Litecoin

1. What is Litecoin?

Litecoin (LTC) is a peer-to-peer cryptocurrency that enables global instant and low cost payments. The network is secured by cryptography and empowers individuals to control their finances.
Created based on the Bitcoin protocol and launched in 2011, it was designed as a lightweight alternative to Bitcoin (“altcoin”) that offered faster and cheaper transactions. The most significant difference is that it takes 2.5 minutes for Litecoin to generate a block, or transaction, in comparison to Bitcoin’s 10 minutes. Besides, there will be 84 million Litecoins that can be mined, which is 4 times more than Bitcoin’s max supply.

2. Litecoin Consensus Mechanism

Litecoin network uses a Proof-of-Work (PoW) mechanism. A PoW mechanism is a decentralized consensus mechanism where the more computational power a miner puts into solving a mathematical puzzle, the more chances he has to solve the puzzle. The chain of blocks that has proved more computational power is the one that is accepted by the network consensus.

In order to be considered a successful transfer, every Litecoin transaction must be added to the Litecoin blockchain – the official public ledger of all completed transactions. Every transaction that occurs is verified before being added as a new block to the Litecoin blockchain.

Mining is the process by which unconfirmed transactions in a mempool (short for memory pools, which are queues of pending and unconfirmed transactions for a cryptocurrency network node) are confirmed into a block on a blockchain. Miners select unconfirmed transactions from their mempools and arrange them into a block. The first miner on the network to find a suitable block earns all the transaction fees from the transactions in that block. As a result, miners tend to prioritize transactions with higher transaction fees.

With every block (a collection of transactions) added to the blockchain comes a reward called a ‘block reward’, as well as all fees sent with the transactions that were confirmed and included in the block.

Rewards

Miners are currently awarded 6.25 new Litecoins per block, an amount which gets halved roughly every 4 years (every 840,000 blocks).

3. Use Cases of Litecoin

The Litecoin blockchain network is an open source global payment network that is dedicated to powering the Litecoin cryptocurrency. Use cases of Litecoin include the following:

• Daily payments. LTC is digital cash able to be sent quickly and cheaply to anyone in the world. It is often used for small-scale payments and purchases.
• A store of value.
• Cross-Border Remittances, especially in regions with limited banking infrastructure.
• Investment, used as an asset for long-term holders.

4. Shariah Screening

In this section, we will highlight Shariah’s stance on some aspects of the Litecoin blockchain and subsequently draw Shariah’s opinion about the exchange and use of Litecoin cryptocurrency. This screening is based on Litecoin’s website, Litecoin Foundation information, as well as information published on various sources such as DeFiLlama and Coingecko.

Litecoin’s Shariah-compliance will depend on assessing the following elements:

• The project: purposes of Litecoin
• The legitimacy
• Is Litecoin a currency that has value from the Shariah perspective?
• Underlying Relationships between Litecoin participants
• The process of Litecoin transfer
• Uses of Litecoin

• The project

Litecoin’s core project’s aims to enable global instant and near-zero cost payments, with the potential advantages of decentralization such as security, privacy and people’s control of their finances. This purpose contributes to economic efficiency as well as financial inclusion by providing access to money transfers to unbanked populations. These purposes fill important gaps and add value to the economy and the society that is aligned with Shariah objectives.

• The legitimacy

With substantial industry support, trade volume and liquidity, Litecoin is a proven medium of exchange, complementary to Bitcoin.

Litecoin Foundation is a nonprofit organization whose mission is to promote and standardize the adoption, awareness and development of Litecoin and its ecosystem.
Established in both Singapore and the US, the Litecoin Foundation regularly publishes annual audited financial statements on its website.

Notably, Litecoin has seen consistent adoption on payment platforms such as BitPay and CoinGate, making it accessible to a broad audience worldwide.

