IRP 122 – Smart Contracts: A Shari’ah Analysis in Light of Contemporary Applications

Blockchain has great attributes that can enhance the governance and effectiveness of any institution. It also offers promising solutions through its distinct innovative feature known as the smart contract. The last few years have witnessed an increasing number of applications based on blockchain and smart contracts in many fields, including trade, investments and financing. Blockchain applications have moved beyond use for cryptocurrencies towards much more sophisticated applications. Tokenisation and token economics have become almost an independent discipline whereby new business models are formed in tandem with the evolution of blockchain solutions and other fintech technologies. Many blockchain use cases have already been tested in the market, and these include Islamic fintech applications. The concept of decentralised finance (DeFi) has become a very hot topic in finance. These developments call for verification of the concept of smart contracts from the Shari’ah perspective, not only theoretically but also based on the various applications available in the market.

While the scant available literature consists mostly of conference papers that discuss the concept of smart contracts theoretically, this study aims to examine their applications. It seeks to provide Shariah analysis of smart contracts within blockchain applications based on real use cases. Differentiating between the various use cases of smart contracts is crucial in understanding the legal implications, the level of advancement of the technology, and the extent of automation of these smart contracts, among many other factors that could have a huge impact on the fiqhi characterisation (takyif fiqhil and the Shari’ah ruling. Furthermore, the term ‘smart contracts’ is used technically to refer to the self-execution of conditions on a blockchain; therefore, it does not necessarily refer to legal contracts: rather, it is an automation of certain functions. Still, such automation may entail some Shari’ah issues; therefore, it is very important to analyse these functions and their compliance with the Shari’ah rulings. This aspect is also covered in this study.

Accordingly, this research is designed to clarify the concept of smart contracts in the context of blockchains and to differentiate between the technical meaning and the legal meaning. It further aims to identify the potential Shariah issues in using smart contracts and to provide a fiqhi characterisation (takyif fiqhi) and Shariah analysis of smart contracts based on actual use case applications. For that purpose, this research employs a qualitative research methodology in which all the relevant legal, Shari’ah and technical literature is analysed. This is complemented by in-depth analysis of several blockchain and smart contract applications. A 360-degree view, including technical design and legal implications, is provided on selected use cases.