Crypto currency: The basics, how it's being used, shariah issues, and web 3.0

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This article is a transcription of our interview with Brother Aziz, Chief Product Officer of Fasset and Founder of the acquired Master The Crypto. Join our Telegram community to get the latest updates, answers and initiatives on Islamic Finance:

Introduction The global coin market is worth $100 billion, and coins will play a vital role in the future of our world. While cryptocurrency investors are at risk for many different types of legal action, including criminal and civil penalties such as in China, it all points to one major factor, the lack of regulation in this field.

The Securities and Exchange Commission (SEC), a US regulator for securities, warned investors that cryptocurrencies are subject to government regulations, which means the government can seize them. Additionally, cryptocurrency exchanges have been hacked in the past. Investors may lose their funds if they do not take the proper security precautions.

While the future of bitcoin is up for debate, some people believe that cryptocurrency will continue to grow in use and value. In contrast, others think it will eventually crash due to over-speculation or regulatory action.

In this interview with Brother Aziz, we go from the basics of cryptos and blockchain before diving into the shariah aspects and its present and future use cases.

What is a crypto currency in simple words?

I think that's a great question to start with. When this whole thing started, this entire industry was created and predicated on a single asset and the technology that comes with it, Bitcoin and the underlying blockchain technology.

Bitcoin was described as the next evolution of digital cash relative to, for example, the current Fiat system, which is a centralised monetary system.

Bitcoin is a decentralised system, a peer-to-peer network. Where we see this in the past decade, the evolution of this industry stands from Bitcoin as digital cash and its underlying technology blockchain, which powers a lot of use cases. This (technology) can be disruptive, you know, just with a different set of data structures.

We must be very clear when we discuss this—the bifurcation between cryptocurrencies and blockchain technology. Cryptocurrencies are what you say, is the output of the underlying tech, which is blockchain, and the use cases of blockchain far surpass that of money or any other use cases that we can see today.

Now, just focusing on one vector or one component of this technology, which is the usage of blockchain technology in the context of money, i.e. the most that you have with this Bitcoin, we can see that it is a new system that is distributed and decentralised. This system brings along a host of benefits that we can discuss later.

I see (cryptocurrencies) as the next evolution of money. You can see its various utilities applicable in the current financial system. We see the next development of money, for example, Central Bank Digital Currencies which also utilises blockchain, right? The easiest way to describe CBDCs is that they are a digital currency implementation of the currently existing structure of money, which makes up about 95% of the total money supply.

This digital implementation of Fiat money will utilise blockchain on the backend. On the front end, consumers will not be exposed (interact) to the underlying backend Blockchain technology. A lot of countries and governments are trying to look at (CBDCs) right now.

What exactly is a crypto currency?

I get the question's premise because it's predicated on the fact that cryptocurrencies are not tangible. Therefore, we have to look at the other side of the coin: traditional economies, where we see a general trend towards digital payments.

You see, only 4-8% of the global money is physical cash, and the rest is digital, right? So, when you look at (cryptocurrencies), don't just try to look at cryptocurrencies on the backend; these are complex blockchain stuff.

Instead, look at it as a new kind of tech which is digital and therefore, it is not so different on the front end when we talk about digital money like we are used to.

Are bitcoin and crypto currency the same thing?

So technically Bitcoin is the first cryptocurrencies and therefore when we talk about cryptocurrency, Bitcoin is basically the founding father, or the Adam Smith of the cryptocurrency space and it is always used as a yard stick in the cryptocurrency market. So, when we talk about Bitcoin, it is a form of digital cash, a medium of exchange that we are used to, usually within the context of money, yes.

What is decentralisation?

Decentralisation is a big word, right? We talk about the legal system and legal tender. But decentralisation is a data structure. For example, in a traditional system, the data structure would involve clients and servers. For instance, when you Google something. Your PC is a client communicating with Google's servers and so on.

But in a decentralised structure, there is no (centralised) server. Everyone can be a server. This is one of the tenets of decentralisation, the spirit of decentralisation. It is about empowerment. Anyone can participate and secure the system; anyone can be rewarded, and there are no limitations on who can join. This level of empowerment allows anyone to enter the system and not be limited by the encumbrance of traditional constraints. So that is what we mean when we talk about decentralisation.

But in the question of legal tender, I think that is a separate issue because at the end of the day, when we're talking about one of those vectors of discussion for cryptocurrencies or blockchain technologies where money is a use case, then definitely legal tender is one of those areas that we can discuss on like in the case of El Salvador recently. Or where crypto assets are not being (recognised as) legal tender.

That is one of those areas of discussion that emanates from and is being discussed as a feature or a trait of it being a medium of exchange.

Isn't it growing so fast?

