Is Bitcoin Halal? - Decentralizing Islamic Finance
Crypto Basics

Is Bitcoin Halal? - Decentralizing Islamic Finance

15 Minuten
2 years ago

The status of cryptocurrency in Islam, one of the most controversial topics in Islamic Finance. Learn about the opinions of well-known Islamic Scholars on Bitcoin and Crypto Staking from the Shariah perspective.

Is Bitcoin Halal? - Decentralizing Islamic Finance

Inhaltsverzeichnis

Since its inception in 2009, Bitcoin, the first cryptocurrency in the world, has taken the world by storm. Billions of payments are being made in digital currencies as major financial institutions of the world continue to add them to their commercial infrastructure. Small to large-scale businesses are now accepting cryptocurrencies in return for their products and/or services.
While it took a lot of time for Bitcoin to be accepted by the masses, many are still skeptical about investing in BTC and other cryptocurrencies. A great example of such an institution would be Islamic Finance, where the ruling on cryptocurrencies is still not clear to many Muslims. This is because the speculative characteristic of digital currencies has raised concerns among Islamic scholars over whether they are religiously acceptable or not. 

To understand the underlying reason behind the acceptance of digital currencies in the Islamic world, we must understand the history of currencies in Islam and what makes a business transaction permissible or impermissible in Shariah (Islamic Law).

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How Does Islam See Money?

As Islamic principles are founded based on Shariah (Islamic law), the notion of money in Islam is entirely different from mainstream economics. In Islam, money (or wealth) is property owned by men as Allah’s vicegerents. It should be carefully used and invested in line with Shariah. Islam, in contrast to capitalist philosophies, discourages egoism. Money has a "social function" in Islam, and it should be invested to achieve socio-economic justice for the benefit of the entire society.
The Islamic idea of the free market is one of the most important aspects of the religion. Commodities with inherent value are considered money in Islam. Some illustrations of commodities that can be used as money include gold (as Gold Dinar), silver (as Silver Dirham), and food items, such as dates, wheat, barley, salt, etc., are all examples of hard assets that can be traded. 

Definition of Currency in Islam

Anything of inherent worth, as long as its value does not fluctuate erratically or unpredictably, can be termed as a currency in Islam. Also, any item that can be swapped/traded for anything of similar worth without adding anything is considered lawful in Islamic Shariah.

History of Currencies in Islam

Many currencies were used before the 7th century CE. Even after the origin of Islam, people used many forms of currencies for trades in markets. However, the two currencies that became the most popular and widespread during the Islamic era were Dinar & Dirham.

Dinar

The Byzantine Dinar (gold), which weighed one ‘mithqal’ (a unit of weight equivalent to roughly 5 grams), was the money used by people throughout the early Islamic era. Even though it was the official money at the time, the government had little control over how individuals used it in their transactions due to diverse demographics, unique transaction methods, and other factors in play.

Dirham

The Persian (Sassanid) currency, the dirham, was used both before and after the arrival of Islam in the Middle East. Ali (R.A) issued new coins with the name of the Islamic government inscribed on them during his reign as the fourth caliph of Islam. In the Kufic script, certain Quranic phrases, the year, and the location of the coinage were printed on both sides of dirhams and dinars.

The worth of the metallic contents in dinar (gold) and dirham (silver) was referred to as the ‘natural value' of the coins. For many years, dirham and dinar were traded based on their respective weights. As a result, the price of the dinar and dirham was defined by their contents (silver or gold), i.e the value of money was the same as the natural value of the metal used in the making of the coins, and the term value of money (i.e. purchasing power) was overlooked.
In general, the demand and supply of gold and silver influenced the exchange rate of the dinar to the dirham. The dinar to dirham ratio was 10:1 in the early days of Islam. However, following the conquest of Persia, Syria, and Egypt during the reign of Islam's second caliph Umar ibn Khattab (R.A), the supply of silver increased, causing its price to rise. As a result, the relative cost of gold rose to the point where each dinar was worth 13 dirhams. As previously said, the quantity of gold and silver accessible altered the ratio throughout time.

What Can We Learn From This?

The history of currencies in Islam has mostly been based on physical assets, such as Gold & Silver. Muslims relied on dirhams and dinars to buy goods and/or services. With time the ratio of exchange between dinar and dirham was altered by Muslim countries, however, the Islamic Shariah principles, such as a prohibition of interest while trading and misuse of currencies in the markets to influence the price of dinar or dirham, among other aspects, were strictly upheld.

Despite the use of dirham and dinar for a long period, Muslims had to leave them and move on to paper (fiat) money due to: 

A) The problem of counting and exchanging silver and gold coins 

B) The natural value of these coins was sometimes compromised by dishonest people. 

