Stablecoins, cryptodinars and the Islamic utopia
Cryptocurrency evangelists tout cryptocurrencies as the money of the future. They claim that it is only a matter of time before it replaces traditional fiat currencies as the main means of transaction. It isn’t hard to understand the enthusiasm of crypto evangelists. Cryptocurrency has proven that it can transfer value much faster, with lower costs, and higher security than many traditional systems while being operational 24 hours a day, seven days a week. Unsurprisingly, many major companies accept cryptocurrency as payments. Lately, countries have also considered, or adopted Bitcoin as legal tender.
As rosy as this sounds, it has one major flaw: volatility. Instability isn’t a desired characteristic of currency. If the value of money constantly changes, it may fail to act as a measure of long-term value. An approach to overcome this dilemma is the development of stablecoins. A stablecoin is a cryptocurrency that is pegged to more stable assets like the US Dollar or Gold. This generally occurs in one of four ways:
1. Fiat-collateralized stablecoins.
These stablecoins have the backing of a fiat currency. These stablecoins are generally backed 1:1, with the associated fiat currency such as USD, GBP or EUROs in a bank account that can be redeemed if needed.
2. Crypto-backed stablecoins.
Crypto-backed stable coins attempt to maintain decentralization and may be backed by multiple cryptocurrencies to minimize risk and volatility.
3. Algorithmic stablecoins
These stablecoins technically don’t have assets backing them. The non-collateralized or algorithmic stablecoins follow an algorithm for controlling the stablecoin supply. With the rise in demand, new stablecoins will be created to reduce the price to the normal level. In the event of considerably low coin trading, coins on the market are purchased up for reducing circulating supply. Algorithmic stablecoins could offer stability according to the tenets of market supply and demand – at least that is what has been theorised.
4. Commodity-backed stablecoins
Commodity-backed stablecoins have the backing of different types of interchangeable assets. These may include gold, oil or even real estate. The owners of these stablecoins effectively exercise ownership over the underlying assets. These may open, among many possibilities, the possibility of the average individual owning commodities that were hitherto the domain of the financial elite.
Different iterations of these stablecoins may be seen as the building blocks for an Islamic utopic economy. Stablecoins overcome the challenge of instability while maintaining the numerous benefits that cryptocurrency have to offer. It may assist it reducing the fees associated with the transferal of wealth and pumping liquidity into the economy.
For many years, idealistic Muslims have dreamed of trading in the gold dinar and silver dirham – or at least modern gold and silver backed currencies. While gold and silver currency captures the imagination as it is an integral part of our economic history, many don’t see it’s reimplementation as a priority for the Muslim Collective (ummah). Trading in gold and silver in the modern interconnected world has many issues. These include coins being hard to transport, expensive to trade with and not easily divisible. A gold or silver backed cryptocurrency may potentially overcome these logistical and structural issues associated with returning to a gold dinar or silver dirham.
It should be noted that there may be additional hurdles and considerations to the adoption of a cryptodinar or cryptodirham. However, any discussion on ushering in the dinar and dirham among the Islamic scholars and economists may now potentially move beyond the logistical and structural issue and may be more focused on the crux of the issue.
If you are interested in blockchain and crypto related topics you can read our articles on Benefits of incorporating blockchain into Islamic philanthropy and Developing trust in blockchains .
Allah Knows Best