As interest in bitcoin and cryptocurrencies has risen, so have the questions of Muslim investors wondering if they can invest in them while adhering to the principles of their faith. In particular, is cryptocurrency halal — that is, “permissible” according to the Quran – or should ethical Muslims put their money elsewhere?
This question has not been an easy one to answer for Muslim scholars, and inevitably different fatwa have arrived at various conclusions. Instead of arriving at any standardised consensus, the global Muslim investment community has been thrown into an intense debate.
As we shall see, a major cause of the disagreement is the ongoing and larger dispute about what cryptocurrencies are and what gives them value (if anything).
Today, discussions continue and disagreements persist.
Nevertheless, Muslims across the world have continued to embrace the use of cryptocurrency. In 2018, Mufti Muhammad Abu Bakar, a Sharia adviser and compliance officer at Blossom Finance in Jakarta, published a popular paper that affirmed that bitcoin is halal, a paper which many believe could be the reason for the surge in the price of bitcoin that followed.
The same year, a mosque in London started accepting bitcoin for donations and Zakat contributions.
In this article, we will consider the current state of the debate as we seek to answer the contentious question, “is cryptocurrency halal?”
We’ll cover both sides of the debate, including:
- Con: The case against deeming cryptocurrency as halal
- Pro: The case for considering crypto as halal
- Is cryptocurrency halal? The issues that persist
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[Want to read more about cryptocurrencies in Arabic? Read these Arabic-language articles on digital currencies and bitcoin.]
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1. Con: The case against deeming cryptocurrency as halal
Today, many Islamic scholars and jurists that sit on the boards of national advisory teams, such as in Egypt and Turkey, do not consider cryptocurrency as halal for various reasons.
Mufti Taqi Usmani, a former judge of the supreme court of Pakistan, is representative of this side of the debate.
“Currencies are originally a medium of exchange, and making them a tradable commodity for profit earning is against the philosophy of Islamic economics,” Mufti Usmani said. “In Shariah, there is no valid reason to accept bitcoin or other cryptocurrencies as a currency. It is just an imaginary number, which is generated through a complex mathematical process. It is purchased for gambling or speculations, and used in illegal or unlawful transactions”.
Mufti Shawki Allam, the current Grand Mufti of Egypt, agrees.
“In my opinion, trading in cryptocurrency is haram,” Mufti Allam said. “This is because it is not approved by legitimate bodies, such as Treasury Departments of States, as an acceptable medium of exchange. Such currencies lead to ease in contraband trade and money laundering, and they amount to gambling”.
The Directorate of Religious Affairs in Turkey also believe that “since cryptocurrencies are open to speculation, mostly used for illegal deeds, and far from state auditing and supervision, their trading is not appropriate at this point, in the light of Shariah.”
Putting together these perspectives, we can highlight the main reasons why these top Islamic finance scholars reject cryptocurrency as halal:
- It can be easily used for illegal activities
- It is speculative, amounting to gambling
- It is not real currency
- It has no intrinsic value
- It is not controlled by a legitimate central authority
It is true that cryptocurrencies are not under the control of a central authority. Even though many countries are seeking to regulate the use of cryptocurrencies, they remain, by their very nature, decentralised.
As a result of the decentralisation and anonymity of cryptocurrencies, some bad actors have indeed used them to facilitate illegal transactions.
“The illicit use of cryptocurrencies is predominantly associated with money laundering purposes, the (online) trade of illicit goods and services, and fraud,” according to Europol, the EU’s agency for law enforcement. An academic study published by Oxford Academic in 2019 also found that 25% of bitcoin users are involved in illegal activities, valued at $76 billion annually, constituting about 46% of all bitcoin transactions.
Furthermore, the speculative nature of cryptocurrencies is well-known.
This can be seen in their high volatility, with prices that are known to move significantly upward or downward. According to an article on Gemini, “skyrocketing peaks and depressive troughs occur at a quicker and more extreme pace in crypto prices compared to prices of assets in mainstream markets.”
