Through an ever-growing number of users obtaining Bitcoin and Ethereum and other digital currencies, several Muslims have developed concerns around whether or not they can carry out transactions and/or store these types of digital currencies in adherence with Islamic law (or Shariah).
This can be somewhat complicated due to the complexities of blockchain technology; therefore, in this article, we will examine issues of Islamic law (Fiqh) related to cryptocurrency focusing on the following topics: fundamental principles of Islamic law (Fiqh), current fatwas and ongoing scholarly discussion regarding cryptocurrencies so that you can make wise financial decisions and comply with Shariah.
1. The Nature of Cryptocurrency: Money, Commodity, or Intangible Asset?
Cryptocurrencies are digital currencies that are developed using cryptography and independent blockchains. They provide a method of exchanging currency directly between individuals without the use of an intermediary such as a bank or government. In general, they can be divided into three categories:
Coins:
Coins are standalone blockchains that are used as currencies (examples include Bitcoin and Ethereum).
Stablecoins:
Stablecoins are typically pegged to a physical commodity or fiat currency in order to limit their volatility. Examples of stablecoins include USDT and USDC.
Utility tokens:
Utility tokens are digital assets intended to enable users to access certain services. All items in trade are to be attributed to it to be recognized as "Mal", an Arabic term which translates in English to mean "wealth" or "property". To be part of the category of wealth/property (Mal), it must meet two requirements - it must have intrinsic value and it must be capable of being owned. Although there was a strong belief held by early Islamic jurists that there were exclusive privileges to tangible properties, that view does not reflect modern usage and most contemporary scholars have concluded that intangible properties also qualify under the definition of Mal (i.e. money). Because cryptocurrency has recently emerged as a newly established market source of value, it has been stated by an Islamic finance scholar (Mufti Taqi Usmani) that "If a non-tangible commodity proves to be valuable among the customs of a society, that commodity will also be classified as Mal because of the social acceptance and customary use ("Urf") of it by the members of that society."
2. Core Islamic Financial Principles Applied to Crypto
Islamic Researchers apply defined principles*Bay'* to their findings when looking at the legitimacy of crypto currencies:
*Riba (interest)(*Usury/Interest):
there is a prohibition on all Conventional banks Recieveing the loan can be determined(general- legal- banking purposes) if there is a charge for having strenuous capital cause. You can buy bitcoin and hold it, but this Is not a form of riba unless you make it intentionally a commodity by placing it on a lending platform with the guarantee of getting a set % of your funds back, at the end of a term(conventional bank).In cases where investors receive interest, it can also demonstrate interest in crypto currency through lending of funds.
*Gharar (uncertainty)(Uncertainty):
Any contract that is subject to an excessive amount of uncertainty or risk will voided by itself. The fluctuation in price of crytpo currency can be seen by the religious community as excessive amount of gharar, due to the continuous and dramatic price swings and as a result, the asset is viewed as having no conceivable value (lacks transparency)
*Maysir (Gambling - Gaming)(speculation)(Speculating):
Making money on gambling without creating any type of added economy/cash value when betting on price highs and price low (short play) has been looked at in various ways by businesses throughout the years, especially in the last year of bitcoin and its sucess. Cryptocurrencys are being traded in manner very similar to that as betting on the price of an asset; Therefore, you can easily argue that crypto currency markets mimic the world of gambling.
*Trust and Public Interest:
Protecting what one's owns through Islamical way - basically ensuring one's wealth is protected - Distinguishing between Trust and Public Interest on Digital Assets, Examples of common threats associated with the use of these digital assets include: cybersecurity - Hacking; Forgetting Private Key/Password; Irreversible Transactions. Due to the high level of anonymity that is provided in the use of Crypto, it has been recently used by criminals to launder money and commit other crimes. Thus, there is a need for scholars to assess the potential harm caused by digital assets versus their potential benefit i.e.: Financial Inclusion and International Trade without Borders.
3. Contemporary Fatwas and Scholarly Rulings
Because cryptocurrencies are a new phenomenon, no global scholarly consensus (*Ijma*) exists among Islamic scholars to date. Currently there are three categories of scholarly opinions on this issue:
1. Those Who Oppose Cryptocurrencies
Many government institutions and religious organizations from around the world have published fatwas prohibiting cryptocurrency due to the inherent risks.
* In 2017, Mufti Shawki Allam from Dar al-Iftaa in Egypt declared cryptocurrencies as strictly haram due to high levels of economic exposure, lack of state control and oversight, disruptive effects on the market, and extensive use as a means of facilitating unlawful activity.
* The Indonesian Ulema Council (MUI) and the Syrian Islamic Council both totally prohibited cryptocurrency trading, citing Gharar (speculative uncertainty), Maysir (gambling-like behavior), and as being neither issued by a legitimate financial institution.
* Dr Ali al-Qaradaghi of the International Union of Muslim Scholars, considers speculative investment (in cryptocurrencies) as haram to protect public funds. However, he has recommended Islamic governments issue their own cryptocurrencies that are backed.
