Cryptocurrency is now recognised as one of the key innovative areas in the field of Islamic finance. This has led to the initiation of cryptocurrency projects in various Islamic countries via the setup of cryptocurrency exchanges. Southeast Asia is already a hotbed for cryptocurrency with the likes of Bitcoin Indonesia (Indonesia) and Coinbox (Malaysia). In the UAE, Dubai-based BitOasis offers its services in Kuwait, Bahrain and Saudi Arabia.
Recently, Stellar became the first digital ledger technology (DLT) protocol to obtain Shari’a certification for payments and asset tokenization. The Shariyah Review Bureau (SRB), an Islamic advisory firm licensed by Central Bank of Bahrain, provided the certification for Stellar, alongside guidelines for the types of assets that can be traded in its platform. The move highlights how Fintechs are broadening their footprint to include growth markets in the Middle East and Southeast Asia.
The increasing interest in bitcoin and other cryptocurrencies has extended into the Islamic world and the main centres of Islamic finance. On the other hand, the absence of a cryptocurrency platform that would guarantee the work in accordance with the norms of the Shari’a, has kept a significant number of Muslim investors from entering the cryptocurrency markets.
Another problem is the lack of a unified position on cryptocurrencies amongst the Muslim communities. Ethical uncertainties pertaining to compliance of individual cryptocurrencies and the market as a whole with the norms of the Shari’a has led to the distancing of and, as a consequence, to the non-involvement of almost a quarter of the world’s population towards a technologically innovative financial sector.
Complicating the debate further is the fact that there are hundreds of unique cryptocurrencies, each with different features related to the process of distribution, mining and trading. They also differ in terms of their underlying commodities, projects or businesses. Moreover, it is inappropriate to have one Shari’a ruling for various cryptocurrencies, as a majority of the cryptocurrencies clearly have characteristics that are forbidden for Muslims.
Most of the existing Shari’a rulings either deal with only bitcoin or include all types of cryptocurrencies, disregarding their peculiarities. Given that the most famous type of cryptocurrency is bitcoin, existing fatwas (legal opinions) are generally concerned solely with bitcoin. However, the principles and arguments in analysing any types of cryptocurrency are similar.
SHARI’A COMPLIANCE OF CRYPTOCURRENCY
It is important for the development of the cryptocurrency economy to understand whether the cryptocurrency is halal for Muslims or otherwise. Scholars around the world have differing views of cryptocurrencies. In general, scholars and Shari’a experts have two different opinions. The first group of scholars is of the view that cryptocurrency is haram, i.e. prohibited by Shari’a. The other group argues that cryptocurrency is in principle halal (permissible) because of the social concurrence concept. However, they also emphasised that this does not necessarily mean that cryptocurrencies can be recognised as a legitimate form of currency.
National Sharia authorities have not ruled on whether cryptocurrencies are permissible, and while several global bodies recommend standards for Islamic finance, none has the authority to actually impose them.
Many governments seem ambivalent: worried about the potential for instability, but unwilling to lose the chance of benefiting from new technology.
The Saudi Arabian and UAE central banks have warned their citizens about the risks of trading bitcoin, but have not imposed outright bans. Islamic jurists in South Africa have ruled in favour of cryptocurrencies, arguing they have become socially acceptable and commonly used. Further, some scholars in Turkey, India, and Britain have labelled cryptocurrencies impermissible. In January, Egypt’s Grand Mufti declared they should not be traded. However, one of the prominent scholars in the world — Shaikh ’Abdul Sattar Abu Ghuddah — is of the view that cryptocurrency sits on the border of permissibility and prohibition. His issue with cryptocurrencies are their excessively speculative nature and security risk.
In summarizing the fatwas of scholars who support the view that cryptocurrency is haram, several common reasons of prohibition are highlighted below:
“THE FIRST GROUP OF SCHOLARS IS OF THE VIEW THAT CRYPTO-CURRENCY IS HARAM, I.E.
- BITCOIN IS NOT A LEGAL TENDER (MEDIUM OF PAYMENT RECOGNISED BYA LEGAL SYSTEM TO BE VALID FOR MEETING A FINANCIAL OBLIGATION) AND DOES NOT HAVE AN INTRINSIC VALUE.
