Investment

Is bitcoin halal? What about other cryptocurrencies?

IFG have been getting a flurry of cryptocurrency queries from our readership over this past year, increasingly more and more panicked as they watch the bitcoin price hurtle into the stratosphere and want to get Shariah sign-off. There is lots to be said about the whole area of cryptocurrency and the blockchain technology generally. We propose to discuss various aspects in a series of articles to help break things down.

This article will focus on cryptocurrencies, such as Bitcoin, and whether or not they are shariah compliant. As ever, this is not a definitive fatwa on the matter and should not be relied on as such; it is designed to discuss the area from a well-informed position following extensive research of the actual technology and the Islamic position, and we hope to contribute to the debate through this.

This article is going to be based on Mufti Faraz’s excellent research piece on cryptocurrency (see here), – it provides a great platform for discussion and I agree with large parts of the analysis. In future articles we will be looking to build upon his analysis to answer related questions (see the conclusions section below for these) that are still outstanding.

I will not be going through in exhaustive detail what exactly a cryptocurrency or Bitcoin is, because there is an incredible array of free resources that answer that question for you online. In particular I found the following presentation helpful. My main focus will be the fiqhi (Islamic legal) discussion.

Having said that, a brief summary is necessary for the purposes of this article so that we can understand the Islamic position at which we arrive.

What is cryptocurrency?

A simple explanation:

Cryptocurrency relies on the blockchain technology. A discussion of the blockchain technology is reserved for another article.

With regard to cryptocurrency itself, one analogy that I found very useful was between a cryptocurrency and a casino chip, or cryptocurrency and the token one buys at theme parks for use on rides. These plastic tokens are intrinsically worthless, however they are worth a certain amount of money within a certain context. In Alton Towers, or in the casino where they are used, they are worth pretty much the same as currency. But outside of Alton Towers and the casino, their value depends on how easily exchangeable they are in other locations, whether the person you are offering them to regularly goes to Alton Towers/the casino, and whether enough people know about Alton Towers/the casino for them to value the tokens anyway.

The value of cryptocurrencies is linked to the network within which they operate. The more people join the network, the more acceptance it has as a tradeable assest, the more the value the coin has. Lately though, people have noted that the similarities between this and your classic ponzi scheme/scam. So now the most reputable new crypto offerings seek to create a network where they are actually trying to do something valuable in the real world, and where the coins that they will accept in their network gain value to the extent people join the network to benefit from whatever thing that network is known for.

For example, certain cryptocurrencies are linked to education, where students pay and are rewarded in the token of the network, and where hirers can come and buy the best students judging from their results, using the network’s tokens. Here, one can see that if such a network becomes massive, those tokens will have value even where they are not being directly used on the network itself to buy and sell education.

Three main views

One of the core tenets of Islamic contractual law is that a transaction must have something called “Māl” as consideration. An accepted definition of a transaction amongst Islamic scholarship is an exchange of Māl in consideration of Māl’ (al-Marghinani). If the consideration is not Māl, then the contract is rendered void.

Māl literally means something that can be possessed or acquired and it can be corporeal (e.g. a car) or usufruct (e.g. the right to exclusively occupy a property, or a tenancy as we usually call it). According to a prominent school of Islamic jurisprudence (the Hanafi school), Māl  is “what is normally desired and can be stored up for the time of need”. Desirability and storability are therefore key considerations for something to be deemed Māl. Thus, birds in the sky, or a scent, or a passing thought in one’s mind, are variously not Māl as they are either (i) not in anyone’s possession, or (i) too temporal for there to be effective storage.

The key initial debate is therefore whether cryptocurrencies/blockchain tokens constitute Māl.

There are three main fiqhi positions that scholars have adopted on cryptocurrencies:

  1. Cryptocurrency is not “mal” (wealth) and is purely speculative and is not a Shariah-compliant investment;
  2. Cryptocurrency is a digital asset but not currency;
  3. Cryptocurrency (of certain kinds) are currency.

I would suggest that (1) is wrong as cryptocurrencies are worth at least something. It is clearly worth something to all those people willing to pay a lot of money for it, and it is clearly worth something to all those businesses who are willing to accept it as a means of payment. It is true that when it is all stripped away, a “bitcoin” is essentially an entry on a ledger that is not intrinsically very valuable. However, the pound coins and notes in our pockets are very similar in this regard, and yet we still uncontroversially understand them as mal. Ultimately value derives from the meaning we imbue into things, and if many people do in fact value Bitcoin, then, well, it’s valuable!

I would suggest that (2) is probably about right at this moment in time. This is incidentally Mufti Faraz’s view in his article as well (though I understand he now holds that position 3 can be justified).

