- Cryptocurrency is digital money that is not controlled by any central authority.
- Some Islamic scholars deem cryptocurrencies such as Bitcoin to be halal. While others deem it haram because of speculation and its decentralized nature.
- Fatwas by Islamic scholars might change in the future regarding cryptocurrencies depending on how these assets will perform in the future and how governments around the world would regulate it.
What is Cryptocurrency?
Cryptocurrency or crypto refers to virtual money that exists digitally and is not controlled by a central authority such as a central bank or a government.
The transactions are recorded on a digital ledger known as the blockchain. The blockchain is decentralized and encrypted, which makes hacking extremely difficult.
New cryptocurrencies are produced through the process of crypto mining. Crypto miners solve complicated mathematical puzzles to add a new block to the blockchain and are rewarded with one new cryptocurrency for their effort.
Because cryptocurrency is speculative and not controlled by any central authority, some scholars are of the view that it is haram while others argue that it is halal. In 2019, Mufti Muhammad Abu-Bakr compiled a report on cryptocurrencies including Bitcoin that states cryptocurrencies are permissible in Islam deeming cryptocurrencies including Bitcoin halal. The report stated that all currencies have a speculative element and cryptocurrencies are just one of them.
In 2018, Sharia Review Bureau in Bahrain stated that cryptocurrencies were a type of property that did not involve interest. Hence, it is permissible under Sharia law. Recently, Bahrain has legalized the exchange of cryptocurrencies and become the first predominantly Muslim country to welcome crypto.
What is blockchain and how does it work?
Blockchain technology is what makes cryptocurrencies work. Blockchain is a digital ledger that stores transactions across several computers in a peer-to-peer network.
Let’s take the example of Bitcoin, when a transaction such as a sale or purchase of Bitcoin takes place, it enters the network of powerful computers known as nodes.
Several thousands of nodes all over the globe confirm the transactions through computer algorithms. This process is known as crypto mining (or Bitcoin mining). Whichever crypto miner completes a block first, is awarded a new cryptocurrency unit (or Bitcoin).
The block is added to the blockchain and the rest of the network confirms it. The new block is permanently chained to the blockchain using a hash. A hash is a cryptographic key that makes it impossible to hack the blockchain.
What Is an Initial Coin Offering (ICO)?
Just like in an Initial Public Offering (IPO), when a company raises money by selling stocks, ICO functions similarly. In the crypto industry, when a company wants to raise money, it launches an Initial Coin Offering (ICO). The investors purchasing the ICO get to receive a new cryptocurrency token or coin which depicts their investment in the company.
Fatwas on Crypto
The earliest opinion on crypto was given in 2014 by Monzer Kahf, a prominent author of Islamic finance who deemed it as a legitimate medium of exchange but he also warned that it is vulnerable to manipulation.
In 2019, Mufti Muhammad Abu-Bakr published a report on cryptocurrencies in which he expressed that he deems them permissible in Islam. The report presented an argument on how cryptocurrencies meet all the Shariah finance requirements. He argued that just because cryptocurrencies are speculative in nature, they should not be deemed haram, as most currencies in circulation have a speculative element.
Mufti Billal Omarjee gave a Fatwa that although he believes Bitcoin itself to be Halal, in the UK context, he doesn’t see cryptocurrency as a valid currency from a Shariah perspective.
Asrorun Niam Sholeh, heading the religious decrees for the Indonesian Council of Islamic Scholars gave a fatwa that cryptocurrencies aren’t halal. He added that cryptocurrencies are illegal digital assets or commodities that have elements of gambling, harm, and uncertainty.
Shaykh Assim Al-Hakeem, an Islamic Scholar based in Jeddah, also shared his opinion that Cryptocurrencies are not permissible in Islam because of the ambiguity (gharar). He further stated that each transaction is not simultaneous and because it cannot be exchanged physically, it is used for deceitful activities.
One of the main reasons most scholars are reluctant to give Fatwas or deem crypto trade haram is because they do not understand how cryptocurrencies work. And in the future, if the crypto bubble bursts, they will be the ones responsible for misguiding Muslims. However, it is expected that if the price volatility subsides and governments around the world can regulate the crypto industry, scholars might update their Fatwas.
