Cryptocurrencies are the rage these days, with widespread adoption around the world (see chart below). In recent months, major corporations such Tesla, and Coca Cola are accepting Bitcoins as a form of payment. The USA is said to have the highest number of Bitcoin ATMs. We spoke with the founder of Marhaba DeFi (decentralized finance) that wants to introduce the option for Halal cryptocurrencies.
Crypto adoption in developing countries can be attributed to two main reasons:
But first, the basics. If you’re new to Bitcoin and other cryptocurrencies, there are many technical terms to go through in order to understand the basics of cryptocurrency, where the interview with the founder of Marhaba DeFi regularly refers to.
Cryptocurrencies are digital currencies not backed by real assets. The most well known cryptocurrencies are Bitcoin and Ethereum. They are traded between consenting parties without a middleman (bank) and tracked on digital ledgers.
Bitcoin is the most well-known virtual currency. It is a peer-to-peer cash system that enables individuals to make financial transactions without a third party, such as a bank.. The digital currency is based on a set of protocols which allow non-reversible transactions, and it prevents any double-spending.
Ethereum is different from Bitcoin in that its primary service is through smart contracts, which are stored on digital ledgers known as blockchain.
In crypto terms, you might have heard of coins and tokens. While some people use it interchangeably, there are actual significant differences.
Coins are assets native to its own blockchain, such as Bitcoin on the Bitcoin platform and Ether on the Ethereum blockchain. Coins are used for the purpose of transaction on the digital realm.
Tokens, in contrast, are created on existing blockchains such as Ethereum blockchain, with the use of smart contracts. Tokens are to be used with decentralized applications or on decentralized finance (DeFi). Most tokens are created on the Ethereum blockchain. There are various types of tokens: asset token (also known as security token), payment token, equity token and utility token. (source: BitDegree.org)
DeFi is short for decentralized finance, where the aim is to create decentralized versions of traditional finance. DeFi works on the blockchain, such as the Ethereum blockchain, where tokens are created.
For example, a security token is similar to a traditional financial instrument (security), an equity token is stocks in a company, payment tokens are to pay for goods and services, and utility token is to provide access to goods or services.
Putting it into traditional financial terms, Bitcoin can be considered similar to cash, whereas DeFi can be considered similar to financial instruments (such as equity, debt securities, investment securities, and so on).
The key difference is that it is decentralized, global, digital and has no third party to regulate or control the transactions.
There is a major difference between Fintech (financial technology) and cryptocurrency. While both rely on technology and innovations, there is one major factor that separates them: money. Fintech is based on fiat money where it can be withdrawn as physical money whereas crypto is based on virtual currency, and does not exist in the real world.
This is a major concern for many Muslims: whether Bitcoin and other cryptocurrencies are Halal or not? This has led to low adoption of cryptocurrencies in many Muslim countries (see previous chart).
The main concern for Bitcoin and other cryptocurrencies is that their prices are very volatile, and speculative in nature which makes in haram in Islam. However, there are many other Islamic scholars who have studied the details and nature of these cryptocurrencies to come up with their views based on the Shariah, the Islamic canonical law.
There are two schools of thought on this issue:
Scholars who say Bitcoin and other cryptocurrencies as Haram, and those who say they are Halal:
The Ruling for Haram by The Grand Mufti of Egypt – Shaykh Shawki Allam, The Turkish Government’s Religious wing, Shaykh Haitham al-Haddad.
The Ruling for Halal by Mufti Faraz Adam, Mufti Muhammad Abu-Bakar, Ziyaad Mahomed, Shariah Committee Chairman of HSBC Amanah Malaysia Bhd.
The Halal argument centers around that while all fiat currencies are speculative to some degree due to the nature of supply and demand; since fiat currencies, gold, and most other financial instruments are permissible under Sharia, so too should Bitcoin and other cryptocurrencies be.
Shahfizal Musa, editor of Halalop, spoke with the founder of Marhaba DeFi, Mohammed Naquib.
