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Digital asset market expands to include Islamic cryptos

By Aaron Woolner and Fitri Wulandari

Edited by Aaron Woolner

07:24, 10 December 2021

Ancient islamic copper coin in pile of other coins
Ancient Islamic copper coin in a pile – Photo: Shutterstock

From its headquarters in Frankfurt, technology firm Caizcoin aims to embrace the concept of digital assets on what it terms as the “basis of goodness and faithfulness”, with the world’s first Islamic cryptocurrency. 

The name Caiz was chosen for its similarity to the Arabic word Jaiz, which is a synonym for acceptable or sanctioned. 

The German firm is not the only outfit looking to bring the halal – something which is permissible by Islam – concept into the cryptocurrency world.

Three months ago, the United Arab Emirates’ Securities and Commodities Authority signed an agreement with the Dubai World Trade Centre Authority (DWTCA) to enable the trading of digital assets in DWTCA’s free zone.

Fountains at Dubai World Trade CentreFountains at Dubai World Trade Centre – Photo: Shutterstock

At the start of the year, the Gulf state of Bahrain issued its first shariah-compliant cryptocurrency exchange licence to CoinMENA. 

In June 2020, Malaysia’s Shariah Advisory Council of the Securities Commission issued a ruling on the status of digital currency and digital tokens. 

Indonesia’s MUI did not ban crypto

So far these initiatives have gained little international attention but when the Indonesia’s National Ulema Council, (MUI), a group of religious scholars which provides rulings on Islamic issues in the Southeast Asian country, gave a preliminary ruling on cryptocurrencies at the start of November it prompted global headlines. 

Bloomberg’s take was typical.

In an article headlined “Crypto is forbidden for Muslims, Indonesia’s national religious council rules”, the normally conservative newswire said: “The National Ulema Council, or MUI, has deemed cryptocurrency as haram – forbidden by Islam, as it has elements of uncertainty, wagering and harm.”

Only that is not what the MUI said. 

Firstly, the MUI recommendations on cryptocurrency is merely an opinion.

The MUI’s view will become guidance for Indonesia’s National Sharia Board (locally known as DSN), to discuss the fatwa (ruling) on cryptocurrency – whether to declare it haram or halal (meaning permissible or forbidden respectively– under Islamic law. 

Nothing has been forbidden so far and there is no timeline for DSN’s ruling. 

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Currencies, investments treated differently

The next point is the difference between cryptocurrencies such as bitcoin and cardano being used as a currency or an investment. Currently, only the rupiah is legal tender in Indonesia, therefore the MUI ruled that cryptos cannot be used as currency because that would be illegal. 

The MUI’s take on digital assets as investments is also more nuanced than media reports suggest. 

Crypto traders in Indonesia, the world’s most populous Muslim nation, can still trade digital assets as a commodity or investment as long as they have underlying assets that meet shariah tenets, lawyers and investors told Capital.com. 

The MUI’s opinion is that cryptocurrencies are not permissible for trading if it carries elements of uncertainty (gharar), inflicts harm to others (dharar), is speculative (qimar) or does not meet the requirements of material goods (sil’ah). 

Cryptos with underlying assets are ‘halal’

The material goods requirement means something with a physical appearance, value, ownership, and can be transferred to buyers. 

The MUI also ruled that if digital currencies meet the material goods requirement and have underlying assets, they are halal, and therefore can be traded.  

“What are the underlying assets to be traded in cryptocurrency? Some said crypto has assets. If that’s the case, in what form? Where? Who regulates it?

There are still many questions,” says Mirza A Karim, at Jakarta-based KarimSyah Law Firm, in an interview with Capital.com.

“If those questions can’t be answered, based on Islamic law, then it carries uncertainty or gharar,” said Mirza. 

A crowded street in Yogyakarta, IndonesiaA crowded street in Yogyakarta, Indonesia – Photo: Shutterstock

Cryptos gain popularity in Indonesia

There are still questions and debates on cryptocurrency that need to be resolved, Mirza says. “For new financial products, such as crypto, we cannot rush to declare it is 100% haram. We need to be clear first,” he says.

