The genesis of Cryptocurrency in Islamic economics:

Shariah analysis of HLC tokens

Prepared by

Prof. Abdussalam Ismail Onagun1

Co-Founder and Chief Islamic economics at Qitmeer: the Core network of HLC Foundation,
Dubai UAE
abdussalam@hlc.com

&
Mr. Abdullah Han2
Co-Founder and Chairman at HLC Foundation, Dubai UAE

Abstract

Crypto cash and payment through electronic money has gained popularity after the computer
system is adopted by financial industry. Furthermore, the research on application of
blockchain technology in the Islamic economy system precisely the potential of Cryptocurrency
in providing a better alternative to current fiat money system which will be the scope of this
paper. The cryptocurrency system relies on the payment network, the infrastructure required
to manage payments and avoid multiple spending using the same funds has always been costly
and manage through a centralized banking network. This paper aims of exploring the potential
and capability of Cryptocurrency in Islamic economics that fulfils the Shari’ah requirements
which will provide financial and stable currency. The paper will adopt the Shariah mind to
analyse Shariah experts different opinions on the Crypto currency. The method used for
analysing this object includes a library research on related topics that helps understanding the
functions of money and Crypto currencies as well as study of several cases that can assist in
fulfilling the aims of this paper. Finally, the paper will use analyse the Shariah experts opinions
on the Cryptocurrency and the area of Cryptocurrencies and blockchain requires further
research from a Shari’ah perspective in order to facilitate a better understanding and create
more awareness.

Keywords:
Cryptocurrencies, Islamic economics, HLC tokens, Shariah mind, Blockchain

1
Dr. Abdussalam is a Professor of Islamic Economics and finance. He has great experience in both practical and
Academic research in Islamic economics and Shariah related issues in Fintech.
Email: abdussalam3@yahoo.com or abddussalam@hlc.com

2
Mr. Abdullah is Co-Founder and Chairman of HalalChain (www.hlc.com), a public blockchain
company based on Direct Acyclic Graph , which is friendly to small payment and quick transaction ,
and involves no mining. Email: abdullah@hlc.com
1. Introduction

Several decades ago, Islamic finance was introduced in a more official way and since then, it
showed an enormous growth prospect. Applications of Shari’ah compliant financial and
banking services proved success since its introduction drawing several efforts into regulating
its activities to serve the best interest of participants in the industry. Money and the concept of
currencies is considered of the main elements building a financial system since it is used as a
payment system to settle transaction in the financial system as well as everyday life. Nowadays,
our currencies are based on the concept of paper money in which the central bank print it and
control its circulation in the economy through what is known as a monetary policy.

Globally, the use of virtual tokens (including virtual currencies) to raise funding and facilitate
economic transactions has been on the rise in recent years. This has resulted in increased
attention from financial services regulators. A number of financial services regulators have
issued comments or consumer alerts setting out their regulatory status or position on virtual
tokens and/or virtual currencies. This is especially relevant since the use of virtual tokens and
currencies can be subject to risks arising from fraud, money-laundering and terrorist financing,
as well as the observed volatility of the “value” of virtual currencies. The issue of
cryptocurrency needs the Shariah analysis in order to know the position of Shariah in dealing
with Cryptocurrency. Therefore, this paper focus on the analysing Shariah experts’ opinions
on the cryptocurrency as well as giving a case study of HLC tokens which is base on Islamic
economics principles. This paper will start its analysis with the concept of Cryptocurrency in
Islamic economics

2. Concept of Cryptocurrency

The word “crypto” refers to the encryption or cryptography that the instrument is built on and
then added to a blockchain database. The “currency” here refers to the recognition as medium
of exchange amongst its users.

