3 Types of Cryptocurrency and Their Shariah Rulings

You may have heard of cryptocurrency, but did you know the types of cryptocurrency that are available around you? Cryptocurrency has been an interesting topic, and if we dig it deeper, we could get confused about its technicalities. We have discussed the Shariah standpoint of cryptocurrency in the previous post. In this post, we will continue discussing the 3 types of cryptocurrency and their Shariah rulings.

 

Cryptocurrency

As we have discussed in the previous article, Shariah scholars have different opinions about the Shariah-compliant status of cryptocurrency. Mufti Faraz is one of the scholars who accept cryptocurrency. He argued that cryptocurrency stores a legal utility sufficient to be classified as maal (wealth). Furthermore, he stated that based on the principle of customary practice, it is possible to consider cryptocurrency as a medium of exchange within a specific ecosystem but not beyond.

There are 3 types of cryptocurrency

1- Stable coins

It is a prominent type of cryptocurrency. The value of a stable coin depends on a different fiat currency. Stable coins exist because they reduce volatility by being pegged to something that is considered to have a stable value; such as fiat currency (e.g. US dollar). It is sometimes backed by actual fiat collateral, and it is received as an off-chain asset by the token issuing company. Good examples of stable coins include Tether (USD T), USD Coin (USDC), Binance USD (BUSD), and others.

On the contrary, some stable coins do not rely on fiat currency reserves or collateral to maintain their value or stabilize the token price; instead, they rely on specialized algorithms and smart contracts to manage the token supply in circulation.

According to Shariah, stable coins should fall under the category of money or a payment system. Therefore, the rule of currency exchange applies to this type of coin.

2- Gold or Silver-Backed Tokens

As the name suggests, this type of cryptocurrency relies its value on commodities like Gold and Silver. This coin is also known as commodity-backed tokens. As this coin is backed by gold and silver, the rules of money and currency exchange should be applied. Examples of this type of cryptocurrency include: PAX Gold (PAXG), Tether Gold (XAUT), CACHE Gold (CGT)

3- Unstable coins

Unstable coins or tokens are cryptocurrencies intended for payment or to serve as money but are not backed by fiat currency or gold and silver. Despite the fact that their prices fluctuate immensely due to market conditions, they can still be classified as cryptocurrencies due to their nature and default structure. For the same reason, they are regarded as money from a Shariah standpoint. Some examples of unstable coins are Bitcoin (BTC), Litecoin (LTC), and Ripple (XRP).

The rulings of currency exchange (Bay’ al sarf)

Bay’ al sarf is a contract of exchanging money for money. In the currency exchange prices, Islam has stipulated specific rules to strictly limit the use of money as a medium of exchange. Islamic ruling on currency exchange prevents the creation of interest-bearing loans (riba), which is strictly impermissible in Islam.

According to Ibn Rushd, three types of sale can arise in a market where goods and money are in existence:

“when two commodities are exchanged, one may serve as a currency and the other as a priced commodity, or both may be currencies. When a currency is exchanged for a currency, the sale is called ‘sarf’; and when a currency is exchanged for a priced commodity, the transaction is sale proper (‘bay‘). Similar is the sale of a priced commodity for another priced commodity (barter)”

The rules of bay al-sarf derive mainly from the well-known hadith:

“Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt – like for like, equal for equal, payment being made on the spot. If the type of exchanged commodities is different, sell them as you wish provided that payment is made on the spot”.

Based on the above hadith, the exchange of gold, silver, and other ribawi items (wheat, barley, dates, and salt) must be made on the spot with equal amounts, quantity, and quality.

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