Islam and Cryptocurrency forwards
Are cryptocurrency forward contracts permissible in Islam?
Bai Salam (Arabic بيع سلم, more accurateli) is an Islamic contract in which full payment is made in advance for specific goods to be delivered at a future date.
Before we investigate the minute details of Bai’ Salam transactions in which cryptocurrencies (CC) are traded for regular “fiat” money, we should look into whether the underlying asset itself is permissible (halal).
The question is much more difficult than it appears on the surface. We are in the middle of a “fetwa war”, as Islam legal scholars hotly debate the issue and exchange contradictory fetwas. Among highly regarded cryptocurrency opponents are Sheikh Assim Al Hakeem, a prominent Saudi scholar and Egypt’s Grand Mufti. Bitcoin proponents cheer Muhammed Abu Bakar, who declared cryptocurrencies “generally permissible”. In the meantime, blockchain startups began quietly obtaining shariah-compliant certifications — from Amanie Advisors in Malaysia (HelloGold); or from AlHuda Center of Islamic Banking and Economics in the UAE (OneCoin). Even the Islamic Development Bank follows the trend. It decided to adopt smart contracts to create Muslim-friendly financial products.
I believe that the delay in acceptance of cryptocurrencies among Muslim religious authorities is mostly due to the novelty factor — it will take some time for our religious experts to learn the intricacies of the digital world that would render them qualified to rule on the subject.
Back to the Salam and cryptocurrencies. It is generally accepted that Salam in currencies and monetary units is not allowed, as they are not deemed commodities and have no value in the absence of government commitment to support them. The situation with various CC and tokens is completely different — most countries declared them assets, not currencies. The Financial Stability Board, an international regulatory body established by G20 countries was unambiguous in stating that “cryptocurrencies and tokens” lack the traits of “true” currencies. The rest of the world thinks in a similar manner — Cecilia Skingsley, the deputy governor of Sweden’s Central Bank when asked about Bitcoin specifically replied that “it is an asset and not the money”.
Let us now analyze whether Salam in cryprocurrencies and tokens can be a valid Salam contract:
1) Subject matter of Salam sale must be precisely determined in terms of quality and quantity. By definition all tokens and CC are standardized into identical units. Check.
2) Advance payment. This is a required feature of Salam contract and will be fully applicable to the cryptocurrency forward contract. Check.
3) Period and place of delivery are fixed precisely — upon expiration of the pre-agreed time the tokens or CC would appear in the buyer’s cryptowallet. This transaction is easily secured by the execution of a smart contract. No cash settlement would be allowed. Check.
4) With a little training CC are easily obtainable from the market, so the seller is not required to be in possession of the Salam’s subject matter. Check.
5) If necessary, the performance of the seller can be secured by a pledge or a collateral, and be writted into a self-executing smart contract.
Trading cryptocurrencies and tokens is a risky business due to their high volatility. This volatility in undesirable from the standpoint of most market participants, including the issuers — how can Ripple secure the usage of its token XRP by banks in facilitating interbank transfers if it can lose or gain 5–10% during the transaction itself? A developed forwards/futures market for CC may be able to bring the required stability to this new asset class. And Salam contracts may play a significant role in adoption of cryptoassets by over a billion potential Muslim customers.