- ISSUER OF BITCOIN IS UNKNOWN AND BITCOIN IS NOT MONITORED AND BACKED BY A CENTRAL BANK OR GOVERNMENT.
- BITCOIN IS NOT STABLE AND HIGHLY SPECULATIVE.
- BITCOIN IS NOT TRANSPARENT AND CAN BE USED FOR MONEY LAUNDERING AND ILLEGAL OPERATIONS.
IN ORDER TO ADVOCATE THE PERMISSIBILITY OF BITCOIN FROM THE SHARI’A POINT OF VIEW, EACH POINTS PRESENTED ABOVE ARE DISCUSSED IN DETAIL BELOW.
- BITCOIN IS NOT A LEGAL TENDER AND DOES NOT HAVE INTRINSIC VALUE
When a government announces something as a legal tender, it automatically gets the acceptability within its jurisdiction. On the other hand, to qualify something as money, a legal tender status is not a necessary condition. Bitcoin is driven purely by supply and demand, the same thing that drives the cost of gold and dollars. However with bitcoin, the supply is well known, and the mechanism cannot be gamed. Bitcoin replaces trust in centralised governmental authorities with trust in a transparent and auditable mechanism as well as trust in decentralised algorithms.
The main criterion for money in Shari’a is its acceptability as a mean of exchange, whether enforced by government laws, or through widespread voluntary acceptance. In order for cryptocurrency to have value, there needs to be two components: scarcity and utility. Scarcity means that cryptocurrency has a finite supply. In the case of bitcoin, there is a predetermined amount that could be ever mined; which is 21 million coins. Hence, the total supply of bitcoin cannot be manipulated or inflated. With fewer bitcoin left to be minted (only 20% left to be mined), analysts anticipate a steady increase in prices as digital scarcity makes the coin more valuable than other assets over time, even gold.
Bitcoin also has an intrinsic value since it derives its value from the effort it takes to mine as well as the fairly high production cost (of mining) involved. Furthermore, its value is supported by its high demand; whereby people using bitcoin are ready to buy and sell bitcoin for real goods and services. This confirms the value of bitcoin as a recognised means of exchange and payment.
- ISSUER OF BITCOIN IS UNKNOWN AND BITCOIN IS NOT MONITORED AND BACKED BY A CENTRAL BANK OR GOVERNMENT
Considering the claim that bitcoin is not monitored and guaranteed by the central authority, we can argue that the governing framework of bitcoin is a set of rules adopted by voluntary mutual acceptance users of the cryptocurrency and that these rules are published and open for anyone to critique or even suggest revisions. It is mathematically impossible to manipulate the laws and rules that govern the bitcoin mining and transaction processes because of the cryptographic technology underlying the cryptocurrency. Furthermore, bitcoin uses blockchain technology, which is more secure than any centralised system.
- BITCOIN IS NOT STABLE AND HIGHLY SPECULATIVE
Cryptocurrencies are highly volatile. which makes them very risky to trade. The risk of loss in trading or holding cryptocurrencies can be substantial. If you look at bitcoin as a payment instrument, without doubt, big changes in value are not in favour of bitcoin. On the other hand. there are many currencies with high inflation rates. Tracing back to history, there were even more examples of huge inflation when money was getting down thousands of times in one year.
The situation with bitcoin is completely different. This is a fairly new invention, which has become more expensive in the 8 years since its inception. Throughout its history, Bitcoin has gone through a number of extreme changes in terms of price – from fast pace growth to several crashes. In fact, it has had over six instances where it lost more than 30% of its value. In 2017, Bitcoin went up roughly 2,000% and in 2018, it has plummeted more than half of that price.
Presently, bitcoin is not yet stable and is subjected to sharp price changes. At the same time, a Muslim should not set a target to receive speculative income and be engaged in speculation, but should invest and/or use bitcoin as a medium of exchange or payment and as a store of value.
Shari’a principles, in addition to general prohibitions such as riba, maysir, gharar, qimar, khilabah and ghishsh; emphasise on the real economic activities based on physical assets. In attempts to sway the debate, some start-ups have launched cryptocurrencies backed by physical assets and thereby certifying them valid by Islamic advisors. The idea is to limit speculation.
