Islamic Coin: Navigating Faith and Finance in the Crypto World
Cryptocurrency and the Islamic religion are two things that have not crossed paths until now. Islamic Coin, the supposed ‘ethics-first’ token compliant with Sharia law, is a new contender in crypto on a quest to absorb global liquidity from market participants. The groundbreaking token was released into the market specifically to bridge pressing religious and financial opposing beliefs.
The project has received significant support from Islamic scholars. In June 2022, the Islamic token received a fatwa, or a legal opinion, issued by the world's leading Muslim authorities. The verdict on the fatwa was led by Sheikh Dr. Nizam Mohammed Saleh Yaquby, referred to as 'The Gatekeeper' of a $2 trillion market for Islamic financial products.
Fatwa or not, there’s been debate among other scholars about whether the use of this type of cryptocurrency is permitted according to the mandates of Shariah. The focus of these arguments is on whether Islam Coin is fundamentally haram or halal. Islam belief states that haram is a description of something forbidden or prohibited by Islamic law. Halal refers to the things or actions permitted and seen as lawful according to the same creed.
The digital currency also comes with a strong proposition around sustainability, like Ethereum. The fatwa’s positive ruling on the Islam Coin was based on the project’s use of proof-of-stake mining and commitment to charity. In November 2022, Islamic Coin also won the Most Promising ESG Crypto at the Middle East Blockchain Awards.
Still, individuals and groups have created cryptocurrencies with names or themes associated with religions or belief systems, sometimes benefiting over personal financial gains. Most have been unsuccessful in the long term due to a lack of network effect and genuine use cases.
As for the centralized nature of Islamic Coin compared to decentralized assets like Bitcoin, there’s mild skepticism in the crypto space based on the biased initial distribution of Islam Coin, which amounts to 20 billion tokens. Considering the project's long-term perspective, incentives will ultimately determine the interests of controlling central entities and their inherent counterparty risk by using a centralized ledger system. Whether the Islam Coin digital asset will provide real transactional value for the Muslim nation remains to be proven.
Digging Deeper into the Mechanics of Islamic Coin
To better understand the crypto project, its inner workings, and the road ahead, read its whitepaper. It claims that when a new Islamic Coin is mined, 10% is sent to ‘Evergreen DAO,’ a non-profit virtual foundation that invests funds into Islamic charities or community-impacting projects. To ensure transparency, the project has its own Shariah board to observe Shariah compliance in smart contracts that might occur on the blockchain.
Islamic Coin ($ISLM) is the native token of HAQQ, a layer one proof-of-stake (PoS) blockchain operating on the open framework Cosmos SDK. As for the token's emission rate and its supply cap, on the genesis block (the first block ever mined), 20 billion tokens were mined. Every two years, called an ‘era’, the emission decreases by 5%. This means the emission of the cryptocurrency will stop 100 years from the first block and that there will be a final total of 100 billion tokens of Islamic Coin.
Not Everyone Supports Cryptocurrencies
The digital currency phenomenon has garnered its defendants and naysayers in the Middle East. Some scholars have endorsed mainstream cryptocurrencies like Bitcoin, arguing that they do not generate riba or interest, which is haram, which makes them permissible.
On the other end, anti-crypto muftis, also known as Muslim legal experts, reckon that Muslims should stay away from something that involves such gharar, or speculation—Egypt’s grand mufti Shawki Allam, an Islamic religious scholar, shares this opposing view of crypto. In 2018, he endorsed a ban on Bitcoin trading in Egypt without a license by issuing a fatwa that cryptocurrency is haram.
However, this missing consensus has not dampened the crypto activity in Muslim countries. According to a report from data firm Chainalysis, in 2022, the Middle East and North Africa had the fastest-growing cryptocurrency market in the world. Unsurprisingly, despite the grand mufti’s verdict, Egyptians led the surge in crypto adoption as they turned to the digital asset space to mitigate inflation and devaluation of the local currency. So, how relevant is religion or the government in preventing or furthering crypto adoption?
The Pillars of Islamic Banking
It's important to delve into its core beliefs, teachings, and practices to understand further Islamic banking and how it might conflict with digital money. One of the most distinguishable traits of Islamic banking is that it prohibits charging or paying interest on loans, which is the basis of conventional fractional reserve banking worldwide. Islamic finance is based on profit and loss-sharing agreements between the person who lends and the one who borrows.
Still, even though speculation is not an option in the Islamic rule book, Shariah law permits investing in intangible goods like stocks and bonds. Shariah also only permits investments in businesses and projects that do not harm society (alcohol, gambling, and tobacco are considered harmful).
Shariah emphasizes that the critical factor to avoid risk is ensuring that the assets recorded on a financial ledger have legitimate ownership and are backed by real assets rather than speculative ones.
How applicable is this in a world of speculative, global financial markets?
Is Bitcoin Gharar?