Gradually, the Islamic world adopted fiat currencies and the field of Islamic finance grew its roots.

Types of Money in Islam

Generally, two types of money are considered in Islam. One is the “natural money” and the other one is “customary money”. 

Anything that has intrinsic monetary value can be termed natural money. A great example of it would be gold and silver or any other form of precious metal. 

Customary money on the other hand can be branched into two major types. 

The first one is fiat money, of which we all are well aware. Fiat money does not hold any intrinsic value, meaning it does not have any independent value, rather it has to depend on external authority, in this case, the government to authorize it as legal tender.

The second type of customary money is anything related to a product or a commodity and also has certain monetary value in the eyes of the public. Great examples of such money include barley, salt, rice, etc.

How Is a Tradeable Item Considered Legitimate in Islam?

Different schools of thought have weighed in on this matter. 

The famous Islamic scholar, muhaddith, and theologian, Imam Ibn Taymiyyah said regarding this matter: 

‘’When currencies and money are inter-traded with the intention of investment and profit, it opposes the very purposes of money and Thamaniyyah.’’

Most of the principles about this affair remain the same among major schools of thought. In general, three conditions need to be fulfilled for a traded item to be acceptable in Islam:

  1. The item that is being traded should have some form of monetary value - known as 'Thamaniyyah' in Arabic. The monetary value, in this case, would be defined by A) Independent price and value plus acceptance and stability and B) A primary reference of point which assists in recording prices and managing debt - in other words, a proper transaction mechanism.
  1. The item should have some form of legal value - known as 'taqawwum' in Arabic. It refers to something valuable and also 'halal' in the Islamic Shariah.
  1. The third and final condition is that the item should be tagged as property - known as 'maal' in Arabic. Property in Islam is defined as something desirable, created for the welfare of humans, can be stored and retrieved for making transactions over a certain period. 

What Is a Cryptocurrency?

A cryptocurrency is a digitized form of currency that employs encryption to prevent forgeries and double-spending. Many cryptocurrencies are based on blockchain technology.
It is a digital payment mechanism that does not rely on banks for transaction verification. It's a peer-to-peer system that allows anybody to make and receive payments from anywhere. Cryptocurrency payments are digital inputs to an online database that specify particular transactions, rather than actual money that is carried around and traded in the real world. 

Bitcoin's Ascension to Power

Satoshi Nakamoto, Bitcoin's founder, first stated the necessity for an electronic payment system based on cryptographic verification rather than trust. In 2009, Satoshi created Bitcoin (BTC) which became the world’s largest decentralized digital currency. 
A collective ledger has a record of every Bitcoin transaction that has been made since its inception - including the first famous transaction of BTC in the real world known as ‘Bitcoin Pizza’. A Bitcoin’s worth depends on the evidence present in the blockchain system that is completely decentralized with no connection to the financial institutions that run in the real world. 
At present, there are thousands of digital currencies on the crypto exchanges, such as Ethereum, Cardano, and XRP, that also hold a lot of traction in the world with millions of buyers behind them. The crypto market itself is valued at over $2.48 trillion and this number is predicted to increase at an exponential rate in the upcoming years.

Why Is Accepting Bitcoin a Problem for Muslims?

Despite the world being in the transition mode towards Bitcoin and other cryptocurrencies, the majority of Muslims are highly skeptical about stepping into the blockchain world. A great reason for that is that, in Islam, Muslims are instructed to follow the Islamic scholars who base their decisions on the two major sources of knowledge i.e. the Quran and the Sunnah.

Allah says in the Quran:

“So ask of those who know the Scripture, if you know not” 

- Quran - Chapter: An-Nahl, Verse: 43

It is a common practice among Muslims to refer every dubious matter back to the scholars who provide a ruling, (‘fatwa’ in Arabic) based on Shariah. When it comes to Bitcoin and other cryptocurrencies, scholars’ opinions are divided. Some say cryptocurrencies are ‘Halal’, meaning permissible, others deem them as ‘haram’ meaning impermissible, and there are some scholars who are in the middle and have chosen to take more time to think about nature of cryptocurrencies in order to declare them haram or halal.

Opinions of Islamic Scholars on the Legitimacy of Cryptocurrencies

There are no official rules (yet) on whether Muslims should invest in Bitcoin or refrain from it. This would be the responsibility of the lawmakers who formalized Islam's religious doctrines, but such work has yet to be done. Despite this, several Islamic scholars have weighed in on how the law pertains to Bitcoin.