Definitely, I mean the exponential rise of adoption (of cryptocurrencies) across the globe forces regulators and any other stakeholders, not only shariah scholars, to be in the loop of how the technology works and how you can regulate or create standards within the industry. This is only natural for an industry that is fast-growing and only been established ten years ago.

Are crypto currencies a solution to third world problems?

So naturally, I think that this is a good juxtaposition, like you said. From our point of view, in a developed country, for example, in this country (Singapore), we don't have to worry about the weaknesses of the Fiat system. Therefore we are at a level where, given that we don't have to worry about that, we can worry about other fundamental stuff like customer protection which is a big thing when we talk about regulators, as in efforts to regulate this industry.

But when we look at other countries where their Fiat system isn't working that much, or you can see obvious red flags or weaknesses, therein lies one of the promises of one of the hallmarks of why decentralised cryptocurrencies were created in the first place.

Because at the end of the day, cryptocurrencies have a philosophical underpinning to justify why you would want to create a decentralised world, i.e., to run away from constantly circumventing the weaknesses of the traditional Fiat system where there is evident mismanagement and hyperinflation. In some countries like Venezuela, Zimbabwe, you can see the effects of what's happening there and how Bitcoin, for example, or even dash, is a much more viable medium of exchange than traditional Fiat currencies.

So that, on a fundamental level, is why cryptocurrencies were created in the first place, because we want to create a fair, distributed, and a world where empowerment is the main trait affecting a fully functioning closed-loop system.

Are cryptocurrencies the best form of money for countries that are economically turbulent or have weakened governments?

So, the context of the question is based on the two kinds of polarised systems within the spectrum, where traditional Fiat money is predicated on the management of the government (vs cryptocurrencies). Based on the local economies, you can see that Bitcoin, the most used cryptocurrency, is a viable medium of exchange for users because they don't trust the Fiat cash in the local economy.

After all, it is devaluing right in front of their eyes. Cryptocurrencies try to offer an alternative to the centralised system. In the case of Bitcoin, you see a fixed supply asset that is global and able to hold its value. I mean, you can see at the start bitcoin was worth cents, and now you can see a high of $60,000, currently at $40,000 plus. You can see how cryptocurrency (would) work in those countries where the Flat system isn't working.

Is Bitcoins halal or not? Many question whether Bitcoins is permitted by Islam.

First and foremost, I am not a scholar, and therefore I cannot say this scholar's fatwa is wrong or something which I can argue. As with anything, there are differences of opinion. I mean, we respect all scholars, but here we would need to have an objective viewpoint on how we see cryptocurrencies.

Because it is a very complex thing and if you look at various new Institutions and bodies and scholars that on both sides, you can see their merits, but when you peel them, in just my humble opinion, those against cryptocurrencies are usually centred around the fact that cryptocurrencies are volatile, risky, filled with prohibitive elements like gambling, zero-sum game, are fraudulently used by those in the dark world, and all of that is predicated on a large viewpoint of customer protection as well, just like what regulators are trying to do which is to preserve the maslahah of the economy. But suppose you look from both sides of the crypto mechanics. In that case, one is the philosophical underpinning and the other, the technical implementation.

Starting with the philosophical underpinning since cryptocurrency exists due to the weaknesses in the traditional fiat economies, where you can see inflation or hyperinflation, mismanaged economies, which translates into mismanaged Fiat currencies. While you can attribute it to many things such as inflation, the distribution of wealth, stuff like that, right?

So just the first premise of why crypto was created was because the concept of decentralisation was empowerment. So that everyday people would have a stake in their money and work towards a single global unified currency. And second If you look at the implementation, just in terms of utilities, it's apparent, vis-a-vis the traditional banking system where you want to send money, there's a lot of intermediaries in between, costs, inefficiencies of time, an international transfer can take 3-5 working days, but a bitcoin transfer can take half an hour.

So just based on utility alone, you can see that there are various use cases of Bitcoin, which far surpasses that of the traditional Fiat currency. If you look at all the ideological notions of cryptocurrencies, you can see where it is coming from. I'm just saying that (cryptos) were created because of the weaknesses in the traditional fiat systems.

Lastly, to sum off, I don't want to talk about this because again, at the end of the day, all parties can sort of say OK, you know this the notion is born about on this argument or this fatwa, but you can counter them, so those for and against, right? But when you look at the common arguments of those against cryptocurrencies as haram, in my humble opinion, it doesn't speak to the fact that when you talk about volatility, risk, fraudulence, all those don't hold water in terms of the actual technology that underpins the cryptos which are meant to be more efficient, foster more inclusion, empowerment. But we can discuss that on another day. Still, that's the kind of debate we usually have where it is haram for so and so reasons.

Does bitcoin being intangible make it haram (Non-permissible)?

