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An Islamic Perspective Of Cryptocurrencies


Throughout human civilisation, the continuous quest for an exchange instrument to replace primitive methods has remained a major concern. Arriving at the current form of paper money was a mere production of the economic and social evolution of humans. It is the need and the ruling socio-economic conditions that rule out which money form is best suited for the daily-life economic activities. Larousse dictionary gives a basic definition of money defining it, as a metal coin minted by the sovereign authority to serve for the measurement of values, exchanges, and savings. The European Central Bank (ECB) defines money based on three functions: a means of exchange, a unit of account and a store of value. It is the most liquid part of wealth. On the other hand, Imam Al-Ghazali in the early 11th century defines money as anything that serves as an instrument of exchange, but has no intrinsic value.

While the form of money has undergone various changes to measure value and make trade easy, the third function of money remains the subject of much academic controversy. This debate comes from the problem of whether money has its intrinsic value or not. In fact, before the invention of metal coins in the 8th century AC, we can admit money having an intrinsic value because it took the form of tangible assets, such as furs, shells, etc. However, the contemporary form of money questions this relevance. As a result, currency can be defined as any asset accepted to conduct trade as was defined by Islam.

The classical consideration of money as a commodity contradicts Shari’a as it brings more harm than good to the economy, i.e. promoting inflation and anchoring social injustice. In addition to this, units of any currency of the same denomination are equal to each other. Therefore, the possibility of making a profit by trading and exchanging them would be equal to zero. The only way to make a profit is to trade something having an intrinsic value (asset) or through the exchange of two currencies with different denominations (As-sarf). Eventually, any profit from exchanging money of the same denomination is considered riba and prohibited by Islamic Law.

The Hanafi school considers all things desired by nature and that can be stored in due time as a currency. It turns out that the two criteria of currency according to the Hanafis are, therefore, desirability and the possibility of storage. Note that the tangibility of the currency remains subject to debate among the Hanafis. Mufti Taqi Uthmani (2008) asserts that there are jurists who mention intangibility by quoting the term “Mal”. As for the Shafi’is, the usufruct can also be considered as money.

Mufti Faraz Adam (2017) suggested three conditions that summarise the consensus of money in Islamic Law. According to him, three conditions must be fulfilled to consider something to as “money” in the Islamic law:

  • Tamawwul: consists of all things of accepted value as money by people;
  • Taqawwum: limits the term currency to Shari’a-compliant (halal) elements;
  • Thamaniyyah: refers to the two main functions of money being an independent standard of value and unit of account.

These three elements together frame the concept of money in Islamic law.

Cryptocurrencies and Islamic Law

Cryptocurrencies are defined as electronic virtual money combined with the principles of cryptography. The notion of ‘virtual’ refers to the fact that there is no physical (i.e. tangible) asset that underlies the existence of cryptocurrencies. Cryptocurrencies exist in digital and electronic formats in cyberspaces such as wallet, which are equivalent to bank accounts. Cryptocurrency traders’ ability to bypass government-licensed financial institutions distinguishes cryptocurrencies from centralised currencies. They rely on a decentralised system of (possibly anonymous) validators to maintain and update copies of the ledger.

The cornerstone of the crypto technology is Blockchain, which ensures the distributed verification, updating and storage of the record of transaction histories. Hence, a Blockchain is like a book containing the ledger of all past transactions with a block being a new page recording all the current transactions to eliminate double-spending problems and to ensure security for the payment network. These features are ensured through a consensus by the validators forming the Blockchain. In the case of Bitcoin, for example, this competition takes place through a process called mining. Miners (validators) compete to solve a computationally costly problem, which is called proof-of-work (PoW). The winner of this mining process has the right to update the chain with a new block and is rewarded through the creation of new coin and transaction fees.

Before conduction our comparative study on the Islamic perception of crypto, we shall first present some jurisprudence (fatwa), which tends towards the prohibition of cryptocurrencies. Sheikh Sulaiman Al-ruhayli says that the absence of a central authority regulating this type of currency creates a risk (gharar) for the people who use it, hence it is unstable and speculative. Also, he cites the absence of a value component in encrypted currencies by making a comparison with gold (an argument that implicitly refutes the use of fiat currencies). These two arguments are in most cases used by contemporary scholars to prohibit encrypted currencies.

We must ask ourselves the following question: is the obligation of a central issuing authority an essential condition for money to be Shari’a-compliant?

Throughout Islamic civilisation, the issuance and control of money remained under the aegis of the central authorities, from the first Islamic currency under Caliph Abdul Malik Ibn Marwan until the cancellation of the Ottoman Caliphate in 1924. The state monopoly on issuing and controlling the flow of money is supported by case law because of the stability it provides. The reason for this comes only from the ijtihad, which consists of efforts specific to jurists in cases where the Qur’anic texts or the Sunnah did not explicitly mention the case. Ultimately, it is an effort based on the realisation of maslahah and the elimination of mafsadah.

We can also quote the fatwa of the ex-grand mufti of Egypt, Chawki Allam, who officially took a stand against Bitcoin, which he assimilates to a game of chance, prohibited in Islam, and which he suspects of allowing the financing of terrorism. A group of eight Shari’a lawyers constituting Wifaq Al-ulama also concluded that the use of cryptocurrencies on the grounds of fraud and misuse of funds for malicious purposes should be prohibited. The ground on which their prohibition stands is also present in fiat money.

Another movement has opted for the fiqhi (Al-ibaha) rule over Mu’amalat, which consists of initial acceptance of any contract until an element of prohibition appears. So, we can cite the opinion of Professor Monzer Kahf who states that Bitcoin like any other cryptocurrency should be treated like any other currency. Indeed, the exchange of cryptocurrencies should undergo the same conditions of exchange of currency in Shari’a namely: a spot exchange and the prohibition of speculative transactions.