The European Central Bank explains virtual currency in its published document as "a Crypto
representation of value that is neither issued by a central bank or a public authority, nor
necessarily attached to a fiat money or currency, but is accepted by natural or legal persons as
a means of payment and can be transferred, stored or traded electronically". Examples of virtual
currencies include cryptocurrencies such as Bitcoin, Litecoin, Stellar and so on, but also
include non-cryptocurrencies like in-game credits for in massive multiplayer games such as
World of Warcraft; advertiser issued credits; and various other Crypto stored value systems.
The idea of Crypto monetary systems dates back to the early 1990s when several companies
and programmers tried their hand at creating money meant to be exchanged virtually. Many of
these early currencies struggled to find their footing due to prohibitive regulation, insufficient
technology, poor security features, lack of adoption, and a slew of other issues. The
cryptocurrency segment of the Crypto currency universe was created in 2009 with the invention
of Bitcoin.
The Abu Dhabi Global market has defined the cryptocurrency3 as “

“Virtual currency is a Crypto representation of value that can be Cryptoly traded

and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or
(3) a store of value, but does not have legal tender status (i.e., when tendered to a
creditor, is a valid and legal offer of payment) in any jurisdiction. It is not issued
nor guaranteed by any jurisdiction, and fulfils the above functions only by
agreement within the community of users of the virtual currency. Virtual currency
is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or
“national currency”), which is the coin and paper money of a country that is
designated as its legal tender; circulates; and is customarily used and accepted as
a medium of exchange in the issuing country. It is distinct from e-money, which
is a Crypto representation of fiat currency used to electronically transfer value
denominated in fiat currency. E-money is a Crypto transfer mechanism for fiat
currency—i.e., it electronically transfers value that has legal tender status.”

3. Cryptocurrency: is it Money or Commodity

It’s important to explain whether Cryptocurrency is money or commodity, as well as clarifying

the differences between money and commodities, because, money is not equivalent to
commodity according to Shariah law. Shariah emphasizes to treat money just for its basic
purpose (i.e. as medium of exchange and measure of value). In the following, some
fundamental differences between money and commodities are explained
Ibn Taymiyyah (1995) says that dirhams and dinar (gold and silver coins) have no intrinsic use
and purpose, but they are created just to use as medium of exchange. Gold and silver coins
differ from commodities in that commodities have intrinsic use and purpose. The same
explanation is given by Ibn qayyim (1973) that money is not desired for itself, but rather it is
created to facilitate the trade of goods. So then, if money itself is treated as a good or
commodity, this would lead to destruction. (In other words, the objective of money is to serve
as a medium of exchange. When we deviate money from its natural objective and treat as
commodity, then it will disrupt the financial system from its natural pace).

Shaykh Dr. Burhan Arbouna (2017) explained the differences between money and
commodities in a conclusive manner as he explained that there are fundamental differences
between money and commodities in Shariah law.

There are some Shariah requirements in determine the currency whether is it money or
commodity. However, the Abu Dhabi global market has emphasized that Cryptocurrency is
considered commodity “
Virtual currencies, unlike fiat currencies, are not legal tender. However, virtual
currencies have “value” in that they can be exchanged for other things of value,
with that value being dependent on considerations of supply and demand. In
this respect, virtual currencies have much in common with physical
commodities such as precious metals, fuels and agricultural produce.
Therefore, from a regulatory perspective, virtual currencies are treated as
3
Abu Dhabi Global market, (2017) Guidance on Regulation of Initial Coin/Token offerings and Virtual
Currencies under the Financial Services and Markets Regulations
Virtual Currencies Key Definitions and Potential AML/CFT Risks” (June 2014 , www.fatf-
gafi.org/.../Virtualcurrency-key-definitions-and-potential-aml-cft-risks.pdf)
 commodities, which are not Specified Investments as defined under the FSMR.
This means that a “mining” or spot transaction in virtual currencies will not
constitute a Regulated Activity in itself” 4

4. Halal Chain and its benefit to Islamic economics?

The HalalChain company is at the forefront of the Blockchain industry, providing

comprehensive solutions to Halal industry traceability, Islamic Economics and Finance, instant
E payment, E-commerce and other industry applications powered by blockchain, Internet of
things, big data, Artificial Intelligence, biometrics technologies.
Halal-Chain (Consortium Chain) is a decentralized smart chain based on blockchain and
Internet of things, that enabling to track and verify any food through all stages of production,
processing, and distribution across the entire supply Chain. Thus, the use case of Halal Chain
is not only limited to Halal industry; as well as food, medicine and cosmetics abroad. The pilot
project is expected to be completed before the end of this year with Halal Food manufacturer
in various jurisdictions. Upon the successful industry adoptions of Halal Chain (Consortium
Chain), Dubai will play a significant role to center and drive the global Islamic Economy of
six trillion USD (white paper, 2017).
The Halal-Chain (Public Blockchain) is one of the latest underlying technologies based on
Directed Acyclic Graph which has been defined as Blockchain 3.0 technology. The DAG
involves no mining, supports quick transactions, and is friendly to small payment. This
innovation shows that there is correlation between revealing civilization and blockchain
consensus, which is transparency, justice, creditworthiness, trust and witness described in the
Holy Quran and shared by the whole humanity. The public blockchain could act as a complete
set of ecosystems to support start-ups in the Islamic Crypto economy and beyond. The HLC
token is expected to generate a market capitalization of 20 Billion company in the Global
economy upon the successful delivery of public blockchain.

