Cryptocurrency is the latest development in International Finance. In most of my interactions in public forum, a likely question is: are cryptocurrencies Shariah compliant? This is very contemporary matter and hence deserve careful study. We must also note that there are several kinds of cryptocurrencies in the market today. According to Sharlife website (https://sharlife.my/crypto-shariah), there more than 50 cryptocurrencies that they consider to be Shariah compliant.
However, according to Naz and Nazir (2024) in their paper titled, “Examining the Adoptability of Cryptocurrency in the Islamic Financial System: Perspectives of Shariah Scholars”, they have well demonstrated that there is different opinion on the subject on different key parameters such as:
1. Is Decentralization or Centralization necessary for a currency in Sharīʿah?
The concept of a decentralized currency like cryptocurrency poses a significant challenge within the Sharīʿah context as it departs from normal centralized monetary system. On decentralization, there are two Shariah scholar’s opinion on the matter:
• First opinion, central authority is an integral condition for a valid currency under Sharīʿah.
• Second opinion, the central authority's is not mandatory as long as the currency is functioning as a store of value and a medium of exchange, earning public trust, and avoiding manipulation or unjust practices.
Our Opinion: Considering the principle of maslaha (public interest), cryptocurrency presents notable risks to the security of individuals' wealth due to security risks and market risks. Thus, without the backing of central authority cryptocurrency pose significant challenges to its adoption in a Sharīʿah-compliant financial system.
2. A thing with limited acceptability can be a valid money or not?
The principle of general acceptability is foundational to the issuance and function of currency. Cryptocurrency has limited acceptability in some markets and fully accepted in other markets. On this question, there are two shariah Scholar’s opinion on the matter:
• First opinion, a currency with limited acceptability could still be considered valid money within the framework of Sharīʿah. Although not universally accepted, they are increasingly recognized as a legitimate medium of exchange by a growing number of merchants globally.
• Second opinion, limited acceptance undermines the general usability of a currency, which is a critical characteristic for it to function effectively as money under the Islamic financial system.
Our Opinion: Considering the principle of maslaha (public interest), broad acceptance is critical in particular market or context for currency to be accepted under the Islamic financial system.
3. A money or currency must be good “store of value” or not?
Money should possess the feature of being a good store of value. Fiat money is well norm to possess this feature to a certain extent depending on the inflation rate of the country. Cryptocurrency value has been volatile based on the forces of supply and demand, which brings up this question. There are two Shariah scholar’s opinion on the matter:
• First opinion, if a currency rapidly loses its value or is not a good store of value, enforcing its usage would amount to oppression (ẓulm).
• Second opinion, the capacity of a currency to act as a medium of exchange, by its nature, implies its ability to store value.
Our Opinion: Sharīʿah aims to protect the interests of the common man and thus, a currency that does not store value adequately contradicts the objective of Sharīʿah, and its use would not be allowed.
4. Currency as an Investment tool
Currency of one country or form is sometimes used as a form of investment. Cryptocurrencies have increasingly been used as an alternative investment option besides being means of payment. Is it permissible? There are two Shariah scholar’s opinion on the matter:
• First opinion, currency could be used as an investment tool if principles of bai al-sarf are strictly observed such as the immediate possession of currency after exchange etc
• Second opinion, using a currency as an investment is against the very purpose of money and thus, prohibited in Islam. Primary functions of money is to act as medium of exchange, measure of value and store of value and not a commodity.
Our Opinion: Though money should be treated as money, however, using it as investment tool by following the rules of Sarf is not problematic while managing the risks.
5. Element of Maysir (Gambling) in Cryptocurrency
Maysir and Qimar are prohibited in Islam. Does cryptocurrency entail elements of Maysir? There are two Shariah scholar’s opinion on the matter:
• First opinion, Maysir is a function of the user's actions and not an inherent characteristic of the currency itself. Improper use leading to speculative practices is what introduces an element of Maysir, not the currency itself.
• Second opinion, the volatile nature of cryptocurrency value could introduce an element of Maysir. Unpredictable and highly fluctuating value of cryptocurrencies often leads users to treat it more as a speculative investment than a means of payment. These scholars view is that if a currency is not a legal tender, gains obtained from its use could be indirectly considered maysir or a game of chance, devoid of any legal support.
Our Opinion: it can be inferred that the incorporation of Maysir into the use of cryptocurrency is dependent on its volatility and legal status. If the value of cryptocurrency could be controlled and it obtained legal recognition, it might be considered Sharīʿah-compliant, provided it is not used as a speculative investment medium.
