Is Blockchain Halal?

Introduction

Blockchain is a technology that allows for the creation and maintenance of a distributed ledger of transactions that is secure, transparent, and immutable. Blockchain has been applied to various domains, such as finance, supply chain, health care, and digital identity. The intersection of Islamic finance and blockchain technology is a captivating field of study as the world moves rapidly towards digitalization. Given that over a billion people worldwide are Muslims, it's essential to explore the compatibility of blockchain technology with Shariah. However, as a relatively new and disruptive innovation, blockchain also raises some ethical and religious questions, especially for Muslims who follow the principles of Shariah. Is blockchain halal or haram? How does it fit with the Islamic values of justice, fairness, and trust? What are the potential benefits and challenges of using blockchain for halal products and services?

‍

What is Blockchain?

Blockchain is a system of storing and transferring data using a network of computers that are connected by cryptography. Each computer (or node) in the network has a copy of the ledger, which records all the transactions that have taken place in the system. The ledger is divided into blocks, which are linked together by a hash function that ensures the integrity and consistency of the data. Each block contains a timestamp, a nonce (a random number), and a hash of the previous block. The hash function makes it practically impossible to alter or delete any block without affecting the entire chain.

To add a new block to the ledger, the nodes have to agree on its validity through a consensus mechanism. There are different types of consensus mechanisms, such as proof-of-work (PoW), proof-of-stake (PoS), proof-of-authority (PoA), and proof-of-elapsed-time (PoET). The consensus mechanism ensures that only valid transactions are recorded and prevents double-spending or malicious attacks. Once a block is added to the ledger, it becomes immutable and transparent to all the nodes in the network.

Blockchain can be classified into three types: public, private, and hybrid. A public blockchain is open to anyone who wants to join the network and participate in the validation process. Examples of public blockchains are Bitcoin and Ethereum. A private blockchain is restricted to a specific group of participants who have permission to access and modify the ledger. Examples of private blockchains are Hyperledger Fabric and Corda. A hybrid blockchain combines some features of both public and private blockchains, such as allowing some transactions to be public while keeping others private. Examples of hybrid blockchains are Quorum and R3.

‍

Is Blockchain Halal and Shariah compliant?

In a nutshell, yes, blockchain, in and if itself is a Halal technology.

Blockchain is a new type of software and technology. Technology is neutral, from a Sharia perspective, as it is only an enabler. Adopting new software or technology is lawful and permissible; the default state is of permissibility in such matters. The Islamic legal maxim states:

“Permissibility is the state of all things by default.”

Software can be designed in various ways to deliver various services. Hence, the objective and function of a blockchain must be considered when reviewing a particular type of blockchain. Blockchain can be likened to a knife; it can be used in permissible and impermissible ways. A knife can be used for a virtuous action such as cutting fruits to serve one’s guests, or it can be used for heinous crimes like murder. The knife is, of course, not to blame, but the user and the way they use this tool. Similarly, blockchain is technology. It can be deployed in rewarding and permissible avenues, or it can be used to record data of impermissible activities.

When reviewing a blockchain from the lens of Shariha compliance, there are two levels which need review:

1. macro-level

2. micro-level

The macro-level review should focus on what this particular consensus algorithm is validating and what the blockchain is serving - what it is keeping a record of and facilitating. The macro-level review ensures that the processing endeavours of nodes is not actively facilitating non-Sharia-compliant activities. This is vital because, even though the micro-level requirements might be structured in a compliant manner, the overall output can facilitate a non-compliant activity or service.

The micro-level review should focus on the process of an algorithm, transaction fees, distribution of rewards, nodes’ rights, nodes’ input, and the overall governance protocols, if any. A process can be developed in a non-Sharia-compliant way wherein one party is unjustly disadvantaged, or the process is ambiguous and creates discord. Likewise, fees can be unwarranted, unfair, or unjustified. Fees can also be structured in a non-Sharia-compliant manner. Rewards in a system can potentially be distributed in a non-Sharia-compliant mechanism and can lead to a gambling scenario. The rewards’ distribution mechanism must be analysed to ensure a gambling scenario has not been orchestrated.  

Furthermore, the rights of participants in any system can be constructed in various ways. Sharia has principles to ensure that any participant in any system is not taken advantage of, nor are they unfairly treated. Thus, the rights of nodes need to be reviewed to ensure they align with the Sharia principles of justice and fairness. Finally, if any blockchain or consensus protocol has specific terms, then those terms must be analysed to ensure that no Sharia right is infringed or breached.

Consensus mechanisms are a decision-making process for a group with some particular objectives, such as:

- Coming to an agreement: The mechanism allows the members to come to an agreement.

- Collaboration: The mechanism allows for more collaboration between members to serve the interests of the whole.

- Co-operation: Every member will work as a team and put their own interests aside.

- Equal Rights: Every single member has the same value in voting. Every member is equally important.

- Participation: Everyone inside the network needs to participate in the voting. No-one will be left out or can stay out without a vote.

- Activity: Every member of the group is equally active. There is no-one with more responsibility in the group.

In regard to consensus algorithms, consensus in and of itself is not an absolute must in every matter in Sharia. Sharia principles allow for valid differences of opinion; the Sharia encourages harmony and cordialness irrespective of the views of people. However, in the context of blockchain, consensus is generally about agreeing to a true or false proposition on the occurrence of an event. The consensus is not based on subjective views and thoughts.

‍

Conclusion

In conclusion, blockchain technology presents a world of opportunities for Islamic finance, offering a highly secure, transparent, and decentralised framework that aligns seamlessly with the principles of Shariah. Given its inherently neutral position, the technology is Halal and permissible for use in an Islamic context, with its permissibility extending to both the micro and macro levels of its application. As long as blockchain technology is used in compliance with the principles of fairness, justice, and trust, its potential within the Islamic financial system remains vast and largely untapped.

However, it is crucial to approach this technology with careful and considered oversight to ensure that it is not used to facilitate activities that go against the principles of Shariah. This involves a thorough review of both the macro-level (the overarching function and objective of the blockchain) and the micro-level (the finer details such as transaction fees, rewards distribution, participant rights, and governance protocols).  

By leveraging the power of blockchain technology in a manner that aligns with Islamic principles, we can revolutionise the way we approach Islamic finance, paving the way for a more secure, transparent, and equitable financial system that serves the global Muslim community and beyond. As with any technological advancement, it is important to continuously examine and understand its implications within the framework of Shariah, thereby ensuring it is used ethically, responsibly, and justly.

‍

Try Fasset: Download App Now

‍

No aspect of this platform is intended to provide, or should be interpreted as providing, any investment, tax, legal, financial, or other advice of any kind. The materials presented on this platform should not be considered a substitute for professional advice. If you decide to engage in transactions based on any material found on this platform, the decisions, transactions, and any consequences that arise are solely your responsibility.While other users may share investment advice or opinions, please be aware that such advice or opinions are merely conversational exchanges between individuals who may be anonymous or unidentifiable. Fasset explicitly does not provide investment advice directly, indirectly, implicitly, or in any manner whatsoever.It is recommended that you use any information obtained from this platform as a starting point for your own independent research.