It is expected that these Fatwas against cryptocurrencies will change in the future because experts believe cryptocurrencies are the future of money. This is one of the main reasons countries such as Saudi Arabia and UAE do not restrict their citizens from purchasing cryptocurrencies and Bahrain has legalized cryptocurrencies. Bahrain has become the crypto-hub after licensing more than 30 crypto exchanges including Binance.
Sharia Finance Rules
For a financial asset to be Sharia-compliant, it must be:
- Riba-free: It must not involve interest as interest is prohibited in Islam.
- Non-speculative (Maysir): Any investment similar to gambling is prohibited in Islam, therefore if the risk index of an asset is exceptionally high, it is considered haram.
- Profit-loss sharing: All the parties involved in transactions must share risks and rewards.
- Tradeable (Al-bai’): The asset should be tradeable.
Cryptocurrencies meet most of these Sharia rules as it is tradeable, interest-free, and profits and losses are equal for all. Some scholars are of the opinion that it is not halal because it involves high risk and is not controlled by a central authority therefore illegal transactions occur in cryptocurrencies.
But the truth is that risks exist in all currencies and their value can go up and down with slight changes in the markets. Also, illegal transactions have always been occurring in most conventional currencies and it is not something specific to cryptocurrencies only. Hence many scholars believe that it is perfectly halal to hold cryptocurrencies and use them as a means of trade.
Secondly, there are governments allowing trade in cryptocurrencies such as Bahrain. The Central Bank of Bahrain has permitted banks across the country to let individuals transact and convert their cryptocurrencies to local currency. Sharia requires all Muslims to abide by the law of the land, meaning that if their local government bans cryptocurrencies, they should not hold or trade it. However, if the government allows it, and it becomes a legal medium of exchange, then Sharia also allows it.
Is Bitcoin Halal?
Bitcoin is the world’s largest cryptocurrency, launched in 2009, that is recorded on a decentralized ledger called the blockchain. Most Islamic scholars are of the view that Bitcoin like other cryptocurrencies is halal and it is permissible for Muslims to hold and trade Bitcoin.
While others are reluctant to talk about it and some deem crypto haram because it is highly risky and decentralized. More and more countries including pre-dominantly Muslim states such as Bahrain, UAE, and others are changing laws to welcome crypto. It is evident that digital currencies are here to stay. Therefore, the opinions of scholars may change in the future depending on how the crypto-scene turns out.
Is Ethereum Halal?
Ethereum is a ledger technology that connects several computers in a peer-to-peer network that executes and verifies the application code known as smart contracts.
So, is Ethereum halal? Well, Ethereum technology is not much different from the blockchain technology and most Islamic scholars who deem cryptocurrencies to be halal are of the view that Ethereum is also halal.
Are all cryptocurrencies halal?
Generally, the Islamic scholars who deem Bitcoin and Ether to be halal also deem other cryptocurrencies to be halal. As long as they follow similar rules and are not against the Sharia rules.
Some questions can be very hard to answer for Islamic scholars such as; Is dogecoin halal? Dogecoin started as a joke and its value has been very volatile. The value of the coin is highly dependent on internet memes and tweets from famous personalities, and some scholars might think it fits the description of gambling.
Investing in some cryptocurrencies can also earn regular interest payments. Interest is not permissible in Islam therefore crypto investments that pay out interest are not halal.
Is Crypto Mining Halal?
Many Islamic scholars deem cryptocurrencies and crypto mining to be halal. Crypto mining is the process through which cryptocurrencies are generated and the transactions are stored on the digital ledger — the blockchain.
A crypto miner participates in crypto mining and solves complex mathematical puzzles. For this service, they are awarded a new cryptocurrency, asis compensation for their effort.
Some scholars add that if the government where you operate allows crypto mining, and there are no legal restrictions then crypto mining is permissible.
Is Crypto Staking Halal?
The short answer is “it depends”. In crypto staking, investors stake their coins and are rewarded for it. The objective of crypto staking like crypto mining is validating and adding blocks to the blockchain. Crypto staking follows the proof of stake (PoS) mechanism while crypto mining follows the proof of work (PoW) mechanism.
If staked crypto yield guaranteed interest payments similar to interest payments on a loan, then staking in this context would be considered Haram.
Alternatively, if crypto staking is for the purpose of verifying transactions on the blockchain node which contributes to the overall wellbeing and security of the blockchain network and you are compensated based on your contributions (not guaranteed returns), then in this case, Crypto staking can be permissible.