The ulema council’s initial view on crypto came as the digital assets are gaining popularity across Indonesia. 

In the first seven months of 2021, cryptocurrency investment in Indonesia has surged over IDR478trn ($32.2bn), rising sevenfold from IDR65trn in the whole of 2020, according to the Trade Ministry. 

Based on the ministry’s data 7.4 million Indonesians invested in crypto assets as of July, compared with four million at the end of 2020.

Indonesian crypto boom continues in 2022

Indonesian demand for cryptocurrencies has continued into 2022 according to a recent report from crypto exchange Gemini, which said 41% of the people it surveyed in the Southeast nation owned some form of digital asset. 

This puts the country way ahead of the US and UK, which had ownership rates of 20% and 18% respectively, and made Indonesia the joint global leader with Brazil in terms of digital asset uptake.

One reason for this is ease of access with tech publication Rest of World recently reporting that Indonesians could set up a crypto account for just 75 US cents.

Indeed, Capital.com recently spoke to a retail ETH miner who said that he could liquidate his recently minted tokens, convert them into cash and withdraw this from an ATM in just ten minutes using his smartphone.

Different types of cryptos

Not all cryptocurrencies are alike and it is important to distinguish between the four main types: stablecoins, central bank digital currencies (CBDCs), utility tokens and private sector digital coins such as bitcoin or cardano.  

One blockchain expert told Capital.com that whether crypto was backed by underlying assets depended on which type of coin was being referred to and there were even differences between tokens of the same type.

While stressing that his expertise lay in the area of blockchain rather than Islamic jurisprudence (law) he pointed to the recent news that Indonesia is looking into launching a retail CBDC, the digital rupiah. 

Not only does this meet the MUI’s stipulation on being legal tender, but the blockchain expert also said that there was no difference between the digital and paper versions of the currency, meaning that the digital rupiah is implicitly halal.

CBDCs are ‘halal’

This view was backed by Affan Giffari, managing partner at Jakarta-based Trifida At Law. Affan told Capital.com that a digital rupiah was in a different world to other cryptos such as ethereum or shibu.

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Affan specialises in technology media telecommunication, including blockchain technology, crypto assets, and smart cities.

“A CBDC is a legal currency issued by a country’s central bank and has different characteristics to the general crypto assets. 

“Crypto assets are decentralized, whereas a CBDC is centralized and supervised by the central bank. Since a digital rupiah will be supervised by Bank Indonesia and directly refer to the value of the currency it should have the element of certainty,” says Affan.

Questions over stablecoins

Next comes stablecoins such as USDC, or tether. In theory, these meet the parameters of being backed by an underlying asset. The blockchain expert, however, pointed to a difference between the two coins.

An illustration of Tether logo on a mobile phone screenIt is unclear exactly what assets back tether – Photo: Shutterstock

“USDC is more than 100% backed by assets and has a clear audit trail to demonstrate this, tether on the other hand is open to question”, the blockchain expert said. 

While tether claims that every dollar of the coins it issues are backed by assets of equal value, a recent Bloomberg article “Anyone seen tether’s billions?” questioned whether $69bn of tether coins in circulation – $48bn of which were issued in 2021 – were truly backed by a similar level of assets. 

Utility tokens need further study

Then comes utility tokens, such as the soon to be launched VOY, which enables the prepayment of trade finance. 

According to the blockchain expert, most jurisdictions treat utility tokens in the same way as gift tokens for tax purposes, and he inferred that this meant they passed the underlying asset test. 

However, according to the Working Paper on Sharia Principles in Cryptocurrency prepared by Halalvestor, an Indonesian community-based platform which looks at shariah-compliant investment, there needs to be more clarity over this area of crypto. 

Halalvestor said that as tokens are an indirect form of cryptocurrency further study is required to decide if they are shariah compliant. 

Is bitcoin Islamic?

