few cases such as Regulatory Sandbox or Sandbox License, , and Ripple). No Government regulations or other institutions to protect the viability and financial stability in the financial system. No protection for small or retail investors (the weakest part of the chain)
They need to have a special category for projects that have disappointed the crypto world and simply turned out to be a scam. These are the projects that destroy the reputation of a very interesting crowdfunding method that is ICO and should be avoided, but do not worry, not every ICO is a fraud.
As per the website tokentops.com and information published uploaded, most of new ICO projects are first announced at the bitcoin talk forum, but a big number of them are scam. That is an unfortunate reality. There are no real people behind such projects, no whitepaper neither business plans. They just beg for money from ordinary people, while others hide behind allegedly real project, raise the funds then disappear or say that they have to end the project for whatever reason. The risks of the decentralized money (cryptos) are opportunities for scammers. Therefore, the more decentralized the more room for cheating.
There is no doubt about the benefits that FinTech (and for sure Blockchain technology) brings to the banking and financial industry, not only for conventional but also for Islamic Financial Institutions: It will improve the competitiveness of all entities, reducing costs, automatization of processes, Robo Advisors, smart contracts, and creating a new and more friendly way of banking (user friendly, reducing transactions time and generating profits for all counterparts)
Artificial Intelligence is a big game changer in the industry. Same for Big Data, Cybersecurity, IoT, Blockchain (and its application in many industries). Most of the banks in the future will become depositaries of data instead of fiat currency, so the more data they manage (and the quality of it) the bigger they will be and will gain more control in future.
Having the banks and finance at your fingertips means that millennials and baby boomers both are much closer doing something as simple as manage savings, payments and buy goods. That’s why the retail trends are changing big time. Number of Customers visiting brick and mortar store is declining compared to millions of people are doing transactions 24/7 in Amazon, Alibaba, eBay and other ecommerce platforms.
According to the website Statista the number of smartphone users worldwide today surpasses three billion and is forecast to grow further by several hundred million in the next few years. China, India, and the United States are the countries with the highest number of smartphone users, with each country easily surpassing the 100 million user mark. By 2021 industry will reach almost four billion of users.
From the Shariah Perspective since Ripple is centralized (controlled by a Government) vs other cryptos as Bitcoin is decentralized (ledger decentralized) there is a difference between these two and for some scholars launching centralized cryptos reduces the uncertainty (Gharar) since centralized by a government or a regulator giving the cryptos the blessings and approval of national institution
According to some Scholars, a cryptocurrency has to have a very stable ledger and Blockchain is a decentralized ledger, which it means that anyone can download the ledger.
The questions for discussion here from Shariah perspective is, if Cryptos are a Currency as a medium of exchange (being Maal as store of value) or if trading cryptos are like trading currency. Answer to this can be highly controversial regarding what is permissible and what is not? It is very difficult to find Scholars with same opinion who can help and clarify these two questions 1.) Are cryptos as a medium of exchange? 2.) Trading cryptos is like trading currency? In old times when the Gulf fiat money was created, we had Gold (Dinar) anlver (Dirham) from Romans (Dinar) and Persians (Dirham), and then you had a very precise value backed by Gold or Silver. Nowadays, in many cases, it is very difficult to contemplate the same in new Cryptocurrencies.
Zakat and Cryptocurrencies
Zakat is the third Pillar of Islam and most probably the first of its economic system, so according with it represents the mechanism to set up economic justice and to provide, let’s say, fuel to the economically unlucky (both are very sensitive issues for Islam)
It is s based on income and the value of all of one’s possessions. It is usually 2.5% of a Muslim’s total savings and wealth above a minimum amount known as Nisab, but Islamic Scholars differ on how much Nisab is. According to Islamic doctrine, the collected amount should be paid to the poor, the needy, Zakat collectors, those sympathetic to Islam, to free from slavery and for debt relief.
Nisab in Shariah is the minimum amount that a Muslim must have before being obliged to Zakat. Several hadith have formulas for calculating Nisab and to explain this concept is not the purpose of this chapter. In short Zakat Net Worth > Nisab then you owe Zakat; on the flip side Zakat Net Worth < Nisab it means you do not owe Zakat
If you own an asset and this increase its value, that asset is subject to Zakat. According to this statement (or principle) such asset is subject to Zakat.
In accordance to owning Cryptocurrencies (since assets have lately appreciated in value) should be subject to Zakat as well, and in a moment of the cycle (living a booming moment in FinTech as other new digital industries such as AI, Cybersecurity, Blockchain technology, Big Data, IoT, SaaS etc for applications in many industries etc.) this would increase the Zakat collection for Islamic community and it will contribute to a greater number of recipients of Zakat (larger number of beneficiaries)
Nowadays since the information about the crypto owners is not transparent, it is very difficult to show a ballpark about this potential impact and its way of calculation, because very few players are disclosing information about how many cryptos they own (Bitcoins, Ethereum, or other Islamic Cryptos launched in the recent year)
This is a game changer that all Islamic countries (and all brothers and sisters) should take into account.
My guess is that the local governments (GCC and other in the Islamic world, such as Malaysia, just to quote regions where FinTech and Cryptos both are very popular) should open this issue with their Shariah Scholars and regulators because this issue affects directly one of the main pillars in Islam as I mentioned in the beginning of this chapter. I am sure that none of the Shariah Scholars or very few of them have given attention to this concern, but for sure nobody is speaking out clearly. It is true that none of them would like to be the first one to open the discussion but someone should be bold enough, especially for the benefits of the Islam (and the beneficiaries of the Zakat) so the sooner the better. My view is that Scholars can judge topics that are not stated by the Prophet (“ﷺ”) regarding Zakat and issue a fatwa.
However, there is no consensus about the role that cryptos play in any financial or real economy system. Are those financial assets or by contra they should be treated as money (digital money)? The question is not easy to answer but one thing is clear: A cryptocurrency (as Bitcoin) is an asset that can be converted to cash quickly with high volatility (so let’s consider as a stock)
The initiatives launched in the region (the Gulf) such FinTech Bay and the new sandbox regulations issued in Bahrain (by Central Bank of Bahrain) have had to see the light of new Islamic Cryptocurrency such as Rain (regulated by the Kingdom of Bahrain).
On top of that UAE’s Mubadala Ventures has invested in crypto asset trading platform by the name Midchains
An increase in commodity or merchandise held for sale is subject to Zakat. Therefore, money (including Gold and Silver) is also considered as an increasing commodity. To wrap up all assets that increase in value are subject to Zakat.
So from the previous statement it can be inferred that net increase in the value of Cryptos should also be subjected to Zakat Estimating potential amount of collection on Zakat based on the increased value of the Cryptos shall be a good exercise (as long as the owners would be willing to disclose such information).