Decrypting Cryptocurrency – I

History of Money

(Shaykh Dr Sajid Umar, Standing Shariah Committee, Islamic Council of Europe (ICE),  Interviewed by Usman Malik)

U: Before we get into the fiqh of cryptocurrencies, we would like for you to summarise some important preliminary concepts, to have a better understanding of the topic at hand.

The first of these preliminaries relates to the history of money, especially from the perspective of Islamic thought: how was money considered money historically? Was it always gold and silver?

S: From the universal laws of Allah Almighty is that He made us inter-dependent beings, with varied levels of ability, needs, financial standing, and material well-being. This in turn naturally makes us in need of each other, in order for us to achieve our essentials suitably and sustainably. And since mankind by design has been created to survive the terrain of its environment, this idea of inter-dependency is a mercy from Allah upon us.

This reality also naturally makes us closer with one another on a human level despite our differences, because our worldly requirements would be more closely aligned to a degree.

This idea of us being inter-dependent by design has been taught to us by Allah in the Qur’an. For Allah Almighty says:

“Do they distribute the mercy of your Lord? It is We who have apportioned among them their livelihood in the life of this world and have raised some of them above others in degrees [of rank] that they may make use of one another for service. But the mercy of your Lord is better than whatever they accumulate.” (al-Quran, 43:32)

Accordingly, we see that before the advent of money, as it came to be over time, a barter system of exchange was used. In such a system, people could just trade back and forth ‘in kind’, because they all had similar possessions and aligned needs due to their circumstances…

….So by way of example, if a person had more berries than required, and a fellow citizen happened to have more chickens, they would make a transaction between these two ‘counter-values’. Ultimately, both would eat what was desired on that day. This was known as the BARTER trade system…

Now, given that our preferred exchange-based practices are naturally linked to our norms, it is important to note that a barter system for trade thrived in its time for two important reasons:

1. People were mainly hunters and gatherers, and as a footnote, it is worth noting that this process of hunting and gathering happened in groups. Generally speaking, people had the same food range preferences and thus hunted and gathered similar items. This entailed that people were kept together by the design of their norms, which eventually led to them being more connected as a people.
2. Instead of being sedentary and settled, people were predominantly nomadic, which was the norm for hunters and gatherers. As a result, storing possessions would naturally be an unwelcomed logistical burden, as we can imagine…

So people never stored their food, as opposed to what we see with civilizations which came after, due to their circumstances evolving.

Now, with the passage of time and the transformation of society, life naturally evolved further, and accordingly, we find cultivators becoming a prominent part of society and the system.

So now you had 1) hunters and gatherers, and 2) cultivators. This new dynamic naturally instigated changes in two areas:

1. The first pertained to transactions and exchange.
2. The second related to the social element of society due to cultivation being a more localised and specialised process, as opposed to hunting and gathering.

Accordingly, two resulting scenarios occurred, which were as follows:

1. Groups of people naturally spent less time with other groups, as opposed to how things were before cultivators arrived on the scene. For now you had a situation whereby some stayed local and cultivated their gardens, whilst others went out and hunted and gathered…
2. For the first time, the problem of excess arrived…how was that so?

This was due to the collective group of cultivators having more vegetables than required, and the collective group of hunters and gatherers having more meat and berries than required.

U: On top of this you can imagine that this experience of excess was further complicated economically by the fact that the harvests from successful cultivations were confined to only a couple of times of the year, whilst meat was available throughout the year.

S: Yes, you are right. And due to these issues, an upgrade to the scope of the barter trade system was needed, in the form of someone now needing to widen the scope of their search. This was in order to find other individuals who may be interested in the excess of meat or vegetables available. This resulted in further issues, such as:

1. Suitability issues, given that this process was time consuming, and also resource intensive in that it required more energy…
2. Practicality issues, as once the people who were in need of our excess were found, we had to make sure that they had a conducive counter-value offering which we required. Obviously, we would not want to exchange our excess for something we would not benefit from, or something that will only create a different logistical burden upon us!

Along with these issues, mankind recognised other niggling concerns with the barter trade system, such as:

• The inability for these counter-values to be broken down into parts, along with the incapability of easily determining the value of each broken part in light of the exchange…
• The difficulty of storing the exchanged product, in order to use it when a person wanted to acquire something else in the future.

So due to all of these issues, the evolution of society was required to meet the new needs of mankind. Hence, we see the idea of money being born…

By the way, these complexities have been documented in Islamic literature long before Western literature, or the writings of the 18^th century CE Scottish economist Adam Smith, who is known as the father of modern economics. So for instance, we can find this information and treatment of the ideas I have just shared in the eloquent writings of Jafar b. Al al-Dimashq, a scholar living in the 6^th century AH.

In any case, due to everything we see in terms of societal changes and the presence of need, money was adopted as a means of taking care of exchange requirements. And this happened in different forms:

So we find the commodity money system introduced first, where different forms of selected merchandise  were being used as money…

So as some direct examples, we see those who lived near the seas adopt certain types of shells or fish as money…

Those who were more land based took certain types of animal hides as money.

In central Asia certain types of tea were used as money.

In Japan, rice was considered to be a medium of exchange.

In northern Europe, fur was a major trading good.

Now, as we can see here, commodity money did a better job than the barter system and immediately provided a massive upgrade to events. As this ‘money’ was standardised within society, a variety of different things could be purchased, and thus it became:

1. A means of exchange.
2. A means through which the pricing of things were understood…
3. Over time, commodity money naturally developed for itself an ability to store value. Eventually over time it was considered valuable, and people were comfortable to store it for the sake of using it in the future.

That said, mankind and society continued to evolve, and commodity money developed. But another issue arose as a result; it was jurisdictive in nature…

If I went to another place, my ‘money’ would be worthless. This is just like the case of the Zimbabwean dollar bearer bond notes, which were introduced in 2003 after the Zimbabwean dollar crashed in an unprecedented manner.

The bearer bond note was used for trade within the borders of Zimbabwe, but was totally worthless beyond its borders…

And by the way, I lived through that period between 1994 and 2003 when the Zimbabwean economy collapsed, which lead to the demise of their own currency.

In the early noughties, I opened my own IT business – MicroWhiz– which was the business I had made dormant in 2003, when I first came to Saudi Arabia to study Arabic. During that time, in order to balance the books, I had to store money overnight in the form of merchandise and not cash…why though?

Because the currency was devaluing as we would breath. And with merchandise, I could sell the product the next day by basing its price on stable currencies like the US dollar, and through it hedge any losses.

In any case, coming back to the case of commodity money, society did away with it due to it increasingly being jurisdictive by nature. And the result of this was the birth of the metallic money system, which started in the form of copper and bronze metals. It then evolved into gold and silver forms of money. And then eventually, we find the fals or fuls being introduced when the price of gold and silver had elevated. This was done to facilitate the purchase of products considered miniscule in value.

To be continued at Decrypting Cryptocurrency – II

Reproduced with permission from A Master Class on Decrypting Cryptocurrency