The question of whether cryptocurrencies are real currencies always centre on their acceptability as mediums of exchange. Though El Savador has accepted bitcoin as a legal tender, many countries, including China, have banned cryptocurrencies altogether, while the UK and the US are imposing or planning various regulations.
Today, though the adoption of cryptocurrencies is rising, many still use them as an alternative investment asset rather than an alternative medium of exchange.
And this is why many are concerned whether cryptos have any intrinsic value, or whether the value derives only from demand and supply dynamics among investors/speculators.
2. Pro: The case for crypto as halal
On the other hand are the Islamic scholars and jurists who believe that cryptocurrencies are halal.
So, what are the arguments they present today?
The Islamic Economic Forum, a Whatsapp-based group of Islamic economists and jurists, argues that “a cryptocurrency is permissible as long as it doesn’t breach Islamic prohibitions on interest, contractual uncertainty, and gambling,” says Dr. Humayon Dar, the Director General of the Cambridge Institute of Islamic Finance and an Islamic finance product development specialist. Dr. Humayon also agrees, even though he believes that the ambiguity and uncertainty around cryptocurrencies should lead to caution in assigning them any “halal” tag.
So, how do cryptos fare under these three conditions?
Contractual uncertainty
According to Sharia law, a contract is valid if there is a consideration, referred to as Mal. That is, there must be an exchange of something real that can be owned, possessed, stored, and traded.
Since cryptos are real digital assets that can be owned, possesed, and stored on wallets and traded on exchanges, some Islamic scholars consider them halal.
Interest
The absence of interest (riba) is a core principle of Islamic finance. Since cryptocurrencies do not charge interest, some Islamic scholars consider them halal.
Gambling and illegal activity
While cryptocurrencies are speculative, some experts, such as Mufti Abu-Bakar, a scholar of Islamic Jurisprudence, have argued that all financial assets are speculative. Even stocks, which are widely considered as being “halal”, can have significant volatility.
Abdulkader Hallak, a wealth advisor at Sarwa, also believes that volatility is not enough of a reason to consider cryptocurrency as haram. What matters is the motive of the investor. “If you’re not using any leverage or CFDs, and you’re not gambling and taking excessive risk – then this is what draws the line,” he said. “What is your goal behind investing in crypto? Is it to accumulate your wealth? Are you using crypto as a store of value? Then that’s okay.”
Then what about the concerns raised about using crypto for illegal activities, such as funding for drugs or other crimes?
Scholars have argued that when something that is considered halal is used for haram, it does not necessarily make the original object itself haram. As Abdulkader Hallak puts it, “Islamically, the use of an item that is deemed halal for an unlawful purpose does not make the original item halal.”
As it stands today, as long as a Muslim is using a cryptocurrency like bitcoin for the purpose of investing, no ethical codes are being broken.
Are cryptos real currencies?
Scholars in support of seeing cryptocurrencies deemed as halal argue that the absence of a central authority actually enhances the value of cryptos as currencies. It means no single authority can increase or reduce their supply at will, thereby ensuring more transparency in the market.
Furthermore, though cryptocurrencies have not been generally accepted as a medium of exchange, many are already using them as such across the globe. These currencies have purchasing power and buyers and sellers can (and do) use them to facilitate transactions.
However, not all experts who agree on seeing cryptocurrencies labelled as halal agree on considering them as a true currency. For example, while some prefer to see bitcoin only as a digital asset (for the time being at least), others believe that it is a currency.
The former includes Ibrahim Khan of the Islamic Finance Guru. “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,” he said. “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.”
The latter includes Mufti Faraz Adam, an Islamic Finance & Fintech consultant at Amanah Advisors. According to him, “Bitcoins are in the ruling of a currency. They will be a currency as long as people use and exchange them.”
That is, as long as people continue to use them as currencies, cryptos will remain currencies even if their use as a medium of exchange is not as dominant as their use as an investment asset.
“A system which is acceptable among people is sufficient to establish a currency in Shariah,” he added.
The question of value
All scholars who agree that cryptocurrencies are halal affirm that they have value.
