In today’s digital age, you might have heard about something called “cryptocurrency.” Over the previous several years, cryptocurrency has garnered a lot of interest among investors. However, Muslims are divided on whether cryptocurrency such as Bitcoin is halal. But have you ever wondered if it’s okay to use it according to Islamic rules? What do Islamic scholars say about crypto? Let’s break it down in simple terms and find out if cryptocurrency is halal or haram and even if it is halal, whether it is compatible with the principles of Islamic banking and finance.
How does cryptocurrency work?
Cryptocurrency is like digital money. Just as you use coins and paper money for buying things, cryptocurrency is used for online transactions. It’s stored in a digital wallet on your computer or phone, and you can send it to others without using traditional banks.
Cryptocurrency doesn’t exist in the form of coins or paper. Instead, it’s made up of computer code. This is different from regular money that you can touch and see. So, is it real money? Some people say it’s not because it doesn’t have a physical form like gold or silver. Cryptocurrency is known for being secure and hard to steal. It uses a technology called blockchain to keep records of all transactions. So, your money is safe from hackers.
Is cryptocurrency Halal or Haram?
This is the big question! Whether cryptocurrency is halal or haram depends on who you ask. Some Islamic scholars say it’s okay, while others have concerns. Islam has severe financial restrictions, and because cryptocurrency is so new, Sharia law regarding this type of currency might be difficult to comprehend.
The Concerns:
1- No Intrinsic Value: Some scholars worry that cryptocurrency doesn’t have any real value by itself, like gold or silver. They think it’s like playing a game where you buy and sell things that don’t exist in the real world.
2- Risk and Speculation: Cryptocurrency prices can go up and down a lot. This makes some people feel it’s too risky and might be like gambling, which is not allowed in Islam.
3- Interest-Like Transactions: There are concerns that certain cryptocurrency transactions may involve elements similar to interest (riba), which is prohibited in Islamic finance.
4- Regulation: Many countries don’t have clear rules for cryptocurrency. This can make it a bit like the Wild West, with no one watching over it.
The Other Side:
On the other hand, some Islamic scholars and experts say that cryptocurrency can be halal if used carefully and transparently. They believe it can bring benefits, like making financial transactions faster and cheaper.
1- Transparency: Cryptocurrency transactions are recorded on a public ledger called the blockchain, which offers transparency. This transparency can help prevent fraud and corruption, aligning with ethical principles.
2- Financial Inclusion: Cryptocurrency can provide financial services to people who don’t have access to traditional banks. This can be especially helpful in regions where banking services are limited.
Suitability of cryptocurrency to the principle of Islamic banking and finance
Cryptocurrency is more certain and not deceptive because the parties involved have
adequate knowledge of the market and the product. Also, it is more transparent because
every single transaction is stored in a massive circulated public ledger called the
Blockchain (Cointelegraph, 2018).
In fact, bitcoin goes beyond what a more conventional closed banking network offers. Unlike conventional bank network which uses private ledgers where there is no guarantee that the originator actually owns the underlying asset. Bitcoin guarantees with mathematical certainty that the originator of the transfer owns the underlying asset. Conventional banks operate using a fractional reserve which is prohibited in Islam. He further stressed that bitcoin is more halal than any currency in wide circulation today but probably still falls short of the strict and narrow definition of money in Islam. Modern sovereign currencies are based on debt with usury-this is strictly prohibited in Islam. Therefore all modern money is not halal. Bitcoin on the other hand is not based on debt-it is based on proof of work and at least not haram.
Excuses to Avoid Using Cryptocurrency
Cryptocurrency is not a legal tender:
The issue that cryptocurrency has no legal tender which implies that it has no
legal backing by the state is to be considered as a relative justification as there are some
countries in which Bitcoin for instance is legal. Among these are Australia, Bulgaria,
Canada, Estonia, France, Germany, Iceland, Israel, Japan, Jordan, Mexico, Sweden
Slovia etc. The major criterion for money in Shariah is its acceptability by people –
whether it comes about by forcing it upon people via laws, or through voluntary
acceptance of people
Cryptocurrency is an avenue for money laundering and illicit activities:
The fact that cryptocurrencies are used for money laundering and other illegal reasons does not prevent them from being accepted as a kind of currency. For example, fiat money (e.g., US dollars) has been used for a similar purpose, yet this does not render the money unlawful. In other words, using something lawful for an unlawful purpose does not make the thing itself unlawful.
Cryptocurrency issuer is not known/central authority:
One of the biggest complaints of Bitcoin is that the issuer is unknown, and there are no monetary institutions to monitor or guarantee it. It is important to highlight, however, that there is a framework for users of this sort of money that is fully revealed for parties’ consumption, and the fact that it uses blockchain technology makes it safer than the centralized system used by a government or central bank.
Conclusion and Recommendations
Despite being considered an economic innovation, Bitcoin is increasingly dominating the center stage of the financial scene as investors regard it as a route of investment. Though this digital money may fit well into the traditional system, caution is required in the case of the Islamic financial system due to its ethical aspect. However, based on the study offered, we can conclude that cryptocurrency is compatible with Islamic banking and finance since, when compared to fiat money, it better fits the primary features of money in Islam and the rules controlling the operations of Islamic banking and finance.
There is a need for all stakeholders (Islamic academics, Shariah experts, AAOIFI, IFSB, etc.) in various economies to get down at a round table and create norms to guide its overall mode of operation since this might go a long way toward alleviating user/investor concerns.