In early November, Indonesia’s National Ulema Council (MUI), the country’s top Muslim clerical body, ruled that “using” cryptocurrency is haram (not permissible), due to its “uncertainty” and “potential for wagering and harm”.
The 11 November ruling, which was not accompanied by any public clarification of MUI’s position on what constitutes “using” cryptocurrency, sent ripples through the Islamic world and reignited discussions about the role of the rapidly expanding digital assets sector in Sharia-compliant finance.
Whether or not cryptocurrency, which is essentially a means of currency exchange via digital payments platforms using blockchain technology, can be Sharia-compliant, or halal, has been the focus of much religious, professional and academic Islamic debate since cryptocurrencies first emerged with the launch of Bitcoin in 2009.
In the past 18 months, the volatility of Bitcoin in particular and reports of cryptocurrencies being used by criminal organisations to launder stolen or illegally earned money, commit fraud and demand ransoms in software hacks, have heightened fears that using cryptocurrency may be contrary to Islamic teachings.
In December 2020, the Kuala Lumpur, Malaysia-based Islamic Financial Services Board (IFSB), an international standard-setting body for the Islamic financial services industry, said in a note on investor protection in capital markets (IFSB-24), that the Sharia debate about the permissiveness of cryptocurrency should be focused on digital tokens that are treated as currency, with no inherent value of their own.
By contrast, digital tokens treated as securities, conveying an interest in the assets or earnings of a business, or asset-backed or utility tokens, which are tethered to some underlying asset or service of value, have not attracted the same controversy.
The IFSB has not yet stated a definitive position on cryptocurrency, preferring to host, and relay perspectives from, regular programmes and events for the Islamic finance industry, where the role of cryptocurrencies and other fintech products in Islamic finance are discussed.
Dr Gapur Oziev, Associate Professor in the Department of Economics at the Kulliyyah of Economics and Management Sciences, part of the International Islamic University of Malaysia, said the main concerns about cryptocurrency relate to how such currencies may enrich users at the expense of others, rather than their fundamental nature as digital forms of money.
“There is no single valid argument from the text of Sharia to prohibit cryptocurrency as such, because the nature of the money, or currency, can be absolutely anything – gold, silver, paper, cow-hide, plastic etcetera,” he said, noting that its permissibility depends on a certain government or “a large group of sound people use it without causing harm to anyone.”
Harm, in an Islamic finance context, is generally taken to mean deception, corruption or money laundering, but Dr Oziev said concerns about crypto could be broader. While using cryptocurrencies to pay for assets is not reprehensible from a Sharia perspective, he said, activities such as trading currency, crypto-mining and swapping cryptocurrencies maybe unacceptable.
From an academic perspective, Dr Oziev suggested it might be possible for cryptocurrencies to be accepted as Sharia-compliant, if they are recognised and integrated into the central banking systems of Islamic countries, removing their ambiguity, drastic volatility and susceptibility to speculation.
However, others experts see no contradiction between Sharia law and cryptocurrency and are fervently in favour of all cryptocurrency use cases within the Islamic finance system.
Cypto: more halal than other forms of cash?
Fait Muedini, the Frances Shera Fessler Associate Professor and Director of International Studies at Butler University in Indianapolis, USA, argues that cryptocurrencies like Bitcoin are not only halal, but are much more halal than other forms of money.
“I disagree with the statement MUI made [about cryptocurrency in November], and believe that their concerns do not address all of the positive benefits that Bitcoin offers within an Islamic financial context,” he said.
In Professor Muedini’s view, cryptocurrency is compatible with Sharia law because, unlike traditional fiat (government-issued currency that may not be backed by a commodity such as gold), the supply of Bitcoin and many other digital currencies is fixed, thereby eliminating potential for gharar (deception) and inflation.
“In addition, unlike fiat and precious metal coins, digital currencies cannot be altered, forged, or manipulated,” he noted, adding that the peer-to-peer (P2P) nature of cryptocurrency transactions removes the need for banking institutions to handle the assets, eliminating risks associated with giving a third-party control of the money.
Other approaches to crypto
The MUI’s ruling was striking because it was the most explicit stance taken against cryptocurrency by a major Islamic authority to date. Other Islamic finance authorities have generally taken a measured but tolerant approach to cryptocurrency, approving its use for certain purposes.
