Reviving the Gold Dinar as a Unit of Account with a Land-backed Stablecoin Waqf
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TL;DR: Instead of being pegged to fiat currency, a stable coin could be pegged to the Islamic gold dinar and backed by a series of land trusts in Muslim majority countries, allowing Muslims to protect and grow their wealth in a period of inflation and instability in an unquestionably halal way while economically supporting the ummah.
For the past few years, most people have been concerned with whether or not cryptocurrency is going to succeed. With each passing day, more and more people are aware that the technology is here to stay.
At the same time, the value of fiat, central bank currencies continues to degrade, making cryptocurrencies more and more attractive. Eventually, there will be a tipping point where the movement of wealth out of fiat and into cryptocurrency accelerates the inflation of fiat currencies, triggering a panic.
Governments will, of course, step in and try to conduct interventions, but in many or most countries, people will (rightfully) lose the trust in governments.
When Stablecoins Become Unstable
At present, the vast majority of stablecoins are (theoretically) backed by US dollars or other fiat currencies. I say theoretically, because in reality, most stablecoin issuers don’t keep full reserves.
In practice, stablecoin issuers stabilize price by way of open market operations, in which they buy and sell tokens in order to maintain price parity with the pegged asset.
Currently many traders, including many Muslims rely on these stablecoins for transfers or other deals, especially in areas where government backed banking and transfer solutions are not available.
But what are these traders going to do when fiat currencies like the dollar collapse, which they inevitably will? We have already seen Muslims suffering greatly with the collapse of the currencies in Egypt, Sudan, Syria, and Lebanon, to name a few.
People tend to think that this only happens with “third world” currencies. Eventually this will happen with major currencies like the Dollar and Euro as well. So where will the “safe haven” be when this finally happens?
Historically, in cases of currency collapse, the government will set up buy-back programs where citizens can exchange their worthless currency for a new, “improved” currency. This presents a real problem for Muslims who are using stablecoins in areas that are not under the control of UN-backed governments. It provides a major opportunity for governments to “wash out” people who are not under the domination of the international financial system by blocking their access to the new, functional currency.
China’s Power Play
China is aware of this eventuality and is positioning itself to make a power move when this happens. China has been hoarding gold for over a decade, and at the same time has made moves to internationalize and digitize the RMB (yuan).
They would like very much to take over the reserve status of the dollar, and they are well positioned to do so because of the heavy dependence of many countries on Chinese imports. By issuing a digital currency with gold convertibility, they can capture a large portion of the global currency market.
This would amplify China’s power in a number of ways. If countries start to hold digital RMB as a reserve currency and in order to pay for imports, it will generate a huge amount of demand for the currency. The US dollar has allowed the US to drain blood from the population of the entire world, enabling them to run the deficits required for financing endless imperial wars. In a scenario of dollar collapse, this power would transfer to China.
China would not need to keep full reserves — because of the demand for Chinese exports, they could likely keep a stock of 5–10% available. This would allow them to issue vast quantities of “debt money,” thus emulating the US’s recipe for power and influence since the end of the Bretton Woods system.
In addition to greatly amplifying China’s economic and military power, this would also give them a “kill switch” on the economies of most Muslim countries. The digital RMB will be completely controlled and censored by the Chinese government. This would effectively give China a mechanism very similar to the US’s Office of Foreign Asset Control (OFAC), which places sanctions on individuals and governments, denying them access to the world financial system. This is one more avenue of tapping into the political potential of Chinese export dominance.
It’s very important that awareness spread among Muslims that using this money is haram, but it is even more important to provide viable alternatives.
The saying “a small amount of prevention is worth a large amount of cure” is very relevant here. The sooner Muslims can transition to using currencies that do not empower the enemies of Islam, the better. This is true on practical, as well as religious, levels.
If Muslims wait for the US dollar to collapse before looking for other stable currencies, they will probably end up using either a central bank digital currency (meaning being under the control of whatever central bank issues it) or using a commodity backed cryptocurrency.
Why Gold-backed Stablecoins are Doubtful at Best, and Haram at Worst
The Prophet (sal Allahu alaihi wa salam) said: “Do not sell that which you do not possess.”
As it happens, ignoring this command is one of the main causes underlying the growth of fractional reserve banking. When the allowance is given to trade in certificates representing a good, rather than the good itself, a huge can of moral hazard is opened. There is a tremendous incentive to misrepresent the amount of the asset stored, and even if a trader is honest, there is the possibility of loss or damage of the goods occurring after receiving payment but before delivering the goods.
A number of gold-backed cryptocurrencies have appeared in recent years, many of which have described themselves as “sharia compliant.” These claims are problematic for a number of reasons.
Even assuming whoever is entrusted with the gold is honest and responsible, many other issues come up, especially in times of political instability. Where will the gold be stored? What happens if, as has happened many times in history, a government takes power which decides to seize the gold? What happens if there is a theft? Will insurance be required? Is that insurance really halal?
