Digital assets and cryptocurrencies have become an increasingly popular tool for trading in recent years. A large number of centralized and decentralized platforms have greatly facilitated access to trading for both professional investors and ordinary users. Being a potential replacement for the currently existing fiat financial system, cryptocurrencies cause constant discussions between experts in the laws of Islam and Sharia. The purpose of these discussions is to provide the Muslim community of traders with clear recommendations regarding their participation as investors or traders in the crypto markets.
The ambiguity of opinions and positions held by various Muslim experts has not yet led to concrete decisions, and therefore the purpose of this article is not to create a specific guide for Muslim traders, but to provide them with information about how actions performed when trading cryptocurrencies can be considered from the point of view of Shariah, and how the market works digital finance trading.
The basic rules that must be followed by Mislims while trading on exchanges.
1. Avoid transactions and actions that may lead to (or involve in):
• Riba or interest.
• Maysir or gambling.
• Garar fahish or excessive insecurity.
• The use in trade and use of assets used for the purpose of promoting actions prohibited in Islam and Sharia (for example, pornography, alcohol, etc.)
2. Ensure that the value of the exchanged assets is based on the prevailing market price at the spot value (i.e. without delays in the delivery or receipt of one or both assets).
3. Avoid future trading (on some exchanges they are known as “perpetual contracts”).
4. Avoid trading in derivative financial instruments.
5. Exercise due diligence and research the nature of the assets to be exchanged in order to avoid trading cryptocurrencies that may not comply with Shariah.
6. Use technical analysis and risk management before entering into transactions (otherwise it may be considered gambling and excessive speculation). While ancillary contracts in Islamic finance (such as wa’d or “unilateral promise”) allow trading for hedging, these activities are usually regulated and applicable only in certain jurisdictions. Currently, there are no centralized exchanges offering futures or derivatives that comply with Shariah, which would be approved by any advisory Islamic committees. However, some exchanges claim to offer “Islamic” trading accounts. Such statements should be treated with caution.
Generally speaking, cryptocurrency trading is similar to stock trading. While in traditional markets there are criteria for selecting stocks and lists of these Shariah-compliant stocks that help traders and investors choose a suitable asset, such a mechanism is still very little used in crypto markets, and on some platforms it works as an “unofficial” functionality. Most operations on cryptocurrency exchanges are associated with the receipt of “interest” received during trading and exchange on the difference in the value of crypto assets.
If the asset you are trading is recognized as a currency in the same sense as existing fiat currencies, there may be a potential problem with “interest income” or riba. Such income may violate sarf (currency exchange) rules. However, most digital assets are considered currencies, not currencies, but goods that are equivalent to ribawi goods (basic goods that are equivalent to currencies). In this case, as long as the digital asset complies with Shariah, the profitability when working with such an asset can be considered acceptable.
Initial Exchanges Offerings (IEO)
A very common mechanism for investing on both centralized and decentralized exchanges. Similar to initial coin offerings (ICOs), crypto assets are offered through trading platforms instead of direct offers to investors. As a rule, projects that issue their tokens on the IEO are thoroughly checked by the exchange itself.
When considering the acquisition of an asset under IEO, the asset should be carefully checked for compliance with Sharia rules. If the developers of the coin and the project claim that they comply with such rules, it is worth examining all available documents, and if necessary, request additional ones.
The above rules of trading and behavior on crypto exchanges are only part of the strategy that should be followed by those who want to comply with Shariah law when exchanging digital tokens and currencies. Any investment and trading activity is primarily a responsibility to the person who has decided to participate in this process. Cryptocurrencies and tokens compatible with Shariah rules, used both separately and within ecosystems, must first of all comply with the rules of Islam.
One of such currencies is IslamicCoin (ISLM)
IslamicCoin is the first project to provide the community with powerful financial technology that allows for seamless transactions, support innovation and charity. The project is 100% compliant with Shariah law and benefits the community. Developers focus on sustainable development and use technology and innovation to ensure financial sustainability.
“At the heart of Islamic finance is the prohibition on charging interest. Islamic finance has always been focused on not shifting most of the risks to one side of the financial relationship. In Islamic finance, balance and transparency of transactions should be observed, which can negatively affect our society,” says Mohammed AlKaff AlHashmi, one of the founders of IslamicCoin.
Islamic Coin targets 1.1 billion Muslims using the Internet. The project creates convenient tools designed for users who have never been owners of cryptocurrencies. The mission of the project is to provide the international community of followers of Islam with a reliable and promising financial instrument that allows for independent financial interaction, support innovation and philanthropy. Using the power of the Muslim community, Isalmic Coin can become one of the most important and valuable crypto assets. If 3-4% of the Muslim online community own an Islamic coin, it will become a bitcoin-scale crypto asset, bringing its holders a trillion dollars and $100 billion for the Evergreen DAO.