For example, in 2019, the Central Bank of Bahrain (CBB) issued its “final rules” on crypto-asset
services and crypto-asset exchanges, permitting their use by bringing crypto-related activities within its regulatory perimeter.
In July 2021, the Central Bank of the United Arab Emirates (CBUAE) announced plans to introduce a central bank digital currency (CBDC), as part of its 2023-2026 strategy to promote digital transformation in UAE’s financial services sector and make cross-border payments faster, cheaper and more secure through a network of multiple Central Bank Digital Currencies (mCBDCs).
Prior to this, in December 2020, the CBUAE collaborated on a venture with the Saudi Arabian Monetary Authority (SAMA) known as ‘Project Aber’, a joint digital currency and distributed ledger proof of concept project also aimed at facilitating smoother cross-border payments between central banks.
In November 2021, Dr Yasir Qadhi, Dean of Academic Affairs of the Houston, Texas-based Al Maghrib Institute and part of a panel of experts of the independent organisation, the Assembly of Muslim Jurists of America (AMJA), broadcast a YouTube video Q&A on Bitcoin, where he expressed the view that cryptocurrency is not haram.
The ambiguity around cryptocurrency’s Sharia status has not deterred issuers of digital tokens from targeting the Islamic finance market.
In January 2021, Bahrain-headquartered CoinMENA launched what it describes as a Sharia-compliant digital assets exchange that is licensed and regulated by the CBB. Users of CoinMENA can buy, sell, store, and receive major cryptocurrencies such as Bitcoin, Ethereum and Ripple, as well as deposit and withdraw funds in their local currency.
In March, Switzerland-based Caizcoin launched what it claims is the first fully Sharia-compliant cryptocurrency. Like other cryptocurrencies such as Bitcoin, Caizcoin is built on a decentralised blockchain, however it is the design of the blockchain that its developers say will ensure Cazcoin is halal.
For example, the system’s e-wallet for holding the tokens will be kept separate from “haram activities”, such as businesses dealing in mortgages, weapons, tobacco, alcohol or pork, or lending with interest, and Caizcoin can only be invested in “halal activities”, such as government bonds, stocks, property and transferring funds, or being used to make Zakat payments to charities.
According to Islamic scholars Mufti Faraz Adam, Shaikh Muhammad Ahmad and Mufti Irshad Ahmad, part of the scholarly network of the Shariyah Review Bureau, a Sharia advisory service for the financial sector based in Jeddah, Dubai and Bahrain and with clients across the world, there is no agreed Islamic law perspective on crypto-assets.
“Since the crypto-boom in 2016/2017, we have continuously researched internally and engaged with various scholars, practitioners and regulators on this topic. We are of the view that a general view cannot be taken as a Fatwa [a formal ruling or interpretation on a point of Islamic law], because of the various nuances and possibilities with crypto-assets,” they explained in a joint statement sent to Salaam Gateway.
They said that the term “cryptocurrency” is used to refer to a vast array of digital assets with different uses and functionalities. They also dispute that the potential for speculation is an innate feature of crypto-assets, arguing that Sharia concerns with crypto-assets arise when the contract used, and the underlying asset, are not Sharia-compliant.
“An investor in a Sharia-compliant transaction is speculating and taking a view on the market. Speculation […] exists everywhere, and it is only an issue when the tools used to speculate and the reference point of speculation are problematic,” they said.
“We promote the idea of evaluating in light of Sharia principles each crypto-asset and checking on the project underpinning the crypto-asset, the utility of the token, the tokenomics, the financials, the staking process and governance,” they added.
However, every Islamic finance authority may take its own view on how to treat cryptocurrency.
A case by case approach
In the view of the scholars of the Bahrain-based Shariya Review Bureau, an advisory institution, each Islamic finance authority is likely to take its own approach to the use of cryptocurrency in its respective jurisdiction. This advisory institution is licensed and regulated by the Central Bank of Bahrain.
“Each authority is a sovereign and independent, and we hope that each regulator will have sufficient expertise and insight, as well as the due process to form an informed response and framework to deal with crypto-assets,” they said, adding that moves are underway to formally adopt Sharia-compliant crypto assets.
“This is already happening with different scholars and platforms coming with interesting concepts that show genuine use cases and implementations of blockchain and crypto-assets. Regional crypto-operators (…) are regulated and have Sharia supervisory boards in place to ensure Sharia-compliance with periodical Sharia audits in place.”
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