DIGITAL ECONOMY & TECHNOLOGY

Research: Is Bitcoin Halal or Haram? Here’s What Islamic Scholars Are Saying

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2 years ago

November 7, 2022

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By Alex Lielacher

Bitcoin and other crypto assets have Islamic scholars racking their brains as they attempt to discern how this new technology fits into Islamic finance, a concept that already dates back 1,400 years. Read on to discover the opinions of various Islamic scholars and an answer to the question: Is Bitcoin halal?

What Makes Something Halal or Haram in Islamic Finance?

Islamic finance encompasses financial activities that comply with Sharia law — guiding principles drawn from the Quran and the sayings of Prophet Muhammad.

Based on these Islamic rules, some financial activities are allowed (halal), while others are prohibited (haram). That means Islamic finance isn’t at all like traditional finance, as some practices are forbidden for religious reasons.

For example, charging excessive interest, riba, on loans is deemed an exploitative activity because it favors the lender and takes advantage of the borrower.

Other haram activities include

Speculative behavior, maisir: This practice is generally regarded as haram. This means that gambling or speculating on gains from uncertain future events is considered a violation of Sharia law. That’s because generating wealth based on chance is considered unproductive. Nonetheless, financial products like options, futures, and other derivatives that require speculation are halal since they are guided by the International Swaps and Derivatives Association (ISDA), an organization that promotes efficient and safe Sharia-compliant derivatives markets.
Prohibited business activities: Businesses that engage in morally prohibited activities like selling pork, alcohol, and tobacco are haram.

On the other hand, halal financial practices entail

Equity finance (Mudarabah), where customers and banks share profits.
Leasing (Ijara).
Profit-and-loss-sharing joint ventures, where two parties provide capital to fund a project and share the profits in agreed proportions.
Islamic contract forwards (Salam and Istisna).

In Islamic finance, money has no intrinsic value — a term that defines some sort of inner or true value of a currency rather than its mere market price.

Muslims aren’t allowed to make money from money through activities like generating interest from lending. In other words, making money for the purpose of making money is haram.

Wealth can only be created via legitimate investments and trade. Hence, money must be used in a productive way. Additional principles of Islamic finance decree that risk must be shared and investments should benefit wider society socially and ethically.

Islamic Scholars’ Interpretation of Bitcoin

The status quo of what is halal and haram, as far as traditional financial practices go, is very clear. However, matters are different when it comes to crypto assets since they are new and complex. Therefore, digital assets have become a bone of contention for Islamic scholars as they attempt to clarify whether they are halal or haram.

Here are various interpretations of Bitcoin (BTC) and cryptocurrencies by Islamic scholars.

Sharia Review Bureau in Bahrain

Scholars from the Sharia Review Bureau in Bahrain said in 2018 that investments in cryptocurrencies such as ether (ETH) and bitcoin are permitted under Sharia law and, therefore, halal.

Mufti Taqi Usmani

Mufti Taqi Usmani has a different perception, arguing that Bitcoin and other cryptocurrencies are haram because they are used in speculative investments and illegal transactions.

Moreover, he says a currency is generally supposed to be a medium of exchange under Sharia law. When it is used to generate profits, it becomes haram. Therefore, in the words of Usmani, Muslims are not allowed to accept crypto as currencies.

The Shariah Committee Chairman of HSBC Amanah Malaysia Bhd, Dr. Ziyaad Mahomed

According to Dr. Ziyaad Mahomed, the Sharia law doesn’t require currencies to have intrinsic value. Instead, society should agree that a currency is valuable and acceptable in day-to-day transactions.

Judging by this view, this could mean the Islam community could consider bitcoin halal if there was a social consensus to use it as a currency.

Mufti Muhammad Abu-Bakar

Sharia advisor Mufti Muhammad Abu-Bakar’s crypto interpretation may have triggered a significant increase in BTC and ETH investment within the Muslim community in 2018.

