Cryptocurrency and its Permissibility in Islam
By Ammar Awais – Freelance writer and researcher
Cryptocurrency is virtual money that is constantly gaining popularity as a medium of exchange and a form of investment. Based on the blockchain technology, cryptocurrencies exist in the form of virtual tokens. Just as the plastic tokens bought at entertainment parks can be used to purchase rides, these virtual tokens are used to purchase goods and services from a rapidly growing number of businesses. Cryptocurrencies can also be exchanged for paper money at online crypto exchanges, similar to how stocks and commodities are traded.
Cryptocurrencies are deemed future-oriented, have a low transaction cost, and afford a high degree of anonymity. Unlike paper currency, cryptocurrencies are not issued by any central monetary authority. New cryptocurrency units are generated through a process called mining. There are thousands of crypto currencies, such as Ethereum and Dogecoin, in operation globally although Bitcoin is the oldest and the most popular one. Bitcoin, launched in 2009, accounts for nearly 45 percent of the total cryptocurrency market capitalization, which currently stands at $1.7 trillion.
With the rising popularity of digital currencies, a question arises regarding their permissibility as per Shariah. There is a difference of opinion among scholars; those who out rightly reject crypto currencies as haram point to the huge price volatilities in their values that are not desirable in a currency. For example, Bitcoin lost $70 billion in market value in a single day during May 2021, clearly making it unreliable as a medium of exchange.
Although transactions using crypto currency are deemed highly secure, the threat of crypto wallets and exchanges being hacked is quite real. For instance, the Bithumb exchange of South Korea was viciously attacked in 2019, resulting in digital tokens worth over $30 million being stolen. In another startling incident, $145 million in digital currencies was lost when the CEO of Canada’s largest crypto exchange, Quadriga CX, suddenly died, being the only person who had access to crucial wallet passwords.
In addition to high uncertainty and risk, cryptocurrencies have no real value of their own, and there is no central authority to back them up. Also, the motive for their trading is most likely pure monetary speculation which is disapproved by Islam. These factors, according to some, make cryptocurrencies impermissible to be used as money. Moreover, in countries like Pakistan where the government has presently outlawed cryptocurrencies, there are no Shariah grounds for their permissibility.
On the other hand, certain scholars have permitted trading in some of the cryptocurrencies on the basis that these do possess the fundamental characteristics required for their legitimacy. They believe that due to the high value people attach to cryptocurrencies, and the fact that these can be possessed, stored, and transferred, they qualify as Maal – a genuine commodity capable of being traded. The benefits of cryptocurrencies, such as greater efficiency and ease of transacting, may outnumber the risks associated with them.
There is also the argument that a currency does not necessarily require intrinsic value of its own – it only needs widespread acceptance for it to be legitimate as per Shariah. This is similar to how the currency notes in circulation today have no material value of their own, yet, they are unanimously accepted as a medium of exchange. An alternative approach in this regard has been to issue asset-backed cryptocurrencies. These include OneGram in UAE and HelloGold in Malaysia, both of which are backed by gold.
The adoption of cryptocurrencies is still in the evolutionary stage, and there is great uncertainty regarding how it may eventually shape the global financial landscape. El Salvador, a Central American nation, recently became the world’s first country to officially recognize Bitcoin as a legal currency. While there is much optimism among certain powerful governments and corporate giants, the Bank of England Governor recently warned investors to buy cryptocurrencies “only if you’re prepared to lose all your money”.
The lack of clarity surrounding the future of cryptocurrency makes a definite Shariah ruling on its permissibility rather difficult. An emerging view among scholars is that certain cryptocurrencies may be considered halal as a form of investment but not as a currency. There is also a need to analyze each cryptocurrency based on its specific features – something Shariah research institutions are increasingly engaging in – instead of having a blanket ruling for all.