“In plain simple English, if someone were to ask what is DeFi, I would say that DeFi is a financial application that is built on top of the Ethereum blockchain. At least 95% of DeFi is built on the Ethereum blockchain. DeFi brings on all the traditional features of traditional banking onto the blockchain.”
“Basically, you can lend, borrow, buy stocks, do a lot of innovative services on the blockchain. Basically, the banking industry is run by the financial people, and the DeFi industry is run by the technical people.”
“Regulations are good for as long as they don’t stifle innovation. Most governments are now introducing their own cryptocurrencies, known as CBDC, central bank digital currency, although they are not really cryptocurrencies in essence.”
“The whole idea of decentralized cryptocurrency is that there is no one who can or should stop things from happening.”
According to Naquib, regulations would happen if funds are held by the platform owners, but in DeFi, the wallets are merely facilitating the transaction and do not hold the funds.
“I started with another DeFi project,where I realized during working that this is pure lending and raising interest, which is against my faith. So, I didn’t work on this project anymore. Apart from that, if projects like these role out in the market, there are so many Muslim users from the crypto ecosystem who will use this. And when I did some research in the market, I didn’t find even one crypto project that is Shariah-screened or certified. This is when I suggested to my co-founders to create a Shariah-compliant offering. Then Marhaba DeFi was created.”
“When I founded the team, I spoke with Shariah scholars and recruited Mufti Bilal to create the guiding steps for a Shariah-compliant crypto platform. The aim of Marhaba DeFi is to fix this one gap in the DeFi ecosystem. “
“The Marhaba DeFi Shariah Board is finding a hard time screening all the DeFi projects which would be deemed Halal. Most of the crypto protocols right now don’t fit into Shariah compliance.”
“Our first phase of development focus on yield farming, where the users of Marhaba DeFi are able to create wealth out of Shariah compliant protocols which our Shariah team are screening and adding to the basket of Halal projects every day. Yield farming is generating profits out of existing protocols.”
Yield farming can be compared to trading of tokens, or lending of tokens.
“In Marhaba DeFi, we are coming up with a feature for ‘crypto only’ charity and zakat. We will integrate our platform to certified charity organizations that receive donations via crypto. We do not deal with fiat banking systems, if we do then we will come under regulations. DeFi doesn’t deal with fiat currencies.”
“For charities, as crypto tokens are volatile in nature, we are backing those with stable coins in order to save the charities from the volatility of the market.”
Stable coins are cryptocurrencies that are pegged to fiat currencies, such as the US Dollar, to provide stability to an otherwise volatile cryptocurrency.
“Marhaba DeFi will come out with its own token, but will not be backed by gold or any real-world assets. In the next phase of development, we will look into stable currencies, where there will be continuous innovation going on. Then we will see how well we can back out tokens with real-world assets.”
“Our tokens will be listed on the crypto exchanges and these tokens can be converted into fiat (money) if needed”.
“Marhaba DeFi is basically building the bridge between traditional Islamic finance with decentralized finance. However, this will only be done in gradual phases.”
We then asked one last question to Mohammed Naquib.
“There are a lot of Muslim users in the crypto system and they really don’t care if the DeFi protocols from where they are buying. People are attracted to the huge returns. Many Muslims see the benefit of it and don’t really care if its Halal or not. For example, they put in USD100 and it returns into USD100,000.”
“This is where I understood that being a Muslim, for me and for my fellow communities, that if I have the talent to utilize it to build for the interest of the Muslim community.”
“The world is going towards this direction. We cannot prevent it. People are coming into the crypto ecosystem, the DeFi ecosystem.”
“So there should be a Halal offering.”
This content is not financial advice and it is not a recommendation to buy or sell any cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with cryptocurrency involves significant risks. We strongly advise our readers to conduct their own independent research before engaging in any such activities.
Farah Ishak is a Content Writer at Halalop. She grew up in the United Kingdom where she obtained her Bachelor’s degree in Management. Later, she completed her MBA and held senior-level positions in Malaysian based MNC. She left the corporate world to be with her young kids. She is passionate about issues concerning Muslim women, Startups and Muslim businesses in general.
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