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Ether is Shariah-Compliant Until it's Used For Profit - Scholars

Ether is Shariah-Compliant Until it's Used For Profit - Scholars 101
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A prominent Shariah advisory firm specializing in Islamic finance solutions, Amanie Advisors, in collaboration with Ethereum Foundation, looked into the Ethereum platform and its native currency Ether, to try and ascertain if they violate any prohibition and if they are permissible for the Islamic community.

The scholar-endorsed whitepaper found that the platform and the currency are Shariah-compliant. This means that a Muslim is allowed “to buy, sell, or hold Ether for the purpose of participating in the Ethereum blockchain and take full advantage of what the technology can and has to offer.”

But there is a twist.

The whitepaper starts by explaining money in Islam, saying, among other things, that Islam does not see money as a commodity, but as a medium of exchange. Therefore money has no intrinsic utility. “There is no room for making profit through the exchange of money in the same denomination,” it says, adding: “The profit earned through exchange of money (of the same currency or denomination) or the papers representing them is interest, and therefore is highly prohibited in Islam.” This means that if ETH were to be used to make a profit from interest, it wouldn’t be Shariah-compliant.

Observing Ether, the scholars conclude that:

  • Ether is a utility token, which users use as the transaction fee to compensate the miners, while from the miners’ perspective, it’s the reward token to incentivize them to keep performing their task;
  • while Bitcoin has no function besides being the token of the Bitcoin blockchain, Ether is the utility token which powers the Ethereum platform;
  • Ether is a commodity which has value in the Ethereum ecosystem only and was not created to become a currency;
  • the existence of Ether is assured and can be verified independently by the public;
  • “Ether can serve as a medium of exchange but not amounting to money or currency,” hence the Shariah laws relating to currency do not apply;
  • it is a requirement for the nature and condition of the smart contract to be free from any prohibited element.

The scholars argue that ETH “has certain value and function within the ecosystem and therefore can be considered as a valuable asset or wealth (mal) from Shariah perspective”.

Some restrictions have been noted though:

  • primarily, that a continues research is required, as ETH’s status may change in the future, such as if people start using it as currency (multiple companies are already accepting ETH);
  • while the Proof-of-Work (PoW) and Proof-of-Stake (PoS) consensus algorithms “do not violate any major Shariah requirements,” a thorough Shariah review on the PoS protocol will be needed “to assess its compliance and adherence to the Shariah principles once the new protocol is finalized or fully implemented” (Ethereum is planning to change is consensus mechanism from PoW to PoS);
  • for the same reason, a Shariah review is needed on the purpose and nature of the smart contracts or decentralized applications built upon the Ethereum platform.

The announcement says that the whitepaper’s main objective is to outline the Shariah parameters of Ether, with the goal to reassure the public that ETH is Shariah-compliant, so that they would be “more confident and assured to be more active in participating in the development of Shariah compliant smart contracts and decentralized applications which is now still lagging behind.” They also added that “It is hoped that with the findings, parameters and guideline outlined in this paper, it would serve as a catalyst to the Islamic finance market, and wider Muslim population to enter and participate in the space as well.”

Meanwhile, in April 2018, a report called ‘Is Bitcoin Halal or Haram: a Sharia Analysis’ was published by certified Muslim legal expert Muhammad Abu Bakar. The paper said that "it is not advisable to buy cryptocurrency for investment purposes, like stocks or shares," adding that "Rather, it is advisable to utilize cryptocurrency networks as a payment system in the cases where cryptocurrency networks offer specific benefits and advantages over conventional systems." However, the the author stressed that this paper should not be considered as final fatwa (ruling) or Shariah verdict​.

Also last year, the Shariyah Review Bureau, an Islamic advisory firm licensed by Bahrain’s central bank, provided the certification for Stellar, alongside guidelines for the types of assets that can be traded in its platform. Moreover, a startup from Dubai, OneGram, issued a gold-backed cryptocurrency as part of efforts to convince Muslims that investing in cryptocurrencies complies with their faith. Also, a mosque in London made headlines in 2018 when it said that it is accepting donations in cryptocurrency.

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