Stellar Receives Certificate of Sharia Law Compliance
Cryptocurrency Ethereum
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The Shariyah Review Bureau, a leading international Sharia advisory agency licensed by the Central Bank of Bahrain, has granted the Stellar protocol a certificate of compliance with Sharia (Islamic) banking laws.  The Stellar protocol and its native token XLM emerged as a non-profit alternative to Ripple and its associated XRP token in early 2014.

Stellar promises to power remittance payments and interbank transfers within seconds by leveraging the speed and finality of the distributed ledger technology underlying its global network.

Sharia law imposes ethical constraints on Islamic financial institutions.  Namely, the doctrine forbids the charging of interest, referred to as riba, which roughly translates as usury.  Sharia law views interest as an institution designed to maintain the wealth of the rich at the expense of the poor, thus it is viewed as a tool of exploitation.

Sharia law also prohibits any financial activity that involves excessive speculation, referred to as maisir, and financial activities that are uncertain or ambiguous, referred to as gharar.  This typically means that Islamic financial institutions are unable to offer derivative products such as options or futures, as they do not represent ownership of a tangible asset such as real estate or equity in an enterprise, and are designed entirely for speculative trading.  Other restrictions placed on financial institutions by Sharia law include prohibitions on short selling, day trading, and margin trading.

The document detailing Stellar’s certificate of Sharia compliance states, “Stellar is just a network and technology.  In and of itself it is lawful as the legal maxim states: ‘Permissibility is the original state of things.’  Therefore, the network is Shariah compliant. It is the use of this tool and technology which needs to be considered for Shariah compliance.”

Basically, the certificate states that the Stellar network in and of itself is Sharia-compliant, but certain activities such as high-frequency trading of XLM tokens or payment for forbidden goods or services like alcohol, pork, or prostitutes in the form of XLM tokens are still in violation of Sharia law, regardless of the fact that the Stellar platform itself has been deemed Sharia-compliant.  

Stellar claimed in a blog post that their protocol was the first distributed ledger platform to receive a certificate of Sharia compliance, however that is not actually the case.  The World Shariah Advisory Committee granted the Noorcoin platform a certificate of Sharia compliance in March.  Noorcoin was actually designed for the purpose of being the world’s first Sharia-compliant blockchain token.

In April, Blossom Finance, a fintech startup in Indonesia, released a report from their in-house Sharia advisor claiming that Bitcoin should be viewed as Sharia-compliant.  While the report is merely one advisor’s interpretation and not a certification, it goes to show that other distributed ledger platforms have been evaluated for their Sharia compliance prior to Stellar.

Regardless, the issuance of Sharia compliance certificates to any blockchain protocol sets a positive precedent for the future of blockchain finance in the Islamic world.  Indeed, one could argue that blockchain-based digital tokens are, by their nature, compliant with one of the core tenets of Sharia financial law, which is that money itself should be intrinsically worthless, a means of measuring value rather than a valuable instrument itself—thus, it should be impossible for one to make their living off of money itself.

While Stellar, which has no mining feature, has been certified as Sharia-compliant, one wonders about the Sharia compliance of other cryptocurrencies that use proof-of-work or proof-of-stake.  Arguably, PoW grants inherent value to tokens by consuming electricity and computational resources in order to generate said tokens.

The rewards to existing token holders in PoS mining could be considered a form of riba, since token holders are expecting compensation for nothing other than holding a form of money.  Of course, this is merely speculation. As of now, no consensus has been reached among Islamic financial authorities as to the Sharia-compliance of blockchain tokens in general.  Given the differing mechanisms underlying different token systems, each protocol will likely have to be evaluated for Sharia compliance individually.