So when we talk about cryptos, this (intangibility issue) is also a hot topic since cryptos are not tangible and therefore make for an argument against crypto, right? But when you talk about it from a shariah perspective, all the madhabs, except the classical Hanafi school of thought, recognise intellectual property as an asset.

So just based on that alone, we can see that intangible asset are seen as legal property within the eyes of shariah.

When we talk about the technical implementation of this, how does this reflect in the real world? I think it must be fair where we must hold ourselves to a reasonable standard across both sides. Because when you talk about intangibility, digital money, which comprises over 90% of the money in the economic system, is also intangible, right? The tangible part, the physical cash and coins, make up a tiny portion relative to digital money.

So, can we extrapolate the argument across digital money as well? Because I can also go to the other side of the crypto space and say, you know what, we can easily manifest that (crypto) in a physical form where bitcoins rests in private keys, which can also allow you to pay, so if that works, so can we say that the argument against cryptos due to its intangibility is absolved?

So, having this discussion would be an exciting affair when we talk about the actual implementation and other assets in our current system.

Does not being legal tender make bitcoin haram?

That is also highly contentious in the sense that if it's not legal tender, then legally, it is not permissible for usage. However, one country, El Salvador, has made it into a legal tender. But I think the crux of the issue is a simple question:

If it's not legal tender, is it still shariah compliant?

At the end of the day, I'm not aware of the need to be a legal tender for it to be a shariah-compliant asset. So, the various utilities that manifest themselves in cryptocurrencies way beyond traditional Fiat currencies are apparent. And if it's just a question of it not being legal tender, then it would be quite a superficial point to paint cryptocurrencies as shariah non-compliant just because a group of people within a country does not give it legal recognition.

So to close out the loop on shariah arguments (on crypto), I'm not saying that I disagree with it not being shariah compliant by some scholars because of the various valid points, but I contend that we need to look deeper than just looking at all these superficial arguments because tomorrow, a country can say Bitcoin is legal tender, and suddenly it becomes compliant.

So, the assertation of shariah compliance should not be based on something superficial, rather more foundational aspects of the technology that you see very little off because every contention could be discussed with subject matter experts where you can see a different viewpoint.

What impact will the decentralization really have on Web 3.0?

So basically, web 3.0 is like a standard or way of doing things in a decentralised manner. The governance or fostering the ecosystem of a decentralised world where all that you see that is centralised in the system, whether it be browsers, data structures, finance, is now decentralised.

Web 3 is a direct product of the evolution of cryptocurrencies and blockchain technology. Although there are a few debates on decentralisation, the amalgamation of a decentralised system that is self-sufficient and secure via cryptocurrency is where we see it being revolutionary.

So yes, cryptocurrency and blockchain facilitate this evolution to web 3.0. You can see a decentralised ecosystem relative to whatever we see in a centralised world like Google and Facebook.

We would have a decentralised alternative to all that clearly because of the advent of blockchain.

The future of Cryptos in Islamic Finance?

That is only natural, and I think on the one hand it's good to discuss, but on the other hand, you sort of limit the innovation and integration of this new technology.

But since the start, I firmly believe that when the Islamic finance industry utilises this new technology, and here, I am emphasising the technology, let's leave crypto for a moment; the underlying fact is that when you can use it on an inefficient field like Islamic finance because let's face it, Islamic Finance tries to circumvent the prohibitions such as Riba. Still, in doing so, we have more contracts, more intermediates, more costs involved, which makes it less efficient than the conventional counterparts that transact in direct riba, so traditionally Islamic finance was created not on a similar pedestal because we need to put in more stuff to make it halal.

So, therefore, you can streamline the inefficiencies and value add across the system and streamline the entire operation by using blockchain technology and one of those critical areas is the usage of automated smart contracts that can remove all the centralised intermediaries to reduce the costs and create a more streamlined and efficient system.

You can already see that in decentralised finance. In the US and Singapore, they have already come up with a proof of concept and even live operational platforms that use blockchain technology to sort of reduce the inefficiencies of traditional capital market operations. So instead of T + 3% for settlements, it is now instantaneous. To be at the same pedestal or on the same plane ground, we must look at all these new technologies to ask: how can we use this new technology to create value and streamline inefficiencies across this industry?


Aziz Zainuddin is currently the Chief Product Officer at Fasset, a Dubai-based cryptocurrency exchange platform. Previously, he founded a media platform called “Master the Crypto” which focussed on simplifying the concepts of cryptocurrencies and blockchain technology for the masses. While his platform has been acquired in 2019, he still frequently publishes his articles on eToro. Mr Aziz was featured in the 2019 edition of Islamica 500, a publication which provides biographical details for 500 of the world’s most prominent and influential personalities in the Islamic world and economy.

Transcription done by: Muhammad Ridhwaan Radzi

Muhammad Azhari Bin Mohamad Hisham