Shariah Compliance

Cryptocurrencies in Islam: Qualities that Make it Halal or Haram

Bitcoin, the cryptocurrency that started it all, is barely 8 years old.

Altcoins – short for alternative currencies, generally understood as ‘any other cryptocurrency aside from Bitcoin’ – are much younger. It’s hard to generalise the age of altcoins, as new coins and new types of coins are created all the time. According to CoinMarketCap, there are more than 600 altcoins.

For simplification, I’ve classified them into 10 categories. Note that some altcoins might belong to multiple categories, and there might be new categories in the future as new altcoins get developed.

CategoriesAltcoins/Network
Blockchain platformEthereum, Omni, Bitshares, NEM, Counterparty, etc
‘Dapps’ (Decentralised Apps)Lisk, Augur, Digix, etc
Privacy-centricMonero, Dash, Shadowcoin, Zcash, Zcoin etc
Social media-centricSteem, Reddcoin, etc
Real-time transfers/Bank SettlementDash, Ripple, NEM, etc
Novelty coinsDogecoin, Potcoin, etc
Bitcoin alternativesLitecoin, etc
Sovereign coinsAuroracoin (Iceland),  etc
DeadcoinsAbout 400 altcoins so far (source: State of Bitcoin and Blockchain Report 2015)
ScamcoinsOnecoin and every other hyped up coins that end up crashing in value, taking investors’ money without impunity


Issue: Lack of Research

Bitcoin in Islam-related research is limited, but exists. Research about altcoins in Islam, on the other hand, is currently non-existent or grouped together with Bitcoin. For the purpose of this article, we will draw on findings from Bitcoin research in the Islamic context to make an informed opinion.

If you find contradictory research, or additional research relevant to this article, please email me at [email protected]

Qualities That Make Cryptocurrencies Halal or Haram

Islam has very clear rules when it comes to finance. Two of the main principles are prohibition against collection of interest (riba’) and profit/loss sharing framework for loans. In this regard, virtual currencies that fit this bill is compliant with Islamic finance and banking. Charles W. Evans, who analysed this in his paper, published in the Journal of Islamic Banking and Finance wrote:

 “While intended as a narrow financial and economic analysis, and not as an in-depth analysis of the subtleties and nuances of Shari’a as they relate to banking and finance, it shows that a BMS (blockchain management systems) can conform with the prohibition of riba (usury) and incorporate the principles of maslaha (social benefits of positive externalities) and mutual risk-sharing (as opposed to risk-shifting). It concludes that Bitcoin or a similar system might be a more appropriate medium of exchange in Islamic Banking and Finance than riba-backed central bank fiat currency, especially among the unbanked and in small-scale cross-border trade.”

According to Islamic Finance scholar Professor Emeritus Dr. Rodney Wilson, recipient of the prestigious 1435H IDB Prize in Islamic Banking & Finance and a faculty member at Durham University and The Global University of Islamic Finance (INCEIF), Bitcoin is Syaria’-compliant in itself, provided the user understood all the risks associated with this currency.

The risks are:

  • Volatility. The prices for all cryptocurrencies are not stable, and may rise and fall rapidly.
  • Potential for abuse. If the user has low digital security knowledge, it makes them easy to fall prey to scammers. Most, if not all of digital currencies transactions cannot be reversed, and some are completely anonymous. Some cryptocurrencies are also artificially inflated to high prices, attracting investors, then left for dead after unethical parties cashed out on profits. These examples are not exhaustive.
  • Lack of regulatory body. Decentralised currencies that are not government-backed do not have agencies to handle fraud cases, market manipulation, pyramid/Ponzi schemes, and other unethical practices.

Presently there are no fatwas that specifically endorse digital/virtual/cryptocurrency usage in Islam. However there are some fatwas that caution Muslims against these currencies due to the risks specified above (here and here).

From the above, this is what we can deduce from our current understanding of cryptocurrencies in Islam: Like cash currencies, cryptocurrencies are tools that are neither good nor evil – it’s functions are decided by humans and subjected to human flaws. As long as you know and understand these flaws and risks, an informed individual may consider cryptocurrencies as halal to use.    

Further reading on Bitcoin in Islam (disclaimer: my articles):

Conclusion

Cryptocurrencies in Islam is an extremely new subject area that requires more research. Muslims who are interested to venture into cryptocurrencies – either for investment, or to use its many features (as a cheaper international funds transfer alternative, for example) – must understand the risks associated with using them, and equip themselves with strong digital security knowledge in order to avoid abuse by unethical parties. Cryptocurrencies which display a strong potential for abuse and categorised as scamcoins should be avoided. On the same page, cryptocurrency services which promote abuse to users (including but not limited to; gambling, dark marketplaces and Ponzi scams) should also be avoided.

In a nutshell, Muslims can use cryptocurrencies freely, as long as they know of the risks and use it for halal purposes. Muslims should avoid scamcoins and deadcoins as they clearly display these risks. In-depth knowledge in cryptocurrencies is a must for Muslims, as low knowledge increases the likelihood of being preyed by unethical parties.

Most people start their cryptocurrency journey with bitcoin. For many, this initial learning process can be a steep learning curve, especially for the technologically challenged. Malaysians can read this bitcoin for newbies guide as a start, before branching to other cryptocurrencies.

Byline:

About Suraya Zainudin — Suraya is a freelance writer specialising in personal finance, investing, nonprofits, women’s empowerment, and FinTech. An aspiring digital nomad, she blogs at ringgitohringgit.com. Follow the author on Twitter @surayaror