Whether investing in cryptocurrencies is considered acceptable in Islamic finance can vary among scholars, and opinions may differ. The crypto asset Bitcoin represents an important verdict on its permissibility and validity, mainly due to being the biggest and most trusted cryptocurrency based on its stellar performance and track record since it came into the market in 2009.
Thai fintech company Blossom Finance published a paper on the Islamic permissibility of Bitcoin. It concluded that ‘bitcoin qualifies as Islamic money’, while others have deemed the asset Bitcoin as ‘haram’ (impermissible) by several Muslim authorities due to being non-compliant with Islamic law. This camp sees the volatile nature of cryptocurrencies as introducing a level of 'gharar' (uncertainty, hazard, or risk) or ‘the sale of what is not present,’ turning them into something speculative and problematic.
The Inherent Risk in Centralized Projects
Aside from religious and government mandates, incentives in any project will usually determine its time span in the industry they are rolled on. Since the altcoin frenzy that began in 2013, we are used to hearing about new projects in crypto created to make something better in one way or provide value in another. Reality continues to prove that not every project lives up to its promises. In light of this, there are concerning issues to consider in the Islamic Coin project.
In most centralized altcoin projects, the participants that have the most at stake, meaning that they control the most funds on the protocol, increase their control over time because they are incentivized to do so. These incentives are based on getting more voting power in the network and rewards through additional tokens for holding and staking their existing tokens in that blockchain.
Notably, the HAQQ blockchain, where Islamic Coin is the native token, is based on proof of stake. Proof of stake means that the more coins you have, the more control you can exercise over the system. As proof of stake, you can think of the tokens themselves as shares in a company. The more shares you own, the more control you can exercise over it. This can be somewhat worrisome when the project starts by giving the initial coin supply to a small number of people, as we will see next.
Examining the Initial Token Distribution of Islamic Coin
Often, pre-mined crypto-project tokens work as rewards for exclusive groups of people and can contribute to creating pump and dump schemes, especially if the tech is not sound and network adoption is low. With Islamic Coin, we need to look closely at the white paper to see how the tokens will be distributed initially.
It claims that from the initial 20 billion ‘supply,’ 2 billion will go to the Evergreen Foundation. The claim is that the Evergreen DAO is for charity, but it also says, ‘Evergreen DAO also may fund activities necessary for the HAQQ Network Evolution.’ It also claims that ‘...key decisions are made by a council that consists of HAQQ network validators whose contribution to the Network's stability and security is the greatest’.
The last statement means that in a proof-of-stake system, the validators that have the greatest contributions to the network's security and stability are the ones with the most tokens. Therefore, these validator participants are the ones that control Evergreen DAO and decide on where the funds go, which could also come with a risk of self-serving actions from participants.
New Faces, Old Incentives
After their initial supply distribution of 2 billion, 5.5 billion tokens go to ‘...partners, boards, initial supporters, promoters and market makers.’ There is no mention of any automated process for selecting these groups, which makes the selection process obscure and biased.
Another 4 billion of their initial supply will be distributed through an ‘initial private sale’. These coins will be sold to ‘qualified private investors.’ There is no detail about their identity, the amount of coins they're getting, and at what value. Everything indicates that the internal giveaway of tokens is through inner circles and referrals, sort of like a membership or club where to get in, it´s required to know another person from the inside, leaving decentralization out of the picture.
Finally, 3 billion tokens will go for ‘Founders Reward.’ Overall, of the 20 billion initial supply, the total amount seems to be controlled by a central entity regarding its destination.
Going back to incentives, it's not unreasonable to assume that a select, vouched-for number of people will get the majority of the Islam Coin tokens in a seemingly unfair, top-down organization structure.
Bitcoin as the Foundation of Digital Money
Having contemplated key aspects of the project, Islamic Coin should be considered for transactional use rather than as a savings technology. Rather, allocating capital to scarcer digital assets like Bitcoin will likely be more beneficial in the long term than trying to diversify in the altcoin space. Bitcoin is becoming the foundational layer for the internet of money in the same way that the TCP/IP protocol has been the foundational layer for all of the internet since the early 1970s.
So why will Bitcoin become the only foundational protocol for digital money and not other altcoins? The relevant part of the answer is that reliability is at the core of digital money. This feature is very expensive to achieve in terms of energy, which Bitcoin has done. Think of it as being unable to modify a digital file in the digital era or having the world's most immutable, decentralized, and secure ledger protected by energy from crypto miners.
Ultimately, whether investing in cryptocurrencies is deemed acceptable within the context of Islamic finance may depend on the specific characteristics and usage of the cryptocurrency, as well as the interpretation of Islamic jurisprudence by individual scholars or financial institutions. Muslims interested in cryptocurrency investments may seek guidance from qualified Islamic scholars specializing in Islamic finance to ensure their actions comply with Shariah principles.