Sharia finance

Holborn blog article

Stellar: a top crypto gains Sharia compliance

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cryptocurrencies

Shariah finance

Top 10 cryptocurrency Stellar (XLM) has received Sharia Certification from the Shariyah Review Board licensed by the Central Bank of Bahrain.

Ethereumworldnews.com reports that, “Stellar has become the first distributed ledger protocol to receive Sharia compliance certification in money transfer and asset tokenization space.” XLM stock has risen 20% on the news, although has since fallen back.

Stellar describes itself as a “platform that connects banks, payment systems and people.” (stellar.org). Sounds like any other crypto, right? So what’s so special about this Californian 2014 startup (now 6th-biggest crypto by market cap.) that it has attracted Sharia backing?

Leading broker Etoro explains that, “Stellar’s approach is quite different than other cryptos, since some of its declared missions include fighting poverty and providing financial solutions for bankless individuals.” Stellar underpins its ethical status by providing open source code ie. free software.

Whether or not cryptocurrencies in general are Sharia-compliant has been the subject of much debate in recent months and has left Islamic investors, not to mention the rest of the financial world, in a state of confusion about whether cryptos are halal (permissible) or haram (forbidden).

 

Snapshot: Stellar

  • Stellar has a market capitalisation of $5.6bn and is the sixth largest cryptocurrency.
  • The trading unit Stellar is called “XLM” – which is why the cryptocurrency is often referred to as “Stellar (XLM)”.
  • Stellar trades now in early Q3 2018 for around a third of a US Dollar, having hit a high of almost 90 cents in January 2018.
  • The price of Stellar stock jumped by over 20% on the Sharia news.
  • Stellar is described by Wikipedia as “an open-source protocol for exchanging money using blockchain technology”.
  • Stellar’s customisable payments infrastructure uses units called “lumens” of which there are almost 19bn in circulation.

 

Islamic (Sharia) finance – the bottom line

In the simplest terms, Islam does not differentiate between the spiritual and the secular, meaning that even the world of finance, in fact all financial exchanges, are subject to the same rules and regulations as the rest of life.  Islamic banking tries to further the ethical and socio-economic principles guiding all of Islamic life.

 

What are the basic principles of Islamic finance?

The fundamental principle of Islamic finance is the avoidance of haram (forbidden) activities such as charging interest, which inevitably favours the lender and not the borrower. This is known as riba and relates to the basic premise in Islamic law that a person (or institution) should not be able to receive income from money alone (i.e. the lending of money with the purpose of charging interest).

As well as the avoidance of haram, Islamic finance must also comply with rules governing gharar (ambiguity) and maysair (gambling/speculation) ensuring that these are of a minimum. In addition, Islamic financial institutions are not permitted to invest in pork, pornography, alcohol or gambling.

 

So how does Islamic banking work?

Islamic banking works on the principle of risk sharing, meaning that both the customer and the bank agree to terms in which risk and profits are shared.

There are 5 main governing principles:

  • Ijara: a leasing agreement where the bank buys the item and the customer leases it over an agreed period.
  • Ijara-wa-Iqtina: as above except the customer can buy the item at the end of leasing.
  • Mudaraba: the bank pools investor’s money and agrees to a share of the profits/loss.
  • Murabaha: a type of credit whereby an intermediary makes the purchase and sells it to the customer for an agreed profit.
  • Musharaka: an investment partnership where profit and loss sharing terms are agreed in advance.

 

How do we know if cryptos are Sharia-compliant?

Blossom Finance, a microfinance investment company that specialises in Shariah compliant investing, recently published a research paper, written by Muhammad Abu Bakar (a Muslim legal expert), on whether Bitcoin, cryptocurrency, and blockchain are halal. The company, itself a user of blockchain technology and Sharia-compliant ethical and sustainable investments, is keen to stress that the paper does not represent a final fatwa or Sharia verdict, but is rather a work in progress, and invites further discussion with experts and scholars.

Founder and CEO of Blossom, Matthew J. Martin, points out that: “contrary to popular myth, Shariah Law is not a single set of rules; it’s a scholarly field subject to differing interpretations and opinions on various matters.”

Indeed, the company’s investigation into cryptocurrency’s compliance with Sharia was undertaken in this spirit, and in response to several Fatwas issued by some leading scholars, including the Grand Mufti of Egypt Shaykh Shawki Allam, and the Turkish Government, who pronounced cryptocurrency as haram ie. forbidden.

 

What is the case FOR cryptos being Shariah compliant?

  • Bitcoin is legal tender because of its acceptability by the people, the main criteria for money in Shariah law.
  • Though the “issuer is unknown” and it is not backed by a government, the Distributed Ledger Technology it is based on ensures that transactions are safer than any centralised system used by a bank or government.
  • Though Bitcoin has so far been a volatile currency, it cannot be described as haram on this basis alone, as doing so would also disqualify other volatile assets like US Dollars, gold, or silver.
  • ALL currencies can be used for money laundering or other nefarious purposes (the US dollar a prime example) and should not disqualify cryptocurrencies as it is an external (and uncontrollable) factor.

 

What is the case AGAINST cryptos being Shariah compliant?

  • Bitcoin is not legal tender.
  • Bitcoin’s issuer is unknown.
  • Bitcoin has no central authority or government backing it.
  • Bitcoin is highly speculative and unstable.
  • Bitcoin can be easily used for money laundering and illegal purposes. 

 

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