Smart Contracts and Shariah Compliance: A Legal Paradox?

Abstract

The places where technological change in personal finance and matters of law and Islam intersect form a dynamic and problematic point of inquiry. One of the most controversial inventions in this field is the emergence of smart contracts, which are digital contracts written on blockchain or similar platforms, programmed to execute the binding provisions of contracts without any involvement of human agents. Although smart contracts have apparent benefits regarding efficiency, transparency, and cost-saving, there are underlying issues of legality and ethics that are brought up when they are implemented in Shariah-compliant applications. Diverging against the logic of smart contracts, the jurisprudence of Islamic law places an interest on human intention (niyyah), mutual consent (ridha), forbidden aspects of unjust elements like riba, gharar and maysir.

By comparing and contrasting the legal framework of both smart contract and Islamic commercial jurisprudence (fiqh al-muamalat), the analysis determines whether decreased legal precision can be accommodated concomitantly by current civilian codes of law that are free of intentions to seek novelty or claim innovations. Specific focus is placed on the interactions of the role of contracts interpretation, dispute resolution, and equitable remedies, which the Islamic law puts more emphasis on ethical discretion and situation-specific decisions which is usually lacking in the strict smart contract code. The paper then analyses the current innovation of the so-called halal smart contracts and the utilization of the Shariah compliant oracles as possible means of aligning these two opposite paradigms.

Finally, the article contends that although existing smart-contract implementations might not simply meet Shariah-compliance demands, a formulated combination of the programmable logic and juristic control, which is considered a hybrid approach, is an alternative way ahead. The paper resolves that in the spirit of interdisciplinary discussion, a constructive converging of both the Islamic scholars and technological and legal theorists can be made by the regulators but only with the cooperation of all the stakeholders. This overlapping may aid the creation of a more diverse and ethically principled digital financial framework by focusing on the legal aspect of organization and the moral purpose.