Cryptocurrencies volatility is one of the main factors hindering the mass adoption of digital finance and a hot topic for discussion among Muslim scholars. In this article we will try to understand in detail how the Islam and Shariah rules relate to cryptocurrency trading, price moving and their value.
Read here about the concept of wealth (mal’) in Shariah and its relation to digital finance and cryptocurrencies.
Cryptocurrencies are absolutely different financial assets, however, their capabilities fully correspond to the capabilities offered by traditional fiat currencies and precious metals, which have been a means of exchange and measures of material values for centuries. From the economic point of view, cryptocurrency systems reproduce the same effect as the real economic environment. Blockchain allows the process of verification, storage, calculation and synchronization of information. Parties involved in cryptocurrency transactions can access the same data and track any transactions. As in the case of stocks and securities issued by large companies, the change in prices for cryptocurrencies is also associated with internal and external factors: supply and demand, political and economic events, the complexity of mining, the volume of supply, etc.
Read here about Cryptocurrency trading and Shariah rules.
Price volatility – is it garar or maysir?
Translated from Arabic, “garar” means “uncertainty”. If one of the parties to the contract wants to hide from the other some of the consequences of the concluded agreement in order to put her partner in a less advantageous position, she resorts to garar.
Literally translated from Arabic, “maysir” is a “gambling game” associated with making a profit as a result of a random combination of circumstances. Maysir includes winning roulette, winning a lottery ticket, making a profit on derivatives and openly speculative behavior in financial markets.
Despite the fact that the definition of garar in Shariah is interpreted in an absolutely definite way, the acceptance of risk and uncertainty does not have the same clear relationship when explaining the very nature of cryptocurrencies and their value. In the Muslim doctrine of the rules of conduct (fiqh), garar usually refers to something unknown, for example, the sale of a flying bird or fish in a pond, as a result of which the probability of catching them is very small. The conclusion of a contract with a high probability of loss can definitely be considered as a garar, but the expectation of profit is based only on a weak assumption about the cost, which is absolutely unacceptable in the case of cryptocurrencies.
Maysir is associated with gambling and the alleged receipt of profit. In Shariah, the commission of such actions is prohibited not because of the very acceptance of risk, but because risk is something that a person agrees to of his own free will. Cryptocurrency trading, if it is based on analysis and accompanied by the application of certain knowledge and skills, is a process that allows a trader to predict the future trend and the value of a particular coin.
There is an opinion that a high-risk sale, which illustrates a high probability of losses, is also considered a garar. But the purchase of cryptocurrencies usually occurs when predicting the future price for the purpose of “buying and holding” as an investment strategy. In addition, the purchase of a crypto asset allows the buyer to enjoy owning a digital asset without experiencing any uncertainty in owning it thanks to the mechanics of the blockchain, which ensures transparency of transactions. Thus, the accusation of cryptocurrencies as a gar asset can be considered inappropriate, since the analogy used in this case is also unacceptable.
From the definition of the nature of cryptocurrencies, it follows that they do not imitate the physical form of fiat money, since they cannot be stored as fiat funds or physical gold. Trading on the crypto market is not at all identical to speculative activity. The existence of speculators is the norm in every market in this world. But judging the same consequences for traders is not entirely accurate.
Criticism of cryptocurrencies is often based on the fact that they do not contain any elements of value, and traders simply rely on speculation. But in the case of cryptocurrencies, such trading and the value of cryptocurrencies correlate with the use of a trademark or brand as an object of trade, which is only a name that does not have its own value. However, after the brand is registered, it is considered a product. Shariah doesn’t prohibit such trading, since the efforts made to create a brand play an important role. This analogy can also be used for trading cryptocurrencies, where the name of any cryptocurrency is a stimulating factor in trading, demonstrating trust and influencing the value when buying and selling coins.
Hope, luck and losses are normal consequences that traders face in any business or investment, regardless of their status. Taking a risk when selling or buying something is common in any trade, but expecting profit without the possibility of loss is unacceptable in an Islamic business transaction. The difference between speculation and risk taking can only be determined by intent, therefore, cryptocurrency trading cannot be considered speculation only because of expected losses or profits on the part of a minority of users. In addition, cryptocurrency potentially replaces fiat money as a medium of exchange, a store of value and a unit of account, provided that the amount of cryptocurrency supplied corresponds to market demand.
Accepting cryptocurrencies as an investment asset that complies with Shariah law is a reasonable idea that has scientific evidence. Despite the fact that cryptocurrencies belong to a different class of financial assets, they have a lot of advantages. Garar and maysir are not obstacles to the adoption of cryptocurrencies, since the behavior of their value can be understood, predicted and predicted. Speculative actions of some market participants can be considered a problem, but they are not naturally embedded in cryptocurrencies, but depend on external factors. Nevertheless, the crypto asset must comply with the requirements and principles of Shariah, and when using it, it is necessary to avoid any prohibited actions that are considered inconsistent with Sharia.
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