Litecoin ranks no. 27 in terms of market cap, amounting to $8.2 bn to date. However, Certik Skynet gives the platform a security score of date of 77.28, ranking no. 1074, still positioned among the top 10% crypto tokens and with a BBB rating. This modest rating is due to a modest score in the Code Security pillar as well as the Fundamental Health pillar. The Code Security includes metrics about Security Audit, Audit Quality and Codebase Monitoring. The Fundamental Health includes Team Transparency, Funding Legitimacy and Project Integrity. This scoring suggests there are some risks associated with the cryptocurrency.

• Is Litecoin a Currency That Has Value from a Shariah Perspective?

Many contemporary Shariah scholars[1] consider that cryptocurrencies have a value as legitimate currencies, that is derived from their widespread acceptance as a currency and people’s desire to own them and save them. This relation is based on the force of General Custom العرف الخاص in Shariah. This means that, if the general custom has become to accept something as a medium of exchange, this thing gains its value and role as a currency from this acceptance.

Ibn Taymiyyah (d. 728 A.H.) says: “The characteristic of (money) being ‘valuable’ does not have a ‘natural’ or ‘legal’ criterion; rather, it depends on custom and convention. This is because, in essence, a currency is not demanded for its sake, but rather to be used as a standard for transactions. Dirhams and dinars are not intended for themselves; they are merely a means of conducting transactions, which is why they are considered as currencies. This is in contrast to other forms of wealth, where the purpose is to derive benefit directly from the owned object itself; thus, they are valued according to natural or legal criteria. A pure medium carries no inherent purpose in its material or form, but it fulfills its role whatever form it takes”[2].

Accordingly, anything that is widely accepted as a medium of exchange is considered a currency that is subject to the rules of currencies in Shariah, the most important of which is spot delivery in being traded with another currency, and the application of Riba prohibition and Zakat obligation.

As such, Litecoin can be considered as a currency that has value and to which apply all rules of currencies in Shariah.

• Underlying Relationships
  • Relationship between Litecoin network and Users

Users submit their payment requests via the Litecoin blockchain. These transactions are processed, validated, and recorded on the chain. In return, the network charges transaction fees for such transfers. This relationship is an Ijara إجارة contract between the network and the user, where a service is provided in exchange for a pre-determined transaction fee, which goes to the miners who process transactions on the Litecoin network. This fee can vary depending on network congestion. This relationship is valid from a Shariah standpoint. Yet, if a payment transaction is ever known in advance to be haram, the network and the miners are not allowed to process it.

• • Relationship Between Litecoin Network and Miners

The relationship between Litecoin and miners can be qualified as Ja’ala (جعالة), where both the service and the fees are pre-determined. However, the work is not assigned to a specific miner but is distributed to whomever solves the mathematical puzzle first. This arrangement is permissible. The fact that miners’ rewards are from newly mined Litecoins does not breach any Shariah principle; it is in fact similar to governments issuing new banknotes, which is commonly accepted by contemporary Shariah scholars.

• The Process of Litecoin Transfer from a Shariah Perspective

In this section, we shed light on the process of Litecoin transfer to verify its Shariah compliance. In this capacity, there are three scenarios: 1) sending Litecoin from one wallet to another, 2) sending Litecoin with currency conversion, and 3) using Litecoin as a bridge between two currencies.

• Scenario 1: Sending Litecoin from one wallet to another.

Users Create wallet → Fund wallet with LTC → Enter recipient’s address → Enter amount → Pay transaction fee → Sign transaction with private key → Broadcast the transaction to Litecoin network → Miners verify the transaction → Transaction confirmation. Once a transaction is included in a block, it’s considered confirmed. Each subsequent block that gets added to the chain is considered another confirmation. After the required number of confirmations, the recipient’s wallet is credited with the LTC.

No Shariah violation comes to our attention in this scenario.

• Scenario 2: Sending money with currency conversion

• The sender in country A first buys LTC with their local currency (e.g., USD). This is usually done on a cryptocurrency exchange that supports fiat-to-crypto conversion.
• The sender sends LTC to the recipient in Country B (who uses EUR for example).