He argued that all currencies have a speculative element, which means bitcoin’s speculative nature doesn’t necessarily make it haram, as every other currency can also be considered to be speculative in nature. Therefore, in his opinion, bitcoin is halal.

Shaykh Shawki Allam

The Egyptian Grand Mufti Shaykh Shawki Allam believes digital assets are haram since they have not earned enough credibility as currencies. His reasoning is similar to other Middle East Sharia scholars, who view crypto as high-risk assets.

“In my opinion, the trading of cryptocurrency is haram. This is because it is not approved by legitimate bodies as an acceptable medium of exchange. Such currencies are used in contraband trading and money laundering,” he said.

Asrorun Niam Sholeh

Asrorun Niam Sholeh is the head of religious decrees for Indonesia’s council of Islamic scholars. In his opinion, crypto trading is illegal because digital assets “have elements of uncertainty, wagering, and harm.”

Anas Amatayakul

Anas Amatayakul, a scholar that has led the committee directing the Islamic Bank of Thailand in Sharia, has an interesting take.

His fatwa (legal ruling) on crypto is that people should avoid it, but only for now. Amatayakul says he’s pro-technological change but admits the crypto space is so fast-moving that Muslims should avoid it for now to protect their wealth.

Fiqh Council of North America

The unanimous fatwa from North America’s Fiqh Council is that Bitcoin is halal under Sharia law.

The Sharia Advisory Council Branch of the Security Commission in Malaysia

This council’s view is similar to the position the Fiqh Council of North America has taken. The members of this council reckon that crypto trading and investment are permitted under Sharia law.

London-Based Shacklewell Lane Mosque

The Shacklewell Lane Mosque was one of the first mosques in the UK to accept crypto donations in 2018, indicating that its leaders regard crypto assets as halal.

Turkey’s Directorate of Religious Affairs

The directorate of religious affairs in Turkey considers cryptocurrencies haram because they are speculative assets, they aren’t overseen by any central authority, they are used in illegal activities, and their trading is “inappropriate.”

So, is Bitcoin Halal or Haram?

It is clear that Sharia scholars are divided when it comes to Bitcoin’s halal or haram status.

Those that say Bitcoin and other cryptocurrencies are haram mainly cite speculation, the illegal activities sometimes associated with the Bitcoin markets, and the lack of a central authority as the factors backing their positions.

On the other hand, scholars that consider Bitcoin halal look at the following aspects:

Decentralization: BTC is decentralized, hence preventing exploitation by central authorities.
Transparency: Bitcoin transactions are visible for anyone’s viewing.
Islamic contract rules: Based on these rules, there must be mal to regard bitcoin as halal. Mal alludes to effective storage and possession. Bitcoin fits these criteria because people can possess and store it, and it has commercial value (mutaqawwam).
Anti-interest: The concept of Bitcoin emanates from a need to empower society rather than profiting its founder(s).

That means Bitcoin can either be halal or haram depending on the factors one evaluates or where one lives.

For example, Egypt and Turkey seem to be taking the haram stance, while Malaysia and Bahrain regard Bitcoin as halal based on their scholarly interpretations above.

Furthermore, the UAE and Saudi Arabia, which are majority Muslim countries, are planning to create their own digital currencies in the form of central bank digital currencies (CBDCs). This shows a positive view in these jurisdictions toward digital assets in general.

That said, the Islam community may have to come to some sort of agreement in the future since the crypto sector is increasingly becoming hard to ignore as mainstream companies like Google, Visa, and Apple get in on the action. There is also a possibility that the current global financial sector may evolve toward the integration of decentralized finance (DeFi). In that case, Islamic finance surely does not want to be left behind.

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DIGITAL ECONOMY & TECHNOLOGY

The Digital Currency that could Upend how the Gulf Trades

Published

7 months ago

September 29, 2024

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By Shruthi Nair

Project mBridge – a China-led central bank digital currency initiative, which the UAE and Saudi Arabia are part of – could have “broad strategic implications” for regional trade, according to market analysts.

