Islam is the world’s second-largest religious group. As of 2020, Islam makes up around 24.7% of the world population, with 1.9 billion adherents. Whether bitcoin is halal and how Islam and Muslims see bitcoin and cryptocurrencies, in general, can have a huge impact on their future.
However, being written 1400 years ago, Islam doesn’t clearly state whether bitcoin is halal or haram. It is up to Islamic scholars now to interpret Sharia laws about finance and money and decide whether the community should use the new-age currency.
This article will explore where different scholars from around the world stand on cryptocurrencies, whether bitcoin is halal or it is permissible for Muslims to engage in crypto trading, lending, borrowing, and yield farming, among others.
In this guide:
- What constitutes money in Islam?
- What about cryptocurrencies?
- Is bitcoin halal? Sharia law and Islamic finance
- What are the key principles of Islamic finance?
- Is bitcoin halal? What scholars favoring it say?
- Is bitcoin haram? What scholars opposing it say?
- Is bitcoin halal or haram? — the final verdict
- Frequently asked questions
What constitutes money in Islam?
According to early Islamic laws, currency is anything that has worth built into it. Its value doesn’t ideally fluctuate rapidly. This is because, as per Sharia law, the exchange of currencies implies the exchange of items of similar worth.
Primarily, the dinar and dirham are the two currencies that were popular in Islam-dominated areas. The Byzantine dinar is a gold coin that roughly weighs 5 grams. On the other hand, dirham is a Persian currency made from silver. The metallic content determined their value.
However, the value of the dinar and dirham changed from time to time owing to the variations in the supply, as well as the demand for silver and gold. Despite this, Islamic countries used the currencies, holding onto the anti-interest policy of Islam. With time, they had to make the move to fiat currencies, even though they were just papers and didn’t have any intrinsic value. Due to their social acceptance, scholars sanctioned fiat currencies, and they went mainstream in Islamic countries.
What about cryptocurrencies?
Cryptocurrencies are simply a digitized form of currency. Built on blockchain technology, it encrypts data to facilitate value transactions without incurring forgeries and double-spending. This is in line with the Islamic view about currencies in general. Only that, here instead of a paper, a decentralized digital ledger stores the data.
There is a catch, though.
According to Imam Ibn Taymiyyah,
‘’When currencies and money are inter-traded with the intention of investment and profit, it opposes the very purposes of money and Thamaniyyah.’’
Islam prohibits interest due to this reason. This is also the logic why many argue that bitcoin goes against the principles of Islamic finance.
As we know, bitcoin, like most cryptocurrencies, is highly volatile. This generates exorbitant profits as well as losses for the holder. It acts as an investment tool rather than a currency under present circumstances, giving momentum to the counter-narrative.
Let’s take a better look at what Islamic finance is and whether bitcoin is compatible with it.
Is bitcoin halal? Sharia law and Islamic finance
As the name implies, Islamic finance denotes financial activities that comply with Sharia (Islamic Law). It covers banking, day-to-day transactions, lending and borrowing, investment activities, business arrangements, and profit and loss sharing. It came into force along with the advent of Islam. However, it was formalized only in the 20th century. Countries under Sharia governance follow the principles of Islamic finance. Despite prohibiting some of the common practices in conventional finance, the Islamic finance sector grows at 15%–25% per year.
What are the key principles of Islamic finance?
- Interests are exploitative and thus forbidden
According to Sharia law, interest payments are unjust gains. They favor the lender and exploit the borrower.
- Investments in haram activities are forbidden
Sharia has clearly defined some activities as haram (forbidden). For example, eating pork, consuming alcohol, or gambling. Likewise, investing in these businesses is also haram.
- Speculation and gambling are forbidden
Speculating on events is strictly prohibited in Islam as it may lead to huge losses. It is termed maisir. Adherents of the religion are not allowed to be a part of contracts where the financial transaction is dependent on an uncertain outcome.
- Participation in risky investments are banned
Gharar translates to uncertainty, hazard, chance, or risk. Islam prohibits extremely uncertain contracts. Derivative contracts and short-selling come under this.