In Search of an Indisputably Halal Cryptocurrency and the Sharia Incompliance of “Sharia Compliance”
I have long advocated that Muslims begin to keep savings in Bitcoin, and I clarified the reasons in my book, “The Islamic Economy in the Age of Bitcoin,” (available to download free here or for purchase as an ebook or paperback here).
One of the problems we consistently ran into when developing the Jamaa mudaraba microfinance platform was skepticism about the underlying currency. Most of these concerns revolve around the large amount of speculation and gambling-type behavior that surrounds cryptocurrency trading.
We started developing with Stellar because of the simplicity and ease of deploying simple programmatic transactions, but Stellar was still part of the broader cryptocurrency ecosystem. Stellar itself was certified as “sharia compliant,” but in the process of seeking “sharia compliant” status for Jamaa, it became very clear that these labels are more or less worthless.
I spoke to scholars who offered to put their stamp of approval on the project for a price, but when I looked into their backgrounds, I found they had also provided this certification to financial products which are functionally identical to riba.
This left us in a difficult conundrum. A large number of Muslims reject the notion of cryptocurrencies because of the doubts surrounding them and the rulings by a number of prominent scholars. Even the few Muslim public figures who were willing to speak to us at all would not back the project unless it was endorsed by scholars, but the difficulty and doubts surrounding cryptocurrency made it difficult to get this support.
We had the option to simply buy a “sharia compliance” certificate, but it seemed somehow that the simple act of purchasing such a certificate would itself be morally questionable.
So what would a genuinely Islamic stablecoin look like? What could it be backed by?
The prohibition on trading in assets one does not physically possess does not apply to immovable assets like houses or real estate. This makes sense, because these assets do not have any of the dangers associated with movable goods like gold, grains, or livestock. Generally, land ownership is public knowledge and can be verified by anyone, which makes it more difficult for someone to sell land that they do not actually own.
In this sense, a land or real estate backed stablecoin could truly represent ownership in the underlying asset.
The Foundation of an Islamic Digital Economy
There are many applications based on censorship-proof, programmable money which could be hugely beneficial to the Muslim ummah. To name just a few:
- Rewards programs that reward Muslims for supporting Muslim owned businesses.
- A jami’a (rotating savings and credit association or ROSCA) backed by cryptocurrency, allowing people who don’t know each other to engage in secure group financing.
- Freelance platforms for Muslim professionals.
- Microfinance platforms like Jamaa.
- Incentive based arbitration systems.
- Escrow services.
- Currency issuance.
- Digital awqaf (trusts) with decentralized financial governance.
- Probably many others…
Applications like these have the potential to increase the economic vitality of the Muslim ummah, but more importantly, they could reduce our dependence on riba based systems whose beneficiaries are hostile to Islam.
Such a currency, in addition to safeguarding the wealth of Muslims, could also be a means of reclaiming economic power which has currently been co-opted by the world financial system.
This role can also be played to some extent by Bitcoin, but there are still reasons for other currencies to exist. While Bitcoin may eventually achieve some level of stability, it presently is not practical for many applications in areas that are cut off from financial services, like Palestine, for example.
Even for those Muslims who hold Bitcoin, other currencies are required in order to leverage Bitcoin holdings into working capital via a Bitcoin based jami’a (ROSCA).
Overall, there is a strong case for an Islamic stablecoin as an enabling factor for an Islamic digital economy.
How are Stablecoins Stabilized, Who Benefits, and How?
Running a stablecoin can be a very profitable venture. This is where the power of commercial banks comes from — the ability to create money out of nothing.
The largest and most well known stablecoin, Tether, has admitted that they don’t keep full reserves. This means that they quite literally can print their own money.
This is similar to the United States’ ability to run an endless deficit. Since there is a huge pool of demand for dollars, the US can expand the money supply without threatening the stability of the US dollar. In the same way, the more people use a stablecoin, the more of that stablecoin the issuer can release into the market.
As demand for a stablecoin increases, buyers, of course, buy it with some other asset, like Bitcoin or fiat currencies. This means that the stablecoin issuer accumulates a lot of “real” capital as demand for the stablecoin surges.
The issuers have to keep some of this capital to stabilize the stablecoin’s price. They do this simply by buying up their own coins if the price goes too low. Likewise, if the price gets too high, they issue more coins and release them onto the market.
If demand for the stablecoin is growing, the profits from issuance will exceed what is needed to stabilize price, which goes directly into the pockets of the issuers. Furthermore, since stablecoin issuers have a large reserve of cash on hand, they can keep this money in interest bearing accounts, further boosting their profits.