A CBDC is a digital form of a country’s fiat currency, which is backed by a government. It eliminates the need for intermediaries like banks, or even other currencies such as the US dollar, to facilitate real-time, peer-to-peer, cross-border payments.

“When we look at international trade, not much has changed over the decades. It is a primitive method in the digital age,” Arun Leslie John, chief market analyst at Century Financial, said.

China’s global digital yuan transactions amounted to 7 trillion yuan ($986 billion) in the first six months of this year. The UAE’s inaugural cross-border payment utilising the digital dirham amounted to AED50 million ($13.6 million).

Considering the UAE and China are major trading partners with the total volume of bilateral trade between the two countries reaching $95 billion last year, project mBridge would significantly reduce and replace the use of dollars in this case. However, analysts believe that it might be too early to conclude whether CBDCs could result in global de-dollarisation.

“Dollar is the choice of transaction for global trade. The US has the deepest capital, debt and equity market. Many countries around the world would want to diversify away from the dollar but they aren’t able to do so,” John said.

While Europe does not have deep debt markets, the Chinese government has capital controls over the yuan. So the only remaining choice is the dollar.

Countries such as Russia and Iran that are facing sanctions stand to be beneficiaries of CBDCs and initiatives like mBridge too. While the Russian central bank announced plans to launch its CBDC next year, the central bank of Iran said that its digital rial will be used for retail transactions, including purchasing goods and services.

“In the current international payment structure, countries can arbitrarily kick out one country from the system. This reduces strategic autonomy and political power of other countries involved,” John said.

To find out how CBDC’s work and its retail use cases, click to watch the video above

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DIGITAL ECONOMY & TECHNOLOGY

How Blockchain can Enhance Islamic Finance by Overcoming Barriers

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7 months ago

September 16, 2024

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By Aamer Yaqub

Blockchain technology is making waves in the financial sector with its promise of transparency and immutability. These features align closely with the principles of Shariah law, which governs Islamic finance, creating significant opportunities for blockchain to overcome barriers and unlock growth. The Islamic finance sector is projected to reach approximately $6.7 trillion in assets by 2027, as noted in LSEG’s Islamic Finance Development Report. In this evolving landscape, blockchain technology is emerging as a crucial tool for addressing the unique challenges faced by Islamic finance.

Islamic finance operates under Shariah law, which prohibits practices such as interest (Riba), excessive uncertainty (Gharar), and speculative transactions (Maysir). Blockchain technology’s core attributes—transparency and decentralization—are well-suited to address these constraints. Blockchain can effectively enhance compliance with Shariah principles by providing a tamper-proof ledger and facilitating decentralized transactions. Its ability to create a permanent, verifiable record of transactions aligns well with the Islamic finance requirement for clarity and accountability.

According to Moody’s, innovations like smart contracts are poised to improve Islamic finance transactions significantly. Smart contracts are self-executing contracts with terms written directly into code. They automatically enforce Shariah-compliant rules, reducing human error and enhancing transparency. These advancements support real-time settlements, which align with Islamic finance principles of fairness and clarity. By using blockchain to overcome barriers related to transparency and automation, financial processes can become more efficient and compliant with Shariah.

Enhancing Transparency and Efficiency

One of the most significant ways blockchain can overcome barriers in Islamic finance is through its ability to enhance transparency. The immutable nature of blockchain ensures that every transaction is recorded in a tamper-proof ledger, providing a clear and verifiable record of all financial activities. This transparency is crucial for maintaining compliance with Shariah principles, which demand a high level of clarity and accountability in financial transactions.

Blockchain technology facilitates smart contracts that automate the execution of Shariah-compliant financial agreements. This not only streamlines processes but also reduces the need for intermediaries, lowering transaction costs and increasing the speed and accuracy of financial transactions. By addressing long-standing challenges in Islamic finance, blockchain technology is helping to create a more efficient and reliable financial system.