6. Cryptocurrency and Maqasid al Sharīʿah
The objectives of Islamic law, or Maqasid al-Sharīʿah, stipulate the security and protection of an individual's wealth. Is cryptocurrency challenges these objectives, primarily due to its extreme volatility and the absence of governmental oversight? There are two Shariah scholar’s opinion on the matter:
• First opinion, Sharīʿah law only supports currencies exhibiting minimal volatility. They contend that any deviation from this principle contravenes Sharīʿah law.
• Second opinion, a currency's permissibility is not invalidated if its value diminishes. This perspective is founded on the premise that conventional forms of currency are also subject to fluctuations in value.
Our opinion: Maintaining the protection and stability of one's wealth, as enshrined within the objectives of maqasid al Sharīʿah, should remain a central consideration in any discussions regarding the permissibility of cryptocurrency within the Islamic financial system.
7. Vulnerability to Hacking Attacks and Validity of Money
Cryptocurrency is vulnerable to hacking attacks. This vulnerability brings into question the validity of such a currency. There are two Shariah scholar’s opinion on the matter:
• First opinion, currency susceptible to hacking activities could still be considered a valid form of currency within Sharīʿah law. They argued that susceptibility to theft or unauthorized access does not necessarily render a form of currency impermissible in Sharīʿah.
• Second opinion, a currency highly vulnerable to hacking not only jeopardizes security but also disrupts the harmony of the financial system, thus violating maqasid al-Sharīʿah, which include the preservation of wealth and maintenance of social order. Such currencies are not valid.
Our Opinion: The common-sense understanding is that an insecure payment system ought to be avoided by contracting parties due to the potential risk and uncertainty it introduces. This prudence is not explicitly a part of Sharīʿah law, but rather a matter of logical reasoning and self-interest.
8. Identity of Currency’s Creator in Sharīʿah
Does the issuer of cryptocurrency have to be known to be Shariah compliant? There are two Shariah scholar’s opinion on the matter:
• First opinion, the identity of the creator of a currency was not a crucial requirement from a Sharīʿah perspective. The Sharīʿah law does not stipulate specific mandates for currency issuance.
• Second opinion, the identity of the currency's creator to be a significant factor from a Sharīʿah perspective. They underscored the importance of safeguarding the public interest. Knowledge of the creator's identity can foster trust, accountability, and transparency in the monetary system.
Our Opinion: Knowing who is behind a currency can help guard against fraudulent activities and financial misconduct, thus protecting the integrity of the Islamic financial system.
9. Currency “Promoting Illegal Activities” in the Light of Sharīʿah
Majority of Shariah scholars are of the view that the potential use of a currency for illicit activities does not inherently disqualify cryptocurrency from being Sharīʿah-compliant. The underlying principle is that the nature of the currency itself, and the actions it is used for, are considered separately in terms of their adherence to Sharīʿah law.
Our Opinion: This understanding is rooted in the broader Islamic principle that a tool or medium is not inherently haram (impermissible) based on its potential misuse. Rather, it is the act of misuse itself that is seen as impermissible. In this case, it is not the cryptocurrency that is problematic but the illegal activities that it may potentially facilitate. It is necessary to have robust regulatory frameworks and monitoring systems to prevent and combat the misuse of such innovative financial tools.
10. Totally Computerized and Vulnerable Currency under Sharīʿah.
Cryptocurrencies are in digital form that rely on different computerized technologies such as blockchain, cryptography techniques, peer to peer networking among others.
There are two Shariah scholar’s opinion on the matter:
• A completely computerized currency could be allowed under Sharīʿah, provided it is protected by the law by the central authority. Thus, Central bank digital currencies (CBDCs) will be credible and legitimate under Shariah.
• A completely computerized currency could violate the Sharīʿah principle of preservation of wealth. The inherent vulnerability of cryptocurrencies, such as their susceptibility to hacking and market volatility, pose a significant risk to the holders' wealth, thereby challenging their acceptability under Sharīʿah.
Given the highlights of Shariah scholars positions, with due respect to those who maintains contrary opinion, I am leaning toward the view of the Grand Mufti of Egypt Shaykh Shawky Allam who has declared that bitcoin and cryptocurrency is impermissible (Haram) however with an exception to countries that have allowed usage of cryptocurrencies as legal tender or otherwise under their specific regulations.
Furthermore, it is important to remind those who consider it permissible while living in countries that prohibits it of a shariah maxim that says: ruling of a ruler settle the matter that is disputed upon among Shariah scholars such as this issue. In Kenya, Central Bank of Kenya in 2015 issued a press release calling upon the public to desist from transacting in Bitcoin and similar products. In Tanzania, the Bank of Tanzania in 2019 also issued a public notice stating that “members of the public to beware of involvement in the virtual currencies, as they are not legally authorized in Tanzania.” Thus, as Muslims living in these countries, we are bound to observe these directives.