• • This step involves broadcasting the LTC transaction to the blockchain, as described in scenario 1.
  • The LTC is then sent to the sender’s wallet.

• The recipient in country B then converts the received Litecoin into their local currency (EUR).

No Shariah breach comes to our attention in this scenario also. Yet, the mutual delivery between the two currencies on the crypto exchange must be processed with no delay, as is the rule of currency trading. See section 4.6 on particular consideration related to currency trading.

• Scenario 3: Using Litecoin as a bridge between two currencies

It is possible to send a cross-border payment involving currency exchange without the sender needing to buy LTC directly. This process works as follows:

·     Sender initiates the transfer in his own currency (e.g., USD) on a platform that supports crypto-based money transfers.

·     Platform converts sender’s USD to LTC at market rates.

·     Platform then sends LTC to the recipient via Litecoin network. The actual transfer of Litecoin from the sender to the recipient happens in the background via the Litecoin network.

·     Once LTC reaches the recipient, the platform (or its local partner) automatically converts LTC into the recipient’s fiat currency (EUR, for example), using a local exchange or leverage peer-to-peer liquidity in the recipient’s country.

Those platforms typically have partnerships with crypto exchanges, and may have access to liquidity pools that allow them to instantly convert between cryptocurrencies and fiat currencies.

No particular Shariah violation comes to our attention in this scenario, with the particular considerations below. Although liquidity pools that are used in this scenario are often based on interest, this does not affect the permissibility of currency exchange within these pools.

• Particular Shariah Considerations in Trading Cryptocurrencies

Spot possession (Qabd) of the currencies is a condition without which the transaction is void. Regarding the realization of possession of cryptocurrencies, some scholars view that it does not occur unless the transaction is recorded on the blockchain[3].

Accordingly, a seller of LTC is not allowed to sell it before possessing such amount of LTC that is recorded on the blockchain and not just in the platform’s accounts or wallets.

There could be some delay between the execution by the trader of the selling/buying of the currency and the recording on the blockchain, but this delay is forgiven.

A resolution of the International Fiqh Academy about possession of money in banking transactions (which has the same principles as cryptocurrencies) states: “The delay in the banking entry is forgiven in a manner that allows the beneficiary to actually receive the amounts according to the recognized periods in the markets of those transactions. However, the beneficiary may not dispose of the currency during the forgiven period, except after the effect of the banking entry is realized, allowing for actual receipt”.

Leverage and margin trading as applied in traditional currency trading markets are prohibited and thus are not allowed in trading Litecoins with other currencies whether traditional or crypto currencies.

Conclusion of Shariah Opinion

This report has analyzed Litecoin cryptocurrency based on the coin’s structure and uses.

The report deems that using and exchanging Litecoin is permissible based on the opinion of many Shariah scholars that view cryptocurrencies as valid currencies. Litecoin is accordingly considered as a general currency that is subject to all Shariah rules of currencies, similar to gold and fiat currencies. Therefore:

• Using LTC for payments, whether involving or not currency exchange, is allowed.
• Trading Litecoins with other currencies, whether fiat or crypto or gold and silver, must be implemented with spot possession. Possession of crypto is realized when the block of the transaction is recorded on the blockchain. Time between the execution of the currency exchange and recording of the block is forgiven.
• Selling any amount of LTC must have been possessed before.
• Leverage and margin trading are prohibited.

[1] See for example “Cryptocurrencies: an Economic and Shariah Study” (Arabic) by Abo-Nasr Mohamed Al-Shakhar, pp. 96-110; “The Influential Matters in the Ruling on Cryptocurrencies” (Arabic) by Abdel-Bari Mash’al, pp. 45-47.
[2] Ibn Taymiyyah, Majmou’ Al-Fatawa (Arabic), Vol. 19, p. 251.
[3] Abdul-Bari Mash’al, op. cit.