A Land Waqf/Stablecoin
Clearly, creating money out of nothing is contrary to the spirit of the sharia, which, like the light of knowledge, combats all forms of oppression and injustice, and elevates the truth while dispelling falsehood and deception.
So what would an Islamic stablecoin look like? It certainly can’t be pegged to the satanic fiat currency system. It also should not depend on gold reserves, which can be easily falsified or seized. Furthermore, some assurances are needed as to how income in excess of reserve requirements are distributed.
A stablecoin can be linked to the ownership of land by holding companies or awqaf. In other words, a waqf or holding company is created, and in its bylaws, provisions are made that in the event of dissolution, all assets owned by the waqf or holding company are to be liquidated, and the proceeds to be distributed to token holders in proportion to their percentage ownership of total supply.
An organization in a stable, crypto-friendly jurisdiction would hold a series of holding companies or awqaf located in various Muslim majority countries. Each of these holding companies or awqaf would be established to hold land locally.
This is a centralized structure, but it need not have a single point of failure. In the bylaws of the local awqaf, it can be established that assets can be transferred to a local waqf, allowing local awqaf to take over the role of the central waqf in the event of a political disruption.
The tokens themselves would be located on an immutable public blockchain like the Bitcoin network. This means that the main risk for such a project would be the loss of land assets due to government seizure. This risk would be distributed by purchasing assets in a diverse range of jurisdictions.
Political Stability as an Export Product
In times of crisis, people naturally gravitate towards commodity currencies like gold for the stability they provide. Physical gold provides a level of stability, but it (obviously) cannot be transmitted digitally. This is a real liability, especially when there is an ever present danger of authoritarian governments confiscating assets.
The worsening geopolitical climate is one reason for Bitcoin’s growing popularity. However, those interested in a safe haven from inflation and instability might also be interested in a basket of land assets due to skepticism about the Islamic legitimacy of Bitcoin, a need for exchange rate predictability, or a desire to diversify their holdings.
The mandate of a land-backed stablecoin’s governing body could be to classify areas as low, medium, and high risk jurisdictions, and to balance holdings according to signals provided by token holders.
In this way, holding the token would provide indirect exposure to real estate in broad range of areas, supporting price stability and the security of the investment.
Funneling Wealth into Muslim Lands
One of the clear advantages of this arrangement is that it would boost the overall wealth levels of Muslim-majority countries by injecting capital into their economies. When someone purchases US dollars to safeguard their wealth, they unknowingly empower the US Federal Reserve and government in the process. The demand that their purchase generates increases the credit line derived from global dollar dominance.
Likewise, when someone purchases Bitcoin, they gain access to a highly secure deflationary asset which is programmed to increase in value. At the same time, their purchase increases the value of the holdings of all Bitcoin holders.
It could be argued that this would also benefit the corrupt regimes ruling over Muslim lands as well, and this is true. At the same time, though, it would also benefit ordinary Muslims. This is surely better than investing in land in lands ruled by disbelieving regimes, where the majority of the population that would benefit from the investment are also disbelievers.
Legal systems governing awqaf in Muslim countries are also often inherited from pre-colonial systems, so these arrangements could very well survive regime changes or political upheaval.
Ideally, the land held would also be managed as productive awqaf, which would generate jobs locally and profits for token holders. Under this arrangement, land is productive, and profits go towards paying expenses like maintenance and labor, while excess profits are paid to the beneficiary of the waqf.
Agricultural land would probably be the best investment for such a trust, as it is the most stable. This arrangement could also improve food production in Muslim countries by enabling improvements in production methods.
Gold Dinar Parity
A land trust/stablecoin would have a number of expenses. Some kind of organization would be required to maintain stability. Most stablecoins presently target parity with common units of account, like dollars. Other, gold-backed currencies may try to keep their value tied to the price of one gram of gold.
One of the challenges that we will face in the coming economic transformation is making sense of price changes. Gold has a good track record of stability vis-a-vis commodities. Adopting gold as a unit of account can also help us to mentally transition to an economic model based on gold.
The organization charged with maintaining price stability would track the value of gold so that each stablecoin retained a value equivalent to 4.25 grams of gold, the historic weight of the Islamic gold dinar. In this way, it is possible to revive a sunnah, and to create an oasis of stability in a world of rising currency chaos.
Similarities Between Stablecoins and Ponzi Schemes
As interest in the stablecoin increases, the issuing committee or trust would collect funds, probably in the form of Bitcoin or fiat currency. It would be necessary to keep a certain amount in reserve to stabilize fluctuations in demand and price.
If you think about this, it points to another reason why a gold or fiat backed stablecoin, or fiat currency for that matter, would be problematic. When a currency’s price is stabilized via a mandate for open market operations, someone has to be in charge of these operations. That person obviously needs to live, so they are going to receive a salary.
