Unlike fiat money, a cryptocurrency is recognised only by members of a certain community or network who agree to regard it as something of value or as a medium of exchange.
Thus, the legitimacy of any cryptocurrency is solely based on the consensus among participants of a certain network. As cryptocurrencies are not backed by any sovereign or governmental guarantee, their value is highly volatile and speculative.
If one wants to possess a cryptocurrency, there are two ways: to buy it from a cryptocurrency exchange or to create it.
Owing to diverse approaches towards Islamic law, there is no agreement among Muslim scholars regarding the legality of cryptocurrencies
Bitcoin, Bitcoin Cash, Ripple, Ethereum, Zcash, Litecoin, Monero, and Dash are the most famous and widely used cryptocurrencies.
So far, not a single cryptocurrency has been declared as fiat money. However, protagonists of cryptocurrencies are of the view that, in future, real money will be replaced by cryptocurrencies.
There are non-Muslim scholars who argue that cryptocurrencies conform to Islamic financial requirements and that they may be beneficial for Islamic finance. However, owing to diverse approaches towards Islamic law, there is no agreement among Muslim scholars regarding the legality of cryptocurrencies.
There are Muslims who deem cryptocurrencies as un-Islamic.
In Turkey, the Directorate of Religious Affairs or Diyanet has declared that virtual currencies are un-Islamic as their valuation is open to speculation; they can be easily used in illegal activities like money laundering; and they are not under the state’s audit and surveillance.
In Egypt, the Grand Mufti has banned cryptocurrencies saying that cryptocurrencies are similar to gambling and that they may facilitate money laundering and contraband. He has also stated that cryptocurrencies undermine the state as “minting and issuing currency is an ‘absolute right’ of monetary institutions and one of the most specific functions of the state.”
In Saudi Arabia, Assim Al-Hakeem, a popular cleric, has declared that cryptocurrencies are forbidden in Islam as they are ambiguous and they facilitate money laundering, etc.
Thus, arguments against cryptocurrencies include: (1) they are ambiguous; (2) speculative; (3) facilitate various criminal activities; and (4) are not issued by any state.
The central banks in Saudi Arabia and the United Arab Emirates have warned their citizens about the risks associated with cryptocurrencies; however, it have not been banned.
In South Africa, Islamic scholars have ruled in favour of cryptocurrencies because they are socially acceptable and are commonly used.
In Indonesia, Muhammad Abu-Bakar, an Islamic scholar, has declared that bitcoin is permissible in Islam.
He has pointed out that Germany has recognised Bitcoin as a legal currency and, therefore, it qualifies as “Islamic money” in Germany. Also, many individuals and merchants accept bitcoin as a medium of exchange in their transactions; therefore, it can be regarded as Islamic customary money.
In the United Kingdom, Islamic scholars at Masjid Ramadan have declared that Muslims can pay zakat, which is an annual donation subject to the fulfilment of certain conditions, through Bitcoin and Ethereum.
Zayd al Khair, an Islamic scholar based at the mosque, has stated that a money or currency is neither permissible nor impermissible. If money or currency is transacted in a lawful manner, it is permissible.
In Dubai, a start-up company is issuing a gold-backed cryptocurrency. As Islamic finance lays emphasis on real economic activity based on physical assets, the start-up aims to Islamise cryptocurrency.
Other companies too have launched cryptocurrencies based on physical assets. For instance, each unit of the cryptocurrency issued by OneGram is backed by a gram of gold stored in a vault.
In fact, Al Maali Consulting, a Dubai-based advisory firm that determines whether a financial instrument or product is Islamic or not, has ruled that the cryptocurrency issued by OneGram fulfils Islamic standards.
In Malaysia, a gold-backed cryptocurrency has been launched by HelloGold, which has been certified as Islamic by Amanie Advisors, which is based in Kuala Lumpur.
Thus, arguments in favour of cryptocurrencies include: (1) they are socially acceptable; (2) are commonly used; (3) are lawful as long as they are being used for lawful transactions; and (4) are lawful if physical assets back them.
Many Islamic scholars are not familiar with the complexities of cryptocurrencies. There are various cryptocurrencies with peculiar features; therefore, it is not appropriate to have a single ruling for all.
Islamic scholars need to improve their understanding of cryptocurrencies and each one’s peculiar features and rule about permissibility on a case-by-case basis.
In the meantime, Muslims can study the different verdicts given by scholars and then adhere to the one that they find most convincing.
—The writer is a graduate of Harvard Law School and is a counsel at Azam & Rai, Lahore
Published in Dawn, The Business and Finance Weekly, November 12th, 2018