Modernizing Charitable Giving

Blockchain technology also holds promise for modernizing Zakat, the obligatory charitable giving in Islam. Traditionally, the collection and distribution of Zakat have faced challenges related to efficiency and transparency. Blockchain can address these issues by providing a more transparent and efficient platform for managing charitable contributions.

With blockchain, Zakat collection and distribution can be streamlined, ensuring accurate tracking of funds and effective distribution to eligible recipients. This technology allows donors to see exactly how their contributions are used, enhancing trust and accountability. Additionally, blockchain can facilitate the creation of smart contracts to automate the distribution of Zakat, ensuring compliance with Shariah guidelines and reaching those in need more efficiently.

Addressing Challenges and Compatibility Issues

Despite its potential, the integration of blockchain into Islamic finance comes with its own set of challenges. The compatibility of digital assets, including cryptocurrencies and tokenized assets, with Shariah principles, is a topic of ongoing debate. Concerns about speculation and anonymity associated with these assets pose significant challenges, as they contrast with the Islamic finance emphasis on transparency, accountability, and ethical conduct.

Digital assets, particularly unbacked cryptocurrencies, have sparked discussions about their suitability for Islamic finance. The potential for speculation and the lack of intrinsic value associated with some digital assets diverge from Islamic finance principles that prioritize stability and ethical behavior. As a result, Shariah scholars and financial institutions are actively evaluating the compatibility of these assets with Islamic financial principles.

A promising alternative is Central Bank Digital Currencies (CBDCs), which align with Shariah principles by emphasizing transparency, fairness, and social welfare. CBDCs offer a way to digitize national currencies, providing a more efficient and accessible payment system while maintaining compliance with Islamic financial principles. This approach could address some of the concerns associated with speculative digital assets and provide a stable alternative for Islamic finance.

Islamic Finance Innovation in the UAE

The UAE serves as a notable example of how blockchain can be integrated into Islamic finance effectively. With a well-regulated Islamic finance sector, the UAE is at the forefront of digital assets innovation. The country’s regulatory framework for digital assets is overseen by key federal bodies, including the Securities and Commodities Authority (SCA) and the UAE Central Bank. While the SCA focuses on securities-related matters, the Central Bank regulates digital currencies and stored value.

The UAE also has three additional jurisdictions for digital assets regulation: the Dubai International Financial Center (DIFC), regulated by the Dubai Financial Services Authority (DFSA); the Abu Dhabi Global Market (ADGM), regulated by the Financial Services Regulatory Authority (FSRA); and the Virtual Assets Regulatory Authority (VARA). Each jurisdiction approaches digital assets regulation with a unique focus, contributing to the dynamic regulatory landscape in the UAE.

The UAE’s proactive stance on digital assets regulation and innovation underscores its commitment to leveraging blockchain technology to enhance its Islamic finance sector. The country’s regulatory framework continues to evolve, aligning with international trends and addressing emerging challenges.

Strategic Integration and Collaboration

For Islamic finance institutions to fully capitalize on blockchain technology, comprehensive adoption strategies are essential. These strategies should include technology integration, Shariah compliance, regulatory adherence, risk management, and customer education. Collaboration with Shariah scholars and experts will be vital to ensure that blockchain initiatives and digital asset offerings align with Islamic ethical and legal principles.

Many Islamic banks and financial institutions are exploring blockchain technology to streamline their operations. However, they face challenges related to regulatory compliance and interoperability with existing legacy systems. To overcome these obstacles, institutions are seeking solutions to integrate blockchain effectively while ensuring alignment with regulatory requirements and Shariah principles.

In conclusion, blockchain technology holds significant promise for overcoming barriers and unlocking growth in Islamic finance. By enhancing transparency, efficiency, and compliance with Shariah principles, blockchain can address the unique challenges of Islamic finance. As the technology continues to evolve, its integration into Islamic financial practices will likely become increasingly sophisticated, driving further innovation and growth in the sector. The potential of blockchain to transform Islamic finance underscores the need for ongoing collaboration, research, and strategic planning to fully realize its benefits.

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