🌐Token as the Network Currency
In the previous section we introduced the idea of the Islamic economy that is driven by the goals (maqasid) of al-Shariah and how IBF Net is using cutting-edge technology to build a miniature Islamic economy on the blockchain. As we know, money or currency performs several useful functions in an economy. Money is a matter of functions four: a medium, a unit, a standard and a store. Money serves as a medium of exchange, a unit of account or measure of value, a store of value and a standard of deferred payment. The money or currency you find all around you is in the nature of fiat money or money that is backed by the fiat or order of the government. Issued by the central banks, such sovereign money may be very different from the kind of money that goes with an Islamic economy.
So, what would be the currency of our miniature Islamic economy?
Blockchain technology has made it possible for private entities to issue currencies. Do such currencies have a place in the Islamic economy? To answer this, it is perhaps pertinent to examine the nature of currencies in the early Islamic states. How do these currencies compare with present-day ones?
During the time of the Prophet pbuh, in the state of Madinah there were two types of currencies, minted out of gold and silver. They differed from present-day fiat currencies in one important aspect. The face value of a currency was exactly equal to the value of gold or silver contained in it. So, the value at which it changed hands was no different from its intrinsic value. In addition to gold and silver, there were also currencies made of inferior metals (Fulus) where the face value of a currency differed from the value of metal contained in it. In the presence of gold and silver money, fulus were used primarily to settle low-value transactions. Islamic rulers through the ages issued currencies which were made of things other than gold and silver (e.g. camel skin). Even when they were made of gold or silver, their face and intrinsic values differed. These could be used to settle transactions at face value, backed by the order of the Caliphs and Sultans, similar to present day fiat money.
What are the views of scholars of fiqh on currencies?
The history of money tells us that Islamic scholars broadly admit two types of money or currency. One, the face value of a currency reflects its intrinsic worth measured by gold or silver (Thaman Haqiqi). Two, the face value reflects what is ordered by the government or what is found acceptable by the society at large (Thaman Istilahi). It also follows that “private” money as well as “sovereign” money is permissible in Shariah. This is the most powerful argument made in favor of digital money that appeared initially as private money (bitcoins, eths, algos etc). Note that digital money is also being issued by present-day governments, called the Central Bank Digital Currencies (CBDCs). While private money is admissible in Shariah, the condition of its “acceptance and adoption” by all parties to a transaction is a fundamental requirement. In the absence of government or sovereign fiat, such acceptance or adoption is not easy to ensure.
Are digital currencies the same as digital tokens?
Digital currencies are issued as digital tokens with the help of blockchain technology. In fact, they are a subset of a larger universe of digital tokens that may (or may not) have certain features of money and other financial and non-financial assets. A token can be issued whose value is equal to a USD. A token can be issued as equivalent to an equity share in a company. A token can be issued as equivalent to an ambulance or airlines-mile, a kw of solar energy, a tonne of carbon savings or other metrics. A token can also be issued against a work of art, a certificate of merit or even showing ownership of a piece of land or livestock.
Various classification schemes of tokens follow from the above. We have fungible tokens being used as currencies, financial and other homogeneous assets. All fungible tokens are similar and hence, one can be the substitute for another. We also have non-fungible tokens being used replacing works of art, certificates, collectibles etc. Each non-fungible token (NFT) is unique.
Another way to look at tokens is to see if their ownership provides a specific utility or value to the owner. A mall-token may provide the visitor and owner of the token with a right to avail specific discounts or prizes and gifts. A network-token may provide the member with a right to say, use it for placing advertisements or access the e-library or enjoy other benefits of membership. Such a token has come to be known as a utility token. When a token is used to raise funds for projects replacing the traditional securities however, it is called a security token. When an investor buys an equity-token for example, he is a part owner in the project just as a holder of equity securities would be. Security tokens may also be designed in other ways, such as, to mimic a debt security or a revenue-sharing security.
While the conceptual difference between utility and security tokens is very clear, there is an attempt to blur the same in practice, as the latter are technically subject to regulations by the capital market authority in a country. Such regulations usually demand adequate and accurate information disclosure about the project, careful scrutiny of promoters, good market conduct (absence of price manipulation etc.) by market players etc. There is naturally an incentive for actors with no or poor track record to get around such norms and raise funds by selling utility tokens instead. Unfortunately, such practice of raising funds in a vacuum by selling utility tokens has been going on. The utility tokens are sold at an arbitrary price to the public even when the underlying projects are nowhere in sight. No utility or value is passed on to the token holder against the price paid, except a “promise”. The game used by most unscrupulous project owners involves a few sequential steps:
Create or mint utility tokens digitally against a “whitepaper” or a “litepaper” sharing info that the promoter wants the public to believe in;
Sell the tokens in parcels at a gradually increasing price (apparently reflecting increasing demand);
Follow up the initial sales with listing of the tokens in private exchanges by paying required fees;
Manipulate the prices upwards by floating false “paid” stories in the media, engaging in fictitious transactions;
Off-load the remaining parcels when the prices are still ruling high;
Off-load promoter’s share of tokens if the project owners lose interest in the project and intend to repeat the cycle for another “promising” token.
Needless to say, these practices involve mass deception and fraud and have no place in Shariah. Transactions in an Islamic economy must pass the test of Shariah that prohibit transactions under conditions of excessive uncertainty (gharar), inadequate and inaccurate information (jahl), fraud or deception (ghish), cheating (tadlis), elements of gambling (qimar) and overpricing (ghubn). Indeed, one may also see the presence of prohibited riba here. Scholars do not permit free pricing in case of an initial public offer (IPO) of stocks when the underlying project has monetary assets (cash or debt) alone, or when it has more monetary assets than physical productive assets. Unfortunately, the projects that go for initial coin offers (ICO) seek to sell digital tokens to raise funds in a vacuum and at a price arbitrarily determined by them. The funds they collect, therefore, either are in the nature of prohibited riba or ghubn due to over-pricing.
So how do we design our own token – as a utility token or a security token? This is for the forthcoming section.
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