The rest of the Shari’a jurisdictions take a neutral stance on cryptocurrencies because of their novelty and the need to master the technical details of how this system works before issuing a Fatwa on it.

Thus, we can conclude that the different opinions given on cryptocurrencies relatively tend towards their prohibition. The main reason for that would be excessive speculation (volatility) as well as the anonymity of the transactions, which gives rise to the element of gharar.

However, in the case of encrypted currencies, network regulation and transaction verification are done using the virtual community. This community can be infiltrated by malicious elements who can use their status to undermine the proper functioning of transactions. However, the protection and solidity of the network stems from the fact that so far, an attack on the network has no economic benefit. In other words, the cost of an attack is greater than the gain that can be gained from this operation. This statement can provide a guarantee on the solidity of the network but carries in itself the element of gharar because of the uncertainty about the future technological advancements. The rapid development of quantum computing may overturn the previous claim if an improvement in the encrypted currency system does not accompany this movement.

To reach our comparison, we will use the conceptual framework of money as drawn up by the great jurist of Tunis, Sheikh Taher Ibn Achour (1879-1973) (Adam, 2017).

Thus, he lists three essential conditions (Maqasid Al-Shari’a) that must frame wealth in Human life:

• Hifz al-mal (the preservation of wealth);

• Al-rawaj (circulation or liquidity);

• Al-wuduh (transparency);

• Al-thabat (durability or consistency);

• Al-‘adl (equity).

These elements provide a general conceptual framework for the concept of wealth in Islamic law, which by definition extends to money. Therefore, we will analyse the concept of encrypted currencies concerning these elements. This analysis will be the first filtering before moving on to the compatibility of cryptocurrencies with the Islamic understanding of currency.

Preserving wealth provides money with an attribute of trust with the people who use it. However, some cryptocurrencies like bitcoin have experienced exaggerated fluctuations from a value of USD12 in 2013 to reach USD11800 at the end of 2017 with falls, which exceed 10% in one month compromising the element of preservation of value. This argument extends to the fourth condition of consistency and durability. Also, a major operational obstacle may render the use of crypt inconsistent when trading in high volumes. Using summary data for Fedwire and US Debit cards, Chiu & Koepp (2018) confirms that cryptocurrencies are a much better alternative for low-value, high-volume transactions than for large-value payments. This is intuitive, as double spending incentives increase with the size of transactions. Hence, more mining and longer confirmation lags (which are both costly) are required when supporting large-value payments in a cryptocurrency. This conclusion would make the use of crypto for international trade exchanges, for example, hard and costly to accomplish.

The speculative nature of cryptocurrencies, as well as the ambiguity about their future security with the rapid development of extremely fast computers that can challenge the security of the Blockchain system, poses a problem for the durability of cryptocurrencies.

The second condition of liquidity (rawaj) is the acceptability of this kind of currency between people. The overall volume of transactions in the cryptocurrency market, all forms included, reached a volume of USD124.8 billion in mid-September 2017. In addition, the daily trade volume continues to increase, exceeding USD11 billion during the same period. By way of comparison, the volume exchanged for bitcoin in 2009 hardly exceeded 50 bitcoins. In September 2017, this number reached a number of bitcoin exchanges of 16.6 billion in circulation.

Finally, the condition of equity remains vague and open to several interpretations. We can say that the system for producing virtual coins and verifying transactions presents a fair model for the remuneration of agents in the cryptocurrency community. However, we must cite successive frauds and thefts from virtual wallets of cryptocurrencies and have allowed the theft of millions of dollars from the holders of these wallets. It should be noted that this is in no case a failure of the system of production and regulation of cryptocurrencies or of Blockchain but of thefts occurring at the level of digital portfolios governed by stakeholders as a service independent of the process production and verification of cryptocurrencies.

In order to follow the logic that we have outlined previously, remember that the conditions for an asset to be considered as a currency under Islamic law are as follows:

  • Tamawwul

A significant increase in the number of Bitcoin users from 720,705 users at the end of 2011 to 6.7 million users at the end of 2013 shows the increase in acceptability of this concept by people. In addition, many commercial entities around the world now accept payments in cryptocurrencies.

  • Taqawwum

Taqawwum requires that the currency does not contain any prohibited item (haram). Regarding cryptocurrencies, no indication of the existence of such elements has been detected. The production process of the digital parts is based on the effort of the miners, which is consistent with the Shari’a perception of work.

  • Thamaniyyah

Nowadays, cryptocurrencies are quoted against the main world currencies (USD, EUR, GBP etc.). Nevertheless, Islam demands the independence of money in the sense that it must fulfil this function in itself.

From all that has been cited so far, we can say that cryptocurrencies do not fully perform the functions of currency according to Islamic law. However, this finding does not mean that this status will remain valid forever. Thus, improvements concerning the security and regulation of cryptocurrencies could improve its status by incorporating into it the function of the unit of account as well as durability and consistency over time.

Cryptocurrencies, as well as the underlying Blockchain technology, presents a great opportunity for Muslim countries due to their characteristic of transparency and security. Of course, modifications and improvements must be undertaken to adapt these tools to Muslim countries. The economic and monetary situation of most Muslim countries, which is often subject to manipulations have harmful effects on the population, leading us to believe that cryptocurrencies with their self-regulating mechanism would provide a relative solution for its problems. However, this debate must be undertaken outside of rushed and unfounded prohibition decisions, which block all attempts to objectively study this concept. Thus, a debate must be opened by the Islamic authorities to analyse this concept more carefully along with its major benefits for the Ummah.


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