If a currency itself is not connected to any productive asset, and has no intrinsic value, where does the money come from to pay for the continuous effort of stabilizing the currency? Well, it can come from one of two sources — either inflation or growing demand for the currency.
People tasked with stabilizing a fiat currency can pay their own salaries by simply issuing more currency and degrading the value of everyone else’s wealth for their own benefit. When it comes to a gold or fiat backed currency, those responsible for stabilizing the exchange rate can pay their own salaries with the profits from selling the stablecoins.
This explains why Tether (USDT) has never really had full backing by dollar reserves.
In this sense, stablecoins, in their present form, are quite similar to Ponzi schemes. A Ponzi scheme offers high profits, but it can only continue to operate as long as it is growing. As soon as the people operating it are unable to find new buyers, the price collapses, because they are unable to continue paying out profits.
Likewise, if growth in demand for stablecoins ever slows, the people managing themselves will have to dip into the reserves to cover their own expenses. The longer this goes on, the more likely it becomes that the remaining reserves won’t be enough to stabilize the currency. In this sense, in the long run, fiat and gold backed stablecoins are fundamentally unsustainable.
Living Off the Fat of the Land
Land, however, is a productive asset. Agricultural land produces food, residential land produces rents, industrial land produces goods, and commercial land produces profits. As long as land is located in a growing economy, the value of the land itself will appreciate — especially if riba-backed financing is present in the economy.
An Islamic, land-backed stablecoin would be more or less a waqf which manages other awqaf — a sort of stateless, super waqf. Profits would come into the waqf from two sources; growing demand for the stablecoin, and profits from productive land.
In the first line, profits from land would go towards maintaining the expenses of operating whatever investments are on the land. This would include salaries for local workers, maintenance, and equipment required for operating the investment.
Whatever is in excess of the expenses would go into the central treasury. From here, it could bolster reserves for maintaining gold dinar parity, cover the expenses of employees of the waqf, and go towards expanding the overall land holdings of the waqf.
Managing Reserves
For optimal security, the total value of dinar equivalent stablecoins would never exceed the total value of the land. For example, the total circulating supply could be capped at 70% of the total fair market value of the land portfolio.
This ensures some level of peace of mind for holders of the stablecoin, who know that if the waqf is dissolved or is unable to maintain the dinar parity mandate, they will be able to recover some or all of their funds from the proceeds of the land sale.
If there is high demand for the stablecoin and it is necessary to issue new coins in order to prevent the price from rising, then additional profits would be reinvested into land to maintain the balance, allowing a continuously greater than 100% reserve.
The possibility exists to distribute excess profits on investments to token holders. For example, new tokens could be issued and distributed to existing wallets in proportion to the percentage of the total supply held in those wallets.
The problem with this is that ideally the currency would want to become a means of exchange, because the more people who use it, the more economic power would be directed towards strengthening the Muslims and away from strengthening hostile parties. Incentivizing hoarding, as is the case with Bitcoin, decreases the likelihood of the currency being used for trade, and instead it becomes primarily a vehicle for saving or investing.
A deflationary currency can be very useful for causing a stampede effect to take down other assets, as seen with Bitcoin vs. fiat. However, Bitcoin does what it does very well, and it’s not a great idea to try to compete with it.
As far as bonuses for token holders, one possibility would be to construct simple guest houses on land assets and grant the right to token holders to stay in them for short periods of time according to a schedule, similar to the way time share vacation homes work.
Governance
One of the biggest challenges of a project like this is governance. Some of the major concerns include:
- Preventing misuse of funds.
- Determining which land assets to add to the portfolio.
- Deciding allocation of excess reserves.
- Building political resilience into governing bodies.
It’s important not to concentrate the power to move funds. Funds would need to be held in multi-signature wallets or accounts requiring the approval of multiple shura council governing members. This shura council would ideally include scholars of Islamic knowledge as well as those knowledgeable about investments and politics.
The tokens themselves could also carry voting rights. Ideally the decision making power would be balanced between a decentralized network of token holders and a geographically distributed shura council.
Both the shura council and the token holders could potentially be attacked by hostile actors. The shura council would be easier to suppress, while the body of token holders would be easier to infiltrate. If decision making power was somehow divided between these two bodies, it would make the network more resistant to political attacks.
A geographically distributed shura council would also make it harder to cripple decision making power and freeze funds by applying political pressure to any one nation-state.
Opportunity in Crisis
Demand for stablecoins has grown rapidly in recent years, and it’s not showing signs of slowing down. A period of serious currency instability is ahead of us, and the potential exists to use this crisis as an opportunity.
Muslims around the world have been unknowingly subsidizing the US war machine to the detriment of Islam and the Muslims for decades. We are moving out of a period of national currencies into a period of increasing currency globalization.
This is an opportunity for Muslims to reduce their participation in national economic networks and instead shift their economic power and activities towards supporting and building connections with Muslims worldwide.