“At present, they [cryptocurrencies] have some monetary use and people have assigned ‘a value’ to these Bitcoins,” according to Mufti Faraz. “A ‘value’ is envisaged by the people as they purchase, sell, accept and exchange the form of Bitcoins for the underpinning notional value. The value of things can be manipulated, exploited and speculated. These are external issues, which require regulation and control.”
Even Ibrahim Khan, who is less inclined to consider cryptos as currencies (for the reasons listed above), believe they still have value.
“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,” he said.
“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 [to cryptocurrency] 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!”
[For more on the value of cryptocurrencies, especially bitcoin, read “Why Invest in Bitcoin? Understanding The Value of “Digital Gold”]
3. Is cryptocurrency Halal? The issues that persist
Cryptocurrency exists in a grey area today, which is why there is such a strong ongoing debate.
According to Dr. Humayon, “there is nothing ethical or unethical about investing in cryptos, at least as of now.”
Having presented the cases of the two sides to the “is cryptocurrency halal” question, it’s worth mentioning that certain issues persist that can heavily influence the future of cryptocurrencies.
Regulations
Dr. Humayon is among those who believe that there is a need for more patience before classifying cryptos as halal or not.
“When it comes to cryptos, Islamic jurisprudence should wait till there is greater regulatory certainty over their usage and trading in them.”
He believes that regulatory certainty, as the US and UK are attempting, can contribute significantly to determining whether cryptocurrencies should be considered permissible or not.
In addition, many people also believe that the development of Sharia-compliant cryptocurrency guidelines for those who want to invest can go a long way in helping more Muslims enter the crypto market with more confidence.
As of today, it remains to be seen whether there will be more regulatory certainty across nations and whether Muslim communities will be able to create cryptocurrency guidelines that will command wide acceptance.
Medium of exchange
Ibrahim believes that “if a cryptocurrency emerges 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.”
While many believe that a wider acceptance is not necessary to establish cryptos as real currencies, cryptocurrencies will definitely benefit from wider acceptance built on more secure, cost-effective, and faster transactions.
This will also establish the fact that they are valuable, giving more people confidence to see them as more than just speculative digital assets.
Volatility
As bitcoin’s market cap has risen, its relative volatility has gradually reduced. Consequently, many bitcoin enthusiasts believe that the high volatility of cryptos owes to their relative newness in the market and that future volatility might therefore be lower than present.
However, others are more cautious, believing that the increasing popularity of cryptocurrency and the entrance of new players will lead to higher volatility in the future.
It remains to be seen how all this will unfold and whether cryptocurrencies will become a reliable asset class that can help diversify a portfolio – or merely act as a speculative asset.
Investing in cryptocurrencies in the UAE
Sarwa allows investors who are curious about getting into cryptocurrencies to invest in them from the UAE.
For passive investors, there is Sarwa Bitcoin, a variant of Sarwa Invest. Through this investment platform, passive investors can invest in a diversified portfolio of ETFs that also includes a 5% investment in bitcoin.
[For more on the principles behind Sarwa Invest and its passive investing philosophy, read “How to Invest Money In The UAE: All You Need To Know”]
For active investors who prefer to buy and sell cryptos on their own, there is Sarwa Crypto, a variant of Sarwa Trade. With Sarwa Crypto, you can buy and sell various cryptos in addition to stocks and ETFs.
[For more on the best principles to adhere to in buying bitcoin, and other crypto, read “Bitcoin Trading Advice: The Do’s and Don’ts of Trading Bitcoin”]
Are you ready to start investing in cryptocurrencies? Sign up for Sarwa or schedule a free call with a Sarwa wealth advisor to get answers to all your questions.
Takeaways
- Islamic scholars still disagree on whether cryptocurrency is halal
- For those who don’t consider it as halal, its use for illegal activities, the absence of central authority, its speculative nature, and lack of wide acceptance as a medium of exchange are important factors.
- Those who see crypto as halal believe there is Mal in crypto transactions, no interest (riba), and that its usage by some for illegal activities does not make it inherently haram.
- The question of regulations, wide acceptance of cryptos as medium of exchange, and the increase or decrease in their volatility remain issues of concern to all and sundry.