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Islam and cryptocurrency, halal or not halal?

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In Dubai’s decades-old Gold Souq, customers from around the world haggle over bangles and necklaces. Elsewhere in the emirate, the region’s top centre for gold trade, bullion is playing a new role in financial engineering.

A local start-up company founded last year, OneGram, is issuing a gold-backed cryptocurrency – part of efforts to convince Muslims that investing in cryptocurrencies complies with their faith.

The global surge of interest in bitcoin, ethereum and other cryptocurrencies extends into the Gulf and Southeast Asia, the main centres of Islamic finance.

But because they are products of financial engineering and objects of speculation, cryptocurrencies sit uneasily with Islam. Islamic law principles, in addition to banning interest payments, emphasize real economic activity based on physical assets and frown on pure monetary speculation.

Halal or not halal

The speculative nature of cryptocurrencies has triggered debate among Islamic scholars over whether cryptocurrencies are religiously permissible. Cryptocurrency companies are seeking to sway the debate by launching instruments based on physical assets and certified as valid by Islamic advisors.

Each OneGram cryptocurrency unit is backed by at least a gram of physical gold stored in a vault. The idea is to limit speculation.

“Gold was among the first forms of money in Islamic societies, so this is appropriate,” said Ibrahim Mohammed, the Briton who founded the firm with other investors last year.

“We are trying to prove rules and regulations from sharia are fully compatible with digital blockchain technology.”

Tens of millions of dollars worth of the currency has been issued so far. About 60 percent of the planned number of coins remains to be sold; OneGram hopes to issue them all before listing them on exchanges around the end of May.

OneGram obtained a ruling that its cryptocurrency conforms with Islamic principles from Dubai-based Al Maali Consulting.

It is one of dozens of advisory firms around the world that offer their opinion on whether financial instruments meet Islamic law standards.

In Malaysia, HelloGold launched an initial offer of its gold-backed cryptocurrency in October, receiving approval from Islamic scholars at Kuala Lumpur-based Amanie Advisors.

Manuel Ho, HelloGold’s chief marketing officer, said its coin was Islamic as transactions occurred within a defined period, making them less volatile and addressing the issue of ambiguity of pricing.

Among other experiments, United Arab Emirates-based Halal Chain conducted an initial coin offer in December which is linked to data on Islamically permissible goods.

Islamic law committees

Only around 20 to 30 percent of banking in the Gulf and Southeast Asia follows Islamic principles; many Muslims use conventional finance if it offers higher returns or more convenience.

But the issue of religious permissibility is influential and could determine whether Islamic funds and institutions, which are formally committed to the principles of Islamic law, deal in cryptocurrencies.

“One of the biggest difficulties is that there is so much to talk about, and so little certainty in the way crypto will be playing out,” said Ziyaad Mahomed of HSBC Amanah in Malaysia. He chairs its Sharia Committee, which oversees Islamic transactions.

National “sharia authorities” have not ruled on whether cryptocurrencies are permissible, and while several global bodies recommend standards for Islamic finance, none has the authority to impose them. Many governments seem ambivalent, worried about the potential for instability, but unwilling to lose the chance of benefiting from new technology.

The Saudi Arabian and UAE central banks warned their citizens about the risks of trading bitcoin but have not imposed outright bans.

That leaves Islamic investors to choose between sometimes conflicting judgments by scholars at advisory firms, financial companies and academic institutions.

One of the earliest rulings came in 2014, when California-based academic Monzer Kahf, a prominent author of Islamic finance textbooks, deemed bitcoin a legitimate medium of exchange, though vulnerable to manipulation.

Since then, Islamic jurists in South Africa have ruled in favour of cryptocurrencies, arguing they have become socially acceptable and commonly used, said Mahomed.

In October, however, the Durban-based Darul Ihsan Centre refrained from endorsing them, citing concern over potential pyramid schemes. Some scholars in Turkey, India and Britain have labelled them impermissible; Egypt’s Grand Mufti declared in January they should not be traded.

Complicating the debate is the fact that there are hundreds of digital coins or tokens, each with unique features related to distribution, mining and trading, said Farrukh Habib, research officer at Malaysia-based International Shariah Research Academy for Islamic Finance. – Al Jazeera