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The Role of Cryptocurrencies in the Islamic Economy

Cryptocurrencies and electronic money have become popular not so long ago and continue to be one of the main topics for discussion at various levels. Many theorists of Islamic finance and Islamic economy see a huge potential in blockchain technologies and cryptocurrencies as a means of ensuring better financial relations in the environment of fiat money. The study of the potential and possibilities of cryptocurrencies in the Islamic economy is a topic that interests many people, therefore we would like to elaborate on what role they play in systems built on the basis of Islamic finance.

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The growth of the Islamic financial market has also started relatively recently. And although financial Islamic banking and Islamic finance have existed for decades, we can say that they began to spread their influence in the world only since the early 70s, when the National Bank of Abu Dhabi was established. During this time Islamic banking services have proven exceptional success and innovation in the principles of operation they apply, therefore it is quite logical that cryptocurrencies have become the subject of increased attention of leading financial organizations in Arab countries.

The National Bank of Abu Dhabi (NBAD), which is one of the largest and most authoritative financial organizations in the Islamic world, in 2019 recognized cryptocurrencies as one of the forms of means of payment and gave them the following definition: “means of exchange, a unit of account or a means of savings that has the status of legal tender in a valid and legal jurisdiction.” And although it does not follow from this definition that cryptocurrencies can be considered a means of payment that has the functions of a national means of payment, nevertheless, their status implies such a possibility. And although cryptocurrencies do not yet have the status of legal tender in many Muslim countries, their use as a means of exchanging values is recognized and not disputed.

It is important to understand whether cryptocurrency is money or a commodity, and also to clarify the differences between money and goods, because, according to Shariah law, money is not equivalent to a commodity. Shariah emphasizes the need to handle money only for its main purpose (i.e. as a medium of exchange and a measure of value). The National Bank of Abu Dhabi emphasizes that cryptocurrency can be considered a commodity in the sense that virtual money also has value and can be exchanged for other valuable things, and this value depends on supply and demand. In this regard, virtual currencies have a lot in common with physical goods such as precious metals, fuels and agricultural products.

Taking into account the above definitions, it becomes possible to evaluate cryptocurrencies in terms of applicability in Islamic finance and their compliance with the conditions of goods and currency in Shariah.

The potential of cryptocurrencies and blockchain creates the basis for more transparent and reliable transactions that increase trust between users. The principles of operation of the blockchain comply with Shariah law, and therefore the applicability of cryptocurrencies can only be considered with respect to a specific token or project in which it is used. The arguments in favor of the applicability of the blockchain and the absence of prohibitions on the functioning of cryptocurrencies come from the very model of their work, which is a system of computational and mathematical applications, in the content of which, by definition, there are and cannot be elements prohibited by Islam. But this does not exclude the presence of prohibitions voluntarily or involuntarily introduced by developers of blockchain projects.

The chairman of the Advisory Council on Shariah of the Central Bank of Malaysia, Daud Bakar, expressed the idea back in 2018 that cryptocurrencies are acceptable in the Islamic economy. But he stressed that the fear of how cryptocurrencies can be used does not allow them to develop and find new ways of using them in the real world.

With other positive features, any blockchain project should be based on a certain ideology and provide a tool for effective interaction between system participants. IslamicCoin targets 1.1 billion Muslims using the Internet. The project creates convenient tools, for example, a special wallet designed for users who have never been owners of cryptocurrencies. Thus, the opportunities of the Muslim online community are expanding, which is getting the opportunity to use a new form of digital money.

Already at the stage of closed sales, IslamicCoin aroused huge investor interest and was able to raise more than $200 million in just a few weeks. Unlike many other blockchain projects, IslamicCoin uses the full power of the most advanced technologies and is based on the most fair and reliable ideology and rules of conduct.

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