The final type of cryptocurrency, private sector coins such as bitcoin, appears most likely to be declared as haram according to the blockchain expert. 

“The grey area is pure cryptos which have no underpinning and only have value because people believe they have value, like bitcoin and doge,” he says.

According to Affan, however, the Islamic definition of underlying assets may be much broader than that of the blockchain expert. 

“But whether or not the underlying assets are valid, that is not under the council’s domain. It should be left to the legal mechanism,” Affan adds.

White papers are critical for cryptos' Islamic status  

The legal mechanism is coming. Regulation of cryptocurrencies in Indonesia falls under the ambit of the Trade Ministry’s Commodity Futures Trading Regulatory Agency (BAPPEBTI). 

In 2020, the agency issued a regulation on crypto assets, Affan says the agency has set up complex parameters to assess whether a crypto asset is tradeable or not. One of the requirements is that the crypto asset must have a white paper.

“Cryptocurrencies must have underlying assets or projects behind them, otherwise they won’t be able to attract investors. The underlying project must have been properly demonstrated in the white paper,” he says.

Affan also refers to the point about the requirements of material goods under shariah, such as having a certain value, having ownership and can be transferred to buyers. 

“If we see these requirements, cryptocurrency should tick all the boxes. However, again this is a digital economy, we are still waiting for the formal instrument or document of the council’s fatwa,” says Affan.

Over 200 cryptos approved in Indonesia 

According to BAPPEBTI regulation, so far, 229 cryptocurrencies have been approved to be traded in Indonesia.

The agency has registered 13 crypto-asset traders to trade cryptocurrencies. But, out of the 13 companies, one has been frozen and one other has its registration cancelled.

“From BAPPEBTI’s side, the agency has issued instruments which they believe can protect investors or give legal certainties for investors,” he said.

Once these regulations are published it will be possible for the Indonesian government to tax its burgeoning crypto market. In early 2021 the country’s Director-General of Taxes indicated that the Indonesian government was considering imposing a 0.05% tax on each crypto trade bringing the whole sector with the ambit of income tax.

Potential size of the Islamic crypto market 

The broader Islamic finance sector is going from strength to strength. Global Islamic finance assets are forecast to reach $3.69trn by 2024, according to the 2020 Islamic Finance Development Report compiled by Refinitiv and the Islamic Corporation for the Development of the Private Sector.

The report ranked Indonesia as number two on its Islamic Finance Development Indicator, on the back of strong government support for the sector. 

According to Oscar Darmawan, CEO of Indonesia’s largest crypto exchange INDODAX, the country could play a leading role in developing Islamic crypto trading.

He cautions that the current debate over whether certain aspects of cryptocurrencies are Islamic would slow the market’s development in the world’s most populous Muslim nation. 

“Seeing the different opinions regarding halal or haram nature of crypto assets recently means it will take extra time for Indonesia to set up regulations and take a role to start sharia-based crypto,” Oscar told Capital.com.

Government may rule on Islamic cryptos

“But, it is not impossible that the different opinions may trigger the government to issue regulations and encourage the emergence of sharia-based crypto trading. Who knows? The possibility is always there,” he said.

Oscar says that INDODAX itself so far has no plans to launch an Islamic digital coin as it has not yet studied further about the shariah-based crypto. 

Capital.com contacted DSN vice secretary Asrorun Ni’am Sholeh and MUI for comments, but they did not respond.

Putri Madarina, founder of Halalvestor Global AsiaHalalvestor Global Asia founder Putri Madarina – Photo: Halalvestor Global Asia

Cryptos have ‘clear track record’

Putri Madarina, Halalvestor Global Asia's founder and the Indonesian Shariah Fintech Association vice general secretary, said while she once had the opinion that crypto was haram, after some study, she decided to invest in cryptocurrencies.

“I choose cryptocurrencies and they have a clear track record. I cannot say that cryptocurrency does not exist because it is in the form of a digital asset which is very transparent although we do not know who is behind it,” said Putri who has invested in crypto since 2017.

Follow the author on Twitter: @aroaringboy

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