Is bitcoin halal? What scholars favoring it say?
Mufti Muhammad Abu-Bakar
Mufti Muhammad Abu-Bakar is a Sharia scholar who has been working at SilkBank Limited. He has an impressive track record of extensively learning and implementing Islamic finance in compliance with Sharia law in real-life situations.
According to him, bitcoin is halal as it is a store of value that people accept. It is available on exchanges, and it acts as a tool of transaction between people and businesses. As long as a currency is legal in a country, Islam accepts it too, according to him.
However, he also warns that being an industry in its infancy, cryptocurrency prices are highly volatile with an element of risk. While crypto is speculative, all currencies have a speculative element, he argues. This does not deem them haram.
Dr Ziyaad Mahomed, Shariah Committee Chairman of HSBC Amanah Malaysia Bhd
The Sharia law doesn’t demand currencies to have an intrinsic value. If that was the case, fiat currencies in paper wouldn’t have replaced dirhams and dinars in gold and silver. The only fact is, there should be a social consensus that the currency is valuable and can be used for transactions.
This argument is along the lines of Mufti Muhammad Abu-Bakar. He warns of the excessive volatility of cryptocurrencies under the present circumstances and considers the fast fluctuation of prices irrational and a cause of concern. Along with that, he is also cautious about bitcoin trading as it is mostly speculative.
Maulana Jamal Ahmed & Mufti Faraz Adam — Scholars at Islamqa.org
According to Maulana Jamal Ahmed, cryptocurrencies are not considered a part of the real economy. This is because they don’t add value to society or promote labor, production of goods, or services like real currencies do. He also says the concentration of wealth in digital assets will turn out to be harmful to society.
On the other hand, Mufti Faraz Adam argues that despite all the concerns, it is still halal. Those are assets and have a value attached to it, fulfilling the definition of ‘Maal’ (something that can be hoarded or secured for use at the time of need) as long as it has legal validity. Although crypto investments are undesirable, it is not haram.
Is bitcoin haram? What scholars opposing it say?
The Grand Mufti of Egypt — Shaykh Shawki Allam
The Mufti believes that bitcoin is far from being a currency due to its complexity, volatility, and risk. Moreover, it has no links to established marketplaces or economies, according to him. In cases of theft, little can be done, which remains a limitation of decentralized currencies. Due to the untraceable nature of cryptocurrencies, it can be used to fund criminal activities too.
The Turkish government’s religious wing
They deemed bitcoin haram because of its uncertainty and anonymity.
Shaykh Haitham al-Haddad
Shaykh Haitham’s argument is that since bitcoin doesn’t have any intrinsic value, it cannot be considered a currency. He also believes that fiat currencies are not real, as the 1971 Bretton Woods agreement led to a delinking from gold. He sums up that bitcoin mining is also haram as it generates money from nothing.
Is bitcoin halal or haram? — the final verdict
Islamic scholars are divided on the credibility of bitcoin and other cryptocurrencies. While most deem it permissible and halal, others argue that it is speculative and uncertain. Despite this, Muslims have been buying and using crypto as a form of currency and investment tool.
Some of the arguments that consider bitcoin haram is that it is risky, uncertain, and untraceable. However, bitcoin transactions are traceable. That is one of the key factors that attract people to cryptocurrencies in general. The transactions are immutable and transparent. However, since the data only reveal the wallet address rather than the identity of the person who makes the transaction, we can say transactions are pseudonymous. While many consider this as a positive, many believe it enables fraudulent activities. There is plenty of room to mitigate the risks and frauds through carefully laid out regulations.
Frequently asked questions
Is bitcoin halal or haram in Islam?
According to most scholars, bitcoin is halal as it has social acceptance. A few argue that it is haram since it is volatile, risky, and doesn’t have any intrinsic value.
Is cryptocurrency allowed in Islam?
There is no clear Islamic law defining the validity of cryptocurrencies.
Is bitcoin halal as an investment?
As long as the investment is used to fund halal activities, bitcoin investment is halal, scholars believe.
Is bitcoin Sharia-compliant?
Yes. Bitcoin is Sharia-compliant, according to many scholars.