5. How Does HLC tokens work5

The HLC tokens, are bonded to data. As items move through the supply chain and are
transformed during the manufacturing process, a random token reward (the initial reward
amount is 1 token, and would reduce half according to the progress. The 2% of the total tokens
is expected to be allocated for this marketing campaign) assigned can be split and merged into
multiple other Measurements Smart Contracts, which together create a graph representing
the history of a given item. The HLC tokens are sent to the network alongside IoT data,
and remain locked in the Measurements Smart Contract, until a batch completes its
movement through the supply chain.

4
Abu Dhabi Global market, (2017) Guidance on Regulation of Initial Coin/Token offerings and Virtual
Currencies under the Financial Services and Markets Regulations
Virtual Currencies Key Definitions and Potential AML/CFT Risks” (June 2014 , www.fatf-
gafi.org/.../Virtualcurrency-key-definitions-and-potential-aml-cft-risks.pdf)
5
HLC foundation, (2017). Halal chain white paper, published on the HLC website. The HLC website is visited on
21 may 2018, for more details refer to www.hlc.com
In the early days, side chain solutions such as the two-way peg have contributed to
extending the scalability of bitcoin. Later, smart contract platforms such as Ethereum
provided more possibilities to cross-chain interaction scenarios and protocols. Some delicate
projects like BTC (Bitcoin) Relay enabled Ethereum DApp developers to verify the bitcoin
network activities via smart contract. Other projects aimed to realize the “Internet of
Blockchains”. For instance, Cosmos and Polkadot are seeking to realize cross-chain value
transfer or a global consensus through hub or relay mechanism. Till date, most efforts
made in cross-chain interoperability remain in the early stages or are restricted to the domain
of public blockchain. The latter is due to the immature development of consortium blockchain
as there is a lack of conducive environment for exploration and testing.

As Halal-Chain sovereign consortium blockchain prospectively extends Fabric to support

multi-asset accounts and tokens, the problems mentioned above will be solved. We devote
to realize the interoperability of Halal-Chain sovereign consortium blockchain with
Qtum as it is a key process in prospering the Halal- Chain ecosystem. The interoperability
shall realize the reliable asset transfer, cross chain orable and cross contract operation.

6. Methodology
This paper will pursue a case study involving specific applied cases that attempted to address
and solve some of the issues presented in Cryptocurrencies from different angles. Hence,
providing a comprehensive image on how integrating these cases such as HLC tokens can help
to conclude that Cryptocurrency in its nature is Shariah compliant. Case study research assist
in targeting a specific phenomenon to further explain it within its real-life context.

The design of this paper aims to analysize the Shariah experts’ opinions in order to know the
Shariah position in dealing with Cryptocurrency. Even though this is a qualitative research, an
empirical evidence might be presented from other literature to provide a better conclusion on
the topic since a topic of monetary and economic impact such as Crypto currencies must be
reflected in empirical and theoretical evidences. However, Crypto currencies and blockchain
development is a bit of new research topic especially after the development of the world’s most
known Cryptocurrency Bitcoin. therefore, there are still several ideas and issues to be addressed
in specific regarding this topic.