Scholars Who Believe Cryptocurrency Is Haram (Impermissible)

1. Sheikh Shawki Allam - Grand Mufti Of Egypt

Sheikh Shawki warned against the use of digital currencies. According to him, the use of Bitcoin posed a risk of fraudulence, lack of understanding, and dishonesty. Risks, according to the Grand Mufti, might occur since virtual money is not regulated by any central body. He also said that Bitcoin is banned in Shariah since it causes harm to people, communities, and institutions.

2. Shaykh Haitham al-Haddad - British Islamic TV Personality & Islamic Jurist

Shaykh Haitham is a well-known scholar in the Muslim community. On the issue of cryptocurrencies, Shaykh Haitham prepared a thorough research paper in Arabic. Bitcoin, he says, is not legal (halal) in Islam since it is virtual money with no tangible worth. He argues that traditional fiat currencies also have had no real value since the 1971 Bretton-Woods agreement to decouple the dollar from gold. However, despite fiat currencies not having any actual worth, Shaykh Haitham believes that they have a central authority which is not the case for cryptocurrencies, thus they are not reliable. Although Shaykh Haitham believes the current form of cryptocurrencies is not permissible to invest in, he is open to the possibility of a halal cryptocurrency that is directly gold-backed.

3. Sheikh Assim al-Hakeem - Saudi Arabian Scholar & Islamic TV Personality 

Trading in Bitcoin is not permitted in Shariah, according to Sheikh Assim, due to the currency's obscurity. The Arab scholar, who hails from Jeddah, Saudi Arabia holds the view that cryptocurrency is unregulated, and we have no idea where it is being used. This implies that it might be used for illicit activities such as money laundering, drug trafficking, and racketeering. Assim Al-Hakeem also stated that cryptocurrencies have many unknowns, including their long-term viability and security. The fast rise in the cryptocurrency's market value also raises suspicions, according to Sheikh Assim.

Scholars Who Call Cryptocurrency Halal (Permissible)

1. Maulana Jamal Ahmed​ & Mufti Faraz Adam - Scholars at Islamqa.org

Maulana Jamal Ahmed is an advocate of Hanafi fiqh. According to him, Bitcoin and other cryptocurrencies are not a part of the real economy as they do not contribute anything beneficial to society. He said that Bitcoin does not play a role in promoting labor, production of goods, or services. Concentrating the wealth on digital assets can harm society as a whole. According to Mufti Faraz Adam, despite all the concerns, they still qualify as assets (digital) and do have a value attached to them. In Shariah terms, Bitcoin has 'Maal' which refers to something that can be stored, and 'Taqawwum' which refers to something as having legal value. So, while investing in cryptocurrencies is not desirable, it is allowed according to Maulana Jamal Ahmed & Mufti Faraz Adam. 

2. Mufti Abdul Qadir Barakatullah - Shariah Scholar 

Mufti Abdul Qadir has a vast background in economics Islamic finance. His contributions include heading various Shariah supervisory boards and leading Islamic financial institutions. Mufti Abdul Qadir is convinced that cryptocurrencies can be used as a supporting instrument for making great developments in the field of Islamic finance. He believes that cryptocurrencies are halal due to the famous rule followed by Muslim jurists that if anything is widely accepted in society as a form of payment can be recognized as money in Shariah.

3. Mufti Muhammad Abu Bakar - Shariah Scholar & Mufti 

Mufti Muhammad Abu Bakar has extensive experience in studying and implementing the finance perspective of Shariah in the real world. He is currently working as a scholar and a Mufti at SilkBank Limited. According to him, if a country deems a currency as legal tender or as a form of payment, then that currency becomes legal in that region. He gave the example of Germany where Bitcoin is recognized by the Govt. and therefore Muslims can buy, trade, and sell it in that region. Therefore, it falls under the permissible customary form of Islamic money.

Scholars Who Defer Their Opinion to a Later Point in Time 

1. Mufti Taqi Usmani - A Pioneer In The Field Of Islamic Finance

Mufti Taqi Usmani believes that cryptocurrency is used for speculative purposes, however, he does not consider it to be halal or haram. Rather, cryptocurrency can be termed as a 'disliked' form of trading from a Shariah point of view. He also said that if in the future cryptocurrencies are backed by real assets, he may have to revisit his current decision, but at this moment there is no sound evidence to consider it halal in Islam. So according to Mufti Taqi Usmani’s opinion cryptocurrency trading falls under the permissible (‘Mubah’ in Arabic) and disliked (‘Makrooh' in Arabic) category.

