Is Cryptocurrency Halal? A Review of the Perspectives and Debates Driving Policies in the Islamic World
By Ruadhan O, Founder and Lead Developer, Seasonal Tokens (SeasonalTokens.org)
Ruadhan O
Over the last few years, there has been considerable debate among scholars about the permissibility of Bitcoin and other cryptocurrencies under the requirements of Islamic finance. Some scholars have concluded that all cryptocurrencies are haram, while others have argued that some cryptocurrencies are Shariah-compliant and permissible for Muslims to use for trade and investment.
The Directorate of Religious Affairs in Turkey has declared that cryptocurrencies are haram because of their use in illegal activities, along with their status as speculative assets (https://www.euronews.com/2017/11/28/bitcoin-is-not-compatible-with-islam-turkeys-religious-authorities-say). In 2018, two Turkish imams were fired from their positions for trading Bitcoin in violation of the fatwa (https://themerkle.com/turkish-imams-fired-for-violating-fatwa-against-bitcoin-trading/). In the previous year, Egypt’s Grand Mufti, Shawki Allam, while acknowledging that further study was required, declared that all uses of cryptocurrency were haram, due to their high risk, facilitation of criminal activity, lack of state control, and susceptibility to price manipulation (https://egyptianstreets.com/2017/12/31/dealing-with-bitcoin-digital-currency-is-haram-advisor-to-the-mufti/).
Central banks and government officials in Western countries have used the same arguments to criticize cryptocurrencies, and Bitcoin in particular. Nonetheless, cryptocurrency adoption has continued to grow, both in the West and in the Islamic world. In Turkey (https://scalablesolutions.io/news/the-state-of-digital-asset-adoption-in-turkey/), Lebanon (https://insidebitcoins.com/news/crypto-seems-to-have-found-a-perfect-market-in-lebanon), and other countries facing high inflation, cryptocurrencies have been adopted as a way to preserve purchasing power, and warnings about the riskiness of holding cryptocurrency have had little effect on populations who see even greater risk in holding their savings in national currencies.
In contrast to the uniform condemnation of cryptocurrencies by religious authorities in Egypt and Turkey, authorities in other Islamic countries have adopted a case-by-case process to assess cryptocurrencies for compatibility with Islamic finance. The Shariyah Review Bureau, licensed by Bahrain’s central bank, has granted Shariah certification to a number of cryptocurrency projects, including the Stellar blockchain protocol and its native XLM coin (https://www.stellar.org/blog/stellar-receives-sharia-compliance-certification-transfers-tokenization), as well as the proof-of-stake Algorand blockchain project (https://cointelegraph.com/news/blockchain-firm-algorand-announces-sharia-certification-for-islamic-finance), and the Swiss-based X8 stablecoin, backed by a basket of 8 major fiat currencies (https://finance.yahoo.com/news/halal-islamic-scholars-certify-swiss-230504472.html).
Other cryptocurrency projects have also received Shariah certification from qualified religious experts, including Islamic Coin (https://www.kitco.com/news/2023-05-12/Islamic-Coin-the-first-Sharia-compliant-cryptocurrency-set-to-launch-in-May.html) and OneGram, a gold-backed stablecoin (https://www.gulf-times.com/story/554731/Shariah-compliant-gold-backed-digi-coins-could-change-Islamic-finance). A review of the Shariah compatibility of Bitcoin and blockchain technology conducted by Blossom Finance concluded that the use of Bitcoin is permissible in jurisdictions in which it has not been explicitly prohibited (https://blossomfinance.com/posts/is-bitcoin-halal-or-haram-a-shariah-analysis), while the Shariah Advisory Council of Malaysia’s Securities Commission has declared that it is halal to invest and trade in digital currencies and tokens on registered digital asset exchanges (https://islamicmarkets.com/articles/securities-commission-malaysia-s-shariah-advisory-council-permits-trading-of-digital).
There is near-unanimity among scholars that certain cryptocurrencies are haram, based on their incorporation of interest-based lending or financial derivatives into their protocols. These include Yearn.Finance, Compound, Synthetix, Maker, and the now-bankrupt Celsius Network (https://shariyah.net/crypto-yield-farming-can-the-mechanics-address-sharia-principles/). Bitcoin, Ethereum, asset-backed stablecoins, and cryptocurrencies with valuable utility, have generally been considered halal among the scholars who don’t uniformly condemn all cryptocurrencies (https://www.islamicfinanceguru.com/crypto).
Disagreement over the Shariah-compliance of Bitcoin has centered around three main issues, each of which has two opposing viewpoints among scholars today (https://islamandbitcoin.com/is-bitcoin-halal-10-scholars/).