Furthermore, Shariah perspective on Crypto currency is still an under-developed area where

not much of examination and research is done on it. for both issues, choosing a case study and
library research methods seems more appropriate because the emphasis should be aimed
towards building a better understanding on the topic rather than observing the awareness on it
in which it is not expected to yield a better understanding towards developing Cryptocurrencies
market from Shariah Perspective (Mainelli & Smith, 2015).
The blockchain technology is a type of mutual distributed ledgers and its function allows user
to track, record and verify all the transactions in network to ensure its validity and security. It
is hence a decentralized database. In the case of blockchain of Bitcoin, it is a cryptographic
ledger shared among all the users on the network to verify transactions and add them to a block
of other chained transactions to ensure the integrity of transactions and avoiding issues such as
double spending. The Concept of applying Blockchain and relevant technologies to establish a
well-developed and protected Crypto currency can be of a major value to discover new
opportunities or enhance current features of the economy and monetary policies. However, it
is still a viable issue of that current Crypto currencies is fully decentralized in which
government does not look to it in a promising way since it cannot be manipulated to control
certain economic outcomes. The case of virtual and Crypto currencies is that they cannot be
considered as a legal tender by the monetary authorities which created several challenges such
as its interaction with the real economy, protecting the consumer from any issues associated
with these currencies and crimes and fraud that happened by using these currencies since it is
not monitored or properly regulated by a suitable monetary regulation (Zahudi & Amir, 2016).
Hence, it might be a kind of opportunity to look the potential of regulating these currencies and
their respective payment technologies. It may look like it defeats the purpose of decentralized
currencies but it still can be of a massive potential to regulate it to a certain degree to protect
the interest of the public.

7. Cryptocurrency in Islamic economics: Shariah analysis of HLC tokens

Given the above-mentioned rules and discussions, it becomes possible to evaluate

cryptocurrency and discuss whether it fulfils the conditions of commodity and currency. The
most famous type of cryptocurrency is Bitcoin (HLC tokens). Therefore, the existing literature
of articles and especially fatawa (experts’ legal opinions) are generally concerned with bitcoin.
However, the principles and arguments to determine any type of cryptocurrency are same.
Therefore, the existing literature pertaining to Bitcoin specifically has benefits broadly with
regard to cryptocurrency.

In general, the Shariah experts have two different opinions. The first group of scholars is of the
view that cryptocurrency is haram , meaning prohibited by Shariah. The other group is of the
view that cryptocurrency is permissible and is line with Shariah rules. With the blockchain and
Crypto currencies becoming more known to individuals by the day, more literature is getting
published with concepts that is signaling a comprehensive transformation on several aspects of
life that includes political, social, and financial aspects with countless opportunities and
solutions to existing problems.

First Opinion: Cryptocurrency is permissible

The first group of Shariah experts in the opinion that the core concept of Crypto currencies, it
helped transform the financial system by giving it a better tool to integrate more integrity,
transparency, and trust in it through the nature of Blockchain. The potential of Crypto
currencies and blockchain is seen to be enormous. However, most of the literature that
discusses implementing are pursuing the easier means of claiming that HLC and its payment
system is Shari’ah compliant since it is better alternative than fiat money and under the Shariah
rules and principles. This argument holds truth to some extent since fiat money in its core value
does not hold complete compliance with Shari’ah requirements. However, the conventional
Cryptocurrencies still have some issues in compliance with Shari’ah mainly with Crypto
currencies holding no physical intrinsic value. Through Islamic history, Shariah recognized
commodities with intrinsic physical value only to be considered as money, this is uniqueness
of HLC tokens as it is back by HLC project on the Halal and healthy food traceability. and the
second issue is regarding its practicality in today’s societies where governments requires full
control over the monetary supply to control economic conditions and keep it stable.

The Shariyah Review Bureau (SRB), an Shariah advisory firm licensed by Bahrain’s central
bank, provided that Stellar one of the Cryptocurrency company is Shariah compliance (2018).
The authenticity of blockchain to be following Sharia’h in brief can be discussed by inspecting
if it contains any elements of prohibition in Shariah. From previous discussions on blockchain,
it is known that blockchain security include public key cryptography and follow a decentralized
network approach instead of one server to record and verify transactions. The argument
presented here is that in its concept and content, the concept of blockchain consists of
computational and mathematical applications with no prohibited elements within its content.
Furthermore, it does serve to eliminate prohibited elements such as Gharar (ambiguity) from
transactions since its verification process is strong and transparent for all participants on the
network.

The first issue concerning Cryptocurrencies is in its being a fully decentralized currency where
no one can control its supply or verification process. Governments nowadays are proposing
some ideas to include Crypto currencies such as blockchain within specific regulations to
promote its development. However, most of governments are discouraged to promote it and
even some rendered its trading to be considered as a legal activity.