2. Dr. Ziyaad Mahomed - Chairman of Shariah Committee, HSBC

Dr. Ziyaad Mahomed holds a Ph.D. in Islamic Finance and is also a Chartered Islamic Finance Professional (CIFP) holder from INCEIF. He is also the chairman of the Shariah committee of HSBC Amanah Malaysia Bhd. According to him, gold and silver are unmistakably acceptable as currencies in Islam, and while cryptocurrencies are different from them, in Islam what matters is that people acknowledge a currency to have value and use it in their transactions. According to Shaykh Ziyaad, the volatility of the currency is a concern, and this can push Bitcoin as a suspicious form of currency. This is why Shaykh Ziyaad has warned everyone to be cautious about their investments before investing in crypto. Overall, his view falls into the halal category, however, his cautious approach does not allow him to fully back the concept of cryptocurrencies.

Bitcoin Can Be Completely Halal - If?

While the scholars are divided on the permissibility of Bitcoin and other cryptocurrencies, most of their concerns can go away and a consensus may be reached on the status of crypto assets. For it to happen here are the three conditions, Bitcoin needs to fulfill these conditions:

1. It must be backed by a country’s government and the value of the coin should depend on the government's stability and the nation's economy. Or it should be backed by a physical asset, such as gold, silver, etc.
2. The transactions must be tracked by a central authority. This is important in Islam to avoid the spread of illicit activities, such as money laundering, drug trafficking, and other heinous crimes.
3. The speculative nature of cryptocurrencies should be removed or mitigated. This is important in Islam because it stresses the significance of saving capital for all people to prevent losses. In short, the market volatility of cryptocurrencies should be controlled to a reasonable level.

Consensus of Scholars on the Haram Uses of Bitcoin & Other Cryptocurrencies

Although the majority of cryptocurrency use cases are a point of contention between the scholars, there are a few common ones that are considered impermissible by all schools of Islamic thought. The reason is that these issues come from the main sources i.e. the Quran and the Sunnah (Sayings of the Prophet Muhammad ﷺ)

1. Is Futures Trading Halal?

Gambling is categorically prohibited in Islam. Allah says in the Quran:

‘’O believers! Intoxicants, gambling, idols, and drawing lots for decisions are all evil of Satan’s handiwork. So shun them so you may be successful.’’ 

- Quran - Chapter: Al-Maidah, Verse: 90

In cryptocurrency trading, futures trading works on the same principle as gambling. It is often compared to playing poker or wagering on horses for a living. In futures trading, traders analyze the market and predict the future price of the cryptocurrency, by either taking a short or long position in the market. If their future prediction on the price is wrong, they lose their entire invested amount. 

According to Islam, the wisdom behind the prohibition of gambling is based on several reasons. The two main ones include:

  • Relying on a chance to earn money that can be harmful to the person in case of loss
  • Promoting the greed of wealth by making quick money in a short period, plus taking someone’s money from them as “gambling winnings”.

2. Is Cryptocurrency Staking Halal?

Interest is also impermissible in Islam. Allah says in the Quran:

‘’Those who consume interest cannot stand [on the Day of Resurrection] except as one stand who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns [to dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.’’ 

- Quran - Chapter: Al-Baqarah, Verse: 275

In Islam, interest (known as ‘Riba’ in Shariah) is defined by this hadith of Prophet Muhammad ﷺ:

The companion of the Prophet, ‘Ubaadah ibn al-Saamit (R.A) narrated that the Prophet ﷺ said: “Gold is to be paid for by gold, silver by silver, barley by barley, dates by dates, like by like, payment being made hand to hand. He who made an addition to it, or asked for an addition, in fact, dealt in usury [ribaa]. 

- Book of Hadith - Sahih Bukhari - Volume 5, Book 59, Number 426

Many cryptocurrency exchanges offer their users an opportunity to stake their coins for a certain period and earn a fixed amount of interest on them. Different rates are offered for every cryptocurrency with the Annual Percentage Yield (APY) going up as high as 300% on DeFi platforms. For example, getting 1.1 BTC after one year of storing 1 BTC in any crypto exchange is regarded as an interest in Islam. 
Spot trading, on the other hand, involves a user buying and putting their cryptocurrency in their wallet. They have the option to trade, buy, and sell the currency on the current market value. This is the only form of crypto trading that is considered halal by some scholars as highlighted above.

Final Thoughts - Cryptocurrencies Is a Controversial Topic in the Islamic World

It is quite clear that investing in cryptocurrencies holds a disputable position in Islamic finance. While many Islamic scholars have accepted that digital currencies may be the future, the conditions laid out by Shariah hold them back from issuing a clear-cut stance on this matter. However, when things get more clear down the line, many scholars are expected to come forth and present an official stance on the usage of cryptocurrencies.

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