Asset Backing
The first issue is that Bitcoin is not backed by any real asset, such as gold. Without anything of value for which it can be redeemed, an electronic token appears to be no more valuable than a piece of paper. Because of this, many view trading bitcoins as dealing in fictional assets, which is haram.
The opposing view is that bitcoin’s limited supply and cryptographic security make it an unforgeable, difficult-to-obtain asset which it is permissible to vest value into, and legitimately view as valuable, due to the knowledge that it is difficult to obtain, and will be more difficult to obtain in the future.
According to this perspective, Bitcoin does not need to be backed by anything else, because bitcoins themselves are difficult to obtain and produce. They’re not promises to deliver something else, like nearly all paper assets. They’re not electronic promises to deliver nothing, because promises can be created at zero cost, and bitcoins can’t.
Far from being fictional, in the view of those who consider Bitcoin halal, the cost of mining a bitcoin or buying a bitcoin is harsh reality, and the number of bitcoins that you own is also harsh reality. It can’t be banished by disapproving of it, and all scholars agree that Allah knows best.
Speculative Risk
Unconnected to the price of any real asset, Bitcoin has gone through periods of extreme volatility. Many investors bought at the peak of a bubble and lost their hard-earned money. The rush to invest in Bitcoin when its price is rising has led to asset bubbles that destroyed hundreds of billions of dollars in perceived wealth when they burst.
This price volatility makes it haram to use Bitcoin as an investment, in the view of those who consider Bitcoin haram. Buying Bitcoin is putting hard-earned money at risk, and is irresponsible because it’s gambling. The price of Bitcoin, in this view, is purely a result of speculative irresponsibility among the population. It could drop to zero at any time, and all the imagined wealth could disappear.
Those who consider Bitcoin to be halal argue that all assets have some degree of volatility in their prices. Although they acknowledge that there have been speculative bubbles, they don’t concede that Bitcoin’s price is entirely due to speculation.
Once every four years, the rate of supply of Bitcoin is cut in half. Bitcoins will be harder to obtain in the future than they are today. There is no speculation involved in observing that the supply of Bitcoins is decreasing over time. This doesn’t depend on whether the population behaves responsibly or irresponsibly.
It’s this decreasing supply, which is fully predictable, that gives confidence to Bitcoin investors that their investment will hold its value over the long term. It’s the certainty about future supply, not speculation about future demand, that motivates the decision to invest for the long term. This a risk-reducing attitude to investment, which is permitted, according to this view.
Facilitating Crime
Bitcoin has been the currency demanded by hackers who have held businesses, hospitals, and even governments to ransom, by taking control of their computer networks. The identities of the users involved in a Bitcoin transaction can’t be revealed by studying the blockchain alone, making transactions effectively anonymous. Bitcoin is accepted in criminal marketplaces on the dark web where illegal products are sold.
Unlike transactions conducted by regulated financial institutions, Bitcoin transactions can’t be reversed, even by a court order. Bitcoin is beyond the law, governed by code. This makes it incompatible with Islamic finance, because of the requirement that no haram activities should be involved with the investment, according to many scholars.
For those who regard Bitcoin investment as halal, Bitcoin is no different than cash in this regard. A court order will not return stolen cash, if the thief is never caught. Cash is used in criminal activity much more frequently than Bitcoin is. The vast majority of the bitcoins owned are held as long-term investments, rather than used for criminal purposes.
More importantly, Bitcoin was designed to keep a public record of all transactions, so that an authority with the lawful ability to issue and execute warrants could successively unmask every individual in a chain of transactions when seeking to identify a criminal. Law enforcement agencies around the world have made use of services provided by blockchain analytics companies who specialize in identifying individuals from public blockchain data. This has made Bitcoin into a tool that law enforcement can use to catch criminals.
Any asset can be used for criminal purposes, in this view, but only cryptocurrencies like Bitcoin, which make every transaction public, have built-in anti-crime technology. For those who argue that Bitcoin is halal, criminals who use Bitcoin have the same anonymity that cash gives them in the short term, but in the long term, they have left evidence in the public record that can be used to bring them to justice.
In the coming decade, a consensus may emerge in the Islamic world about the Shariah status of cryptocurrencies. Today, the debate that will shape that emerging consensus is taking place, with opposing views and conflicting fatwas being dynamically assessed by Muslims around the world, concerned about both their religious principles and their financial future.
Until that consensus ultimately emerges, the final decision rests with each individual Muslim, who, lacking a uniform message from religious authorities, must take on the personal responsibility of understanding the issues that give rise to disagreement, and then do what they ultimately understand to be right.