2. The Proponents (Ruling it Halal under Certain Conditions)
There are a growing number of Islamic scholars and advisory councils that believe cryptocurrency can be considered permissible under Shariah law if certain conditions are met: • Malaysian Shariah Advisory Council (SAC) – The SAC has recognized digital currencies and tokens to be permissible assets, provided that they comply with Shariah law (i.e., avoidance of riba and excessive gharar). The SAC also states that stablecoins, when pegged to fiat currencies, inherit the halal ruling of the underlying fiat currency. • Mufti Muhammad Abu-Bakar and Ziyad Muhammad– These scholars believe Bitcoin meets the requirement of being māl, in that it is universally accepted as a valid medium of exchange. They contend that social consensus (urf) validates the legitimacy of currency, even when there is no physical backing to a currency like gold.
3. The Cautious Observers (Need for Further Study)
• International Islamic Fiqh Academy (OIC) – In 2019, the Academy did not issue a final ruling as to whether or not cryptocurrencies were halal or haram. Instead, they stated that there are legal and regulatory risks associated with cryptocurrencies and urged further collaborative research between Islamic scholars and economic experts to determine whether or not cryptocurrencies are permissible as a form of payment.
4. Weighing the Arguments
Arguments for Permissibility:
- Money as a Matter of Custom: Digital currency has been given meaning as a value by society to carry out exchange. Thus it is valid as money. - Principle of permissibility: According to Islamic jurisprudence principles, all commercial transactions are generally allowed (halal) unless there is something explicitly prohibited. - Financial Innovation: Blockchain provides transparency allowing for fairness (Adl) in transactions and thus aligns with Shariah.
Arguments for Prohibition:
- Lack of Central Authority: A valuation cannot be provided by a central bank resulting in investors having exposure to the risk of a complete loss of all or part of their investments. - Widespread Speculation: The market is driven mainly by enthusiasm and emotions, being viewed similarly to a type of gambling known in the Islamic community as (Maysir). - Lack of Consumer Protection: There are very limited options for recovering coins that have been stolen or lost, and this is contrary to the Islamic principle of protecting one’s wealth.
5. Practical Shariah Guidance for Muslim Investors
Muslims interested in exploring the cryptocurrency industry should consider their principles carefully before making decisions regarding crypto. The following are some considerations that Muslims should keep in mind regarding cryptocurrencies:
* Evaluate Individual Cryptocurrency:
Each cryptocurrency should be evaluated on its individual merits. Stablecoins that are backed by real-world assets tend to be accepted and less contentious compared to other cryptocurrencies. In regards to decentralized cryptocurrencies, it is important to evaluate the utility of that currency before investing in them. If a cryptocurrency purports to provide a guaranteed return on investment or resembles a Ponzi scheme, then do not invest in that cryptocurrency.
* Invest Vs Gamble:
Day trading, margin trading (using leverage on trades), and trading based solely on market hype creates potential issues surrounding Maysir (gambling) and Gharar. Buying and holding a fundamentally sound investment (investing) has much lower risk according to Islamic law versus making speculative (gambling) investments in the short-term.
* Be Sure To Pay Zakat:
While most scholars who define crypto as Māl have agreed that crypto is subject to Zakat, they have also agreed that once a Muslim’s total crypto holdings exceed the Nisab threshold (minimum required value) and the Muslim’s total holdings have remained over that threshold for 1 whole lunar year, then a 2.5% tax applies to the total of the Muslim’s current crypto holdings.
*Keep Your Assets Secure (Safeguard):
Ensure you manage & protect your digital assets. Use only well-established & reputable cryptocurrency exchanges, enable "Two Factor Authentication" on those exchanges, and store your cryptocurrency (for the long term) using a hardware wallet. Carelessly losing any of your assets is an extremely serious matter in Islam.
*Follow Country Laws:
It is a very important concept in Islam that Muslims are required to obey the laws of the country in which they live, as long as those laws do not contradict Islam. So, if your country has made it illegal to use or own cryptocurrency, then it is in your best interest to comply with the law. If your state has legalised cryptocurrencies, then please use those legal channels that are transparent.
Conclusion
The world of cryptocurrencies is at the cutting edge of technology and across multiple backgrounds of Islamic Finance. Scholars and academics over time have debated and discussed the legitimacy and status of cryptocurrencies with varying degrees of agreement or disagreement as new developments occur in the sector. While it can be said that cryptocurrencies are not considered haram (illegal), they have been characterized by extreme volatility, fraud, and speculation. All of which are contrary to the tenets of Islamic finance. Therefore, the best course of action for a Muslim would be to cautiously engage with cryptocurrency; avoiding unregulated investments and excessive leverage through day trading will help you to stay in accordance with Islamic principles and values. The focus should be on the utility of the underlying technology rather than the potential for profit. If you are ever uncertain about a specific asset or platform, please seek advice from a qualified Sharia Advisor.