I would suggest that (3) is probably a bit punchy given the current state of play in the cryptocurrency industry. It is very obvious that a currency that is prone to crashes, online heists of millions, huge fluctuations in price, is one that is not an effective means of payment. In particular, at times of high transaction volume, the transaction cost of each transaction can go up enormously, and one can end up having to either wait a long time for one’s transaction to be processed, or one pays through the nose for it to be processed. That is not what we look for in a currency as we want instantaneous execution – not high and unpredictable transaction costs.

However, if a cryptocurrency emerges out of this present phase which gains credence and acceptance because it is secure, quick, low in transaction cost, etc, and it subsequently becomes a very readily accepted currency, then I see no reason why it cannot sit alongside fiat money and it category 3.

The other point to note here is that the distinction between (2) and (3) may not appear wholly crucial, and most of the time it isn’t – especially where parties contract privately to designate X a currency for the purposes of their contract (even where others do no accept it as such yet). However, there are differences which are relevant, particularly in the ICO context. But we can reserve that discussion for another article as well.

Conclusions

Firstly, as a broad concept, I don’t find that there is anything problematic from an Islamic perspective about blockchain technology, and cryptocurrency which is a use of blockchain, and seeking to profit from it. The technique of accounting has been around for centuries, and all we’ve done now is put it in a 21st century format which seeks to make things cheaper and more efficient.

People are generally seeking to profit from cryptocurrencies in two ways: 1) buying and holding, selling at a later date; or 2) buying for short-term trades (e.g. minutes, hours, a day).

The opinion on this is the same as doing the same with any halal assets such as shares – 1) is permissible, 2) is more debatable and there are differing opinions on short-term trading. (see this article for more analysis.)

However, there are a number of further issues still to discuss when we start looking at specific crypto offerings.

Firstly, a hallmark of cryptocurrencies is the anonymity and tracelessness they are renowned for – this needs to be analysed from a fiqhi perspective. Secondly, as mentioned briefly above, cryptocurrencies seek to create value from the network or environment they operate in – but what are the fiqhi do’s and don’t’s for these networks/environments? And is it acceptable to hold such currencies if the primary activities of the network/environment are haram? Thirdly, what exactly are initial coin offerings, and does the Shariah have any guidance on them? Fourthly, what are the other uses of blockchain technology – and what does the Shariah have to say on that?

We will be picking up on these themes and others in coming articles.

In the meantime, please do let us know your thoughts/questions/comments – they are very welcome as ever.

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11 Comments. Leave new

  • Assalamu alaikum, For me is a question about gold investment, where a STOCK COMPANY fix a constant amount to pay you every day irrespective of whether the COMPANY make profit or no when you make Gold investment.

    Reply
  • Samantha Ball
    April 13, 2018 8:59 am

    Hi Ibrahim Khan,

    I have read and I am particularly interested in your articles regarding Islamic Mortgages. Have you an email address that I may be able to contact you on in order to discuss this matter a little further?

    Reply
  • Chuck Ogilive
    June 5, 2019 10:33 pm

    Me and my Mrs have read your article with great interest.

    Reply
  • Salam brother Ibrahim. Excellent article and so glad that you are starting this conversation. I’m a newbie in finance as a whole. Onto your point about crypto trading, linking an article you wrote about forex trading and how you feel it is not permissable. In this context however as long as you are not margin trading, and you are just buying a crypto currency such as ethereum using bitcoin on an exchange such as bittrex or binance then selling it once a target spread is met, to me it seems halal. Please see binance terms of agreement here. https://accounts.binance.com/en/terms. They mention they do not participate in trades nor are they Market-Makers. So I believe there is no lend here. The only money they make is % fees from your transactions and from when you withdraw out from your bitcoin wallet. I see this as halal, a bit like an online version of going to travellex but for crypto, but please advise, jazakAllah khairan.

    Reply
  • nulettered
    May 1, 2020 6:46 pm

    videos,this website could certainly be one of the very best in its field.Fantastic blog!

    Reply
  • What about investing in XRP? Ripple (the company) aim to provide instant crossborder transactions at low fees. The XRP crypto coins are decentralised and are deflationary. No more can be created and there is a finite amount within their ecosystem. The Ripple ledger is however somewhat centralised. I’m buying and holding onto the coins for investment purposes. Is this ok? Their model seems to be better than the current financial structure of the payment systems. Essentially getting rid of extortionate fees, and the delay where loads of “IOUs” take place in nostro/vostro accounts. I could be wrong but thats a simplified version of what it is. Would that be halal? They serve a better purpose than Bitcoin and have real life use cases and value. Seems closer to an Islamic financial system as opposed to the current riba infested processes we have

    Reply
    • Assalam Alaycom brother Jay Ahmed
      We have similar opinions but just I didn’t finish my research about cryptocurrency special Ripple XPR
      Not too much informations
      Let’s share our experiences and conclusions and inshallah we can make a solution end to end shariah compliant
      JAZAKOM ALLAH KAYRAN
      Mohamedbar@hotmail.co.uk

      Reply

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