An example of cryptocurrency backed by physical asset is the gold-based cryptocurrency. Here, a token or coin is issued that represents a value of gold (for example 1 gram of gold equals 1 coin). The gram of gold is stored by a trusted custodian (preferably third party), and can be traded with other coin holders.
At a minimum the price of the coin will always equal the current gold rate. If the cryptocurrency becomes popular then the price of the coin can potentially increase in value, greater than the value of gold. If the cryptocurrency doesn’t take off then the value remains as the value of the gram of gold.
In 2017, a cryptocurrency that is fully backed by gold assets was launched by a Dubai-based fintech, OneGram. As the name suggests, each OneGram Coin is fully backed by one gram of gold. OneGram obtained a ruling that its cryptocurrency complies with Shari’a principles from Dubai-based Al Maali Consulting. Another Shari’a-compliant gold-backed cryptocurrency, GOLDX, was launched by the Malaysia-based firm HelloGold. With Amanie Advisors as its Shari’a Advisor, HelloGold has based its operational processes and business model on the Shariah Standard on Gold by the Accounting and Auditing Organization for Islamic Financial Institutions.
BITCOIN IS NOT TRANSPARENT AND CAN BE USED FOR MONEY LAUNDERING AND ILLEGAL OPERATIONS
The reason behind the creation of bitcoin was for it to become digital cash as an alternative to it becoming an actual currency. It is important to note that all money laundering and illegal activities that bitcoin can be used for, can also take place via cash. Cash has been the primary mode of payment for drug dealers, money launderers, and other criminals. Some Islamic scholars claim that bitcoin is impermissible as it is subject to fluctuation and has the potential to be used in illegal activities.
These are not valid reasons under Shari’a as these factors are external to bitcoin. The price of bitcoin is subject to supply and demand, just like commodities and fiat currencies, and the use of any lawful thing for an unlawful purpose can not make the thing itself unlawful. Also, bitcoin removes the need for a bank to store and send your money, so there should not be any worry about a bank using your money to generate profit from riba for themselves.
However, in the process of analysing the different thoughts on the Shari’a compliance of cryptocurrencies, it must not be forgotten that fiqh (Islamic law) is a process rather than a strict code. The differences between several legal schools of thought should be utilised to resolve a problem at hand in light of modern circumstances rather than obstructing the way to progress. In fact, there is a problem in the lack of a systematic study of the cryptocurrency market and its key elements based on Shari’a norms.
ISLAMIC CRYPTO EXCHANGE
A crypto exchange is a digital platform, on which customers can trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. A cryptocurrency exchange is also known as a digital currency exchange (DCE). Although there are over 11,000 cryptocurrency exchanges in the world, currently no exchange for halal coins are in existence.
Recently, ADAB Solutions (UAE-based financial services firm) announced plans to launch the world’s first Shari’a-compliant cryptocurrency exchange. Called the First Islamic Crypto Exchange (FICE), the platform aims to become a universal solution for the involvement of Muslims and users of Islamic finance in the cryptocurrency market. When launched, this will be the first project that allows the performance of cryptocurrency transactions which are in accordance with the principles of Islamic finance and on the basis of Shari’a norms. It will be open to all users, regardless of their religions.
FICE will offer services based on the high moral and cultural values of Islam and will give confidence as well as rovide access to all users of crypto-economics. This allows the formation of an interested community, which will be on a systemic basis formalising the work of crypto-economics based on Shari’a norms.
One of the most important features of this project is that the management of the company is in accordance with the Islamic management model, which supplements the generally accepted standards of business management. The company’s Corporate Governance System is developed based on AAOIFI and IFSB standards. But the most important difference lies in the fact that FICE will introduce a Shari’a Advisory Board (SAB) within its structure.
The SAB is an independent body represented by internationally recognised Shari’a experts, who will provide inputs on Shari’a matters to ensure FICE’s compliance with Shari’a principles. FICE will not only provide high-quality services and information to the Muslim community about the cryptocurrency market, but it will also carry out an explanatory mission as well as facilitate the involvement of the Muslim community within the cryptocurrency market.
Based on the principles of Islamic finance and adherence to Shari’a norms, FICE would potentially solve the problem of excessive risks in cryptocurrency systems by excluding the speculative component from the work of the exchange. This will allow the stabilisation of the crypto-exchange platform, which will increase its reliability and protect FICE users from excessive risks.