The Chairman of the Shariah Advisory Council Central Bank of Malaysia, Dr. Daud Bakar,
has expressed his thought about Bitcoin and other Cryptocurrencies is acceptable in Islamic
Economics (2018). The fear from allowing bitcoin and other Cryptocurrencies can be due to
several elements. The governments are known to control the supply of paper currency in the
economy through what is called “Monetary Policy” where money injects money or withdraws
it from the economy to influence spending and investing resulting in more jobs and stabilizing
inflation. The case if slightly different in the case of Cryptocurrencies adopting blockchain
technology. Blockchain verifies all the transaction through miners consisting of computers
solving complex mathematical algorithms to verify transactions and avoid double spending
issues. Hence, banks are not needed to verify these transactions and cannot control the supply
of Crypto currencies which seems to cause an issue for governments. According to Zahudi &
Amir (2016), “Virtual currency is still a largely uncharted and unsupervised area, and so far,
no protections are likely available to the consumers that become involved with virtual currency
if something goes wrong”.

Second Opinion: Cryptocurrency is Haram (Prohibited)

The second group of Shariah experts in the opinion that the core concept of Cryptocurrencies
is prohibited because of some common reasons of prohibition:

It is also commonly mentioned by scholars who claim Bitcoin and cryptocurrency are haram
(impermissible), that Bitcoin’s exchange rate is highly volatile not stable. Speculation is an
external factor which has no concern with regard to determining something as valid money
and currency. Prices are always based on the rule of supply and demand, as it is the case in all
other assets including, gold, silver, and fiat currencies as well.
The Grand Mufti of Egypt Shaykh Shawki Allam has declared that bitcoin and cryptocurrency
is haram. The Shaykh cites some reasons in his statement, which include but not limited to
Bitcoin is easily used for illegal activities; therefore, people use Bitcoin largely for illegal and
non-Shariah compliant purposes to avoid and hide themselves from governments and relevant
authorities. Another reason is that Bitcoin has no central authority that monitors its system, but
rather it destroys the control of central banks and governments to monitor and control the
monetary system

It is worth noting that, as of writing, the exchange rate of HLC tokens and other
cryptocurrencies is more volatile than many fiat currencies, and therefore trading in HLC and
cryptocurrencies is riskier. Therefore, it is not advisable to trade in cryptocurrency, especially
for lay people who lack professional experience and sophistication with regard to foreign
exchange trading.

However, HLC tokens and cryptocurrency cannot be declared haram (impermissible) based on
the fact that they experience speculation. In fact if this principle was valid and applied, then
trading in gold, silver, US Dollars, and Euros would all be ruled impermissible, since those
assets also experience extreme levels of speculation. For example, twice the quantity of gold
that has ever been mined in the history of human civilization was traded in digital gold markets
in a single physical quarter.
8. Conclusion

• This research paper concludes that the core concept of Crypto currencies, it helped
transform the financial system by giving it a better tool to integrate more integrity,
transparency, and trust in it through the nature of Blockchain technology. The potential
of Crypto currencies and blockchain is seen to be enormous. However, the HLC tokens
and its payment system is Shari’ah compliant since it is better alternative than fiat
money and under the rule of necessity.

• More research is still needed in several areas concerning blockchain and Crypto
currencies. Blockchain and its application is considered a new niche that needs more
literature consisting of analyzing flaws and issues with applying it in today’s economy.

• The aims of cryptocurrency - particularly HLC tokens - is to serve as an alternative

currency in a peer to peer network without the control of any central authority.
Cryptocurrency markets are subject to extreme fluctuation, and will likely remain
volatile for the next few years. In many jurisdictions, the legal status of cryptocurrency
remains unclear, further adding to the price volatility.

• There is a need to provide more ideas or solve current issues in blockchain or the how
the blockchain will solve existing complications occurring in the global economy and
financial sector. Various types of literature on concepts applied by blockchain to several
sectors such as insurance, banking and financial sectors showed an impressive potential
of such technology but it is still under researched and needs more focus. The Crypto
currencies needs further understanding and research on its role in developing payment
systems and the current monetary policies.
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