Cryptocurrency has ascended to a power player’s position in the world’s financial system. It has more recently, and perhaps more importantly, captured the imaginations of investors, technologists, and regulators. Yet within the Muslim world, the acceptance of digital currencies such as Bitcoin is not that simple. It requires walking a difficult line between competing religious teachings, moral imperatives, and academic beliefs. Whether or not cryptocurrency is allowed, or halal, under Islamic law has been an open question and is still up for debate. The hit or miss answer largely depends on how each cryptocurrency is following the tenets of Islamic finance. These principles prohibit interest (riba), excessive uncertainty (gharar), and gambling (maisir). Here’s a look at some of the most notable elements of this ongoing debate. …so that you might gain a greater familiarity with arguments for and against cryptocurrency’s adoption in the Muslim world.
Cryptocurrency and Islamic Finance Principles
Whether cryptocurrency is compatible with Islamic finance depends on its adherence to Islamic principles. Along with prohibiting exploitation and inequality, Islamic finance promotes fairness and transparency with a general aversion to interest-based transactions. Cryptocurrency exists on networks independent of national centralized currencies or banks, introducing a range of new complexities. This distinct characteristic poses both opportunities and challenges through the Islam lens.
Perhaps the biggest issue is that cryptocurrencies are highly speculative investments. Islamic finance forbids gharar, or extreme ambiguity, in financial dealings. The high volatility and unpredictable price swings of many cryptocurrencies would seem to contradict this principle. Cryptocurrency investments have been compared to gambling due to their speculative nature, and gambling is prohibited in Islam.
Other experts have a less strict definition. With regard to the use of cryptocurrency as a medium of exchange, they argue that it can be permissible under certain conditions. According to the late Sheikh Abdul Aziz Ibn Baz, one of the most revered Islamic scholars, conducting transactions with currency is permissible. Most importantly, he noted that these transactions must not fall into interest or other impermissible activities. This view underscores the need to focus on use, not just creation or ownership of a new digital asset.
Classifying Cryptocurrency as Māl
One important element in determining whether cryptocurrency is permissible or not depends on how it’s classified. It had to be declared ‘māl’ under Islamic jurisprudence. Māl māl, or wealth, refers to anything of value that one can possess or obtain. An asset is classified as māl when it has significant tangible or intrinsic value. It needs to be able to provide benefits.
Bitcoin, owing to its decentralized and cryptographic properties, seems to fulfill most of such māl criteria. It’s universal, redeemable for any pattern of goods or services, and capable of value storage. Bitcoin’s value derives from its limited supply and cryptographic integrity. Unlike fiat currencies that are backed by governments, it succeeds based on the trust placed in it and the network of users that utilize it.
Furthermore, the acknowledgment of cryptocurrency as māl is especially important because it allows for the incorporation of cryptocurrency into Islamic finance. As soon as a cryptocurrency is accepted as a legitimate currency held as wealth, it can start playing an integral role in major financial transactions. These transactions need to be compliant with other Islamic principles. This involves preventing conflicts of interest, being transparent, and fostering fairness in all transactions.
Diverse Scholarly Opinions
Even though it has the potential to be classified as a māl, scholarly perspectives regarding its permissibility are still split. Others criticize cryptocurrency as inherently speculative and non-Sharia-compliant given the volatility in prices and lack of central oversight. They argue that crypto investments are too risky. This further complicates the ability to align such investments with the Islamic principles of risk-sharing and wealth protection.
Other scholars, including Liang, take a more nuanced approach, distinguishing between speculative and non-speculative uses of cryptocurrencies. They may find certain cryptocurrencies acceptable if they are used for legitimate purposes, such as facilitating trade or providing access to financial services for underserved populations. Like these scholars, they provide a strong reminder of the importance of due diligence. They call for a nuanced approach on each cryptocurrency to see if it meets Sharia compliance standards.
The plurality of scholarly arguments illustrates the nuance of this controversial topic and highlights the necessity for further conversation and study. We all know how rapidly the cryptocurrency landscape changes. Islamic scholars need to evaluate and provide insight on the permissibility of these new digital assets. This means thinking about the benefits and harms that may come with using cryptocurrency, and the ethics of using them.
Trading Cryptocurrency Within Islamic Guidelines
In terms of trading crypto, a number of things need to be taken into account for it to be compatible with Islamic law. Additionally, spot trading lets you purchase or trade cryptocurrency with near-immediate settlement. So long as it’s not about interest or speculative pieces, he noted, it tends to be permissible. Traders need to be on their toes—not all harvesting practices are acceptable, and some may even be exploitative.
Futures and margin trading, by contrast are much worse. All of these types of trading typically use leverage to amplify profits and losses. Islamic finance has a broader aversion to leverage in principle. It’s a good thing too because it increases the chances of dangerous debt levels and speculation. Above all, margin trading can lead to owing interest on borrowed capital, an exchange of funds that is thaaf prohibited.
If you want to trade cryptocurrency the halal way, stick to spot trading. Don’t use your funds in a leveraged or interest-bearing account. The bottom line is to do your research and due diligence and be aware of the risks associated. Choose a cryptocurrency that is not associated with scams, human trafficking, or money laundering.
Bitcoin Mining and Staking
Over a decade later, Islamic scholars are still worried about Bitcoin mining. This ongoing process has miners and validators continuing to verify and add new transactions to the blockchain. Mining uses a huge share of energy. This would be an environmental disaster and raises fatal questions about its long-term sustainability and environmental impact. As others point out, mining inflicts catastrophic environmental destruction. They argue that this harm conflicts with Islamic teachings on stewardship —or Khalifa —and the responsible use of resources.
Other scholars point out that efforts are being made to make mining more sustainable, such as using renewable energy sources. They argue that mining is allowed under Islamic law. That is only the case if it’s done responsibly with our land. This point of view further emphasizes the urgent need for innovation and technological advancements in combating the ethical pitfalls of cryptocurrency.
Staking, the practice of holding cryptocurrency to support the network and receive earned rewards, is another topic of scholarly dispute. A few academic opinions have classified staking as earning interest, which is haram. Arguably, staking is permissible under current law. As they contend, it’s about rewarding active participation in the network and its role in improving overall security and stability. The permissibility of staking therefore depends on how its mechanism works. It really depends on whether the process attracts the right mix of interest vs. speculation.
Islamic Coin and Ethical Cryptocurrency Projects
A number of these initiatives have appeared lately to address the unique challenges of marrying cryptocurrency with Islamic finance. Their goal is to develop Sharia-compliant digital assets. One of the most prominent examples is Islamic Coin, a new cryptocurrency specifically created to follow Islamic rules and values. The project’s goal is to bring the 1.8 billion Muslims into the digital finance world while maintaining their religious faith.
Islamic Coin runs on a proof-of-stake blockchain and contributes 10% of its transaction fees to an Islamic charitable fund. This feature pays homage to the Islamic principle of zakat. It requires Muslims to give 2.5% of their wealth to charity each year. Islamic Coin embeds zakat within its design. This approach is intended to increase awareness of social responsibility and improve quality of life for the community.
Islamic Coin exemplifies the promise for innovation that exists within the cryptocurrency space. It underscores the commitment to creating digital products that are as innovative and ethically responsible as they are effective. The market for Sharia-compliant financial products continues to grow. Get ready to see a host of new initiatives that will try to bridge the gap between cryptocurrency and Islamic finance.
Ethical Considerations in Cryptocurrency Trading
Aside from the technicalities of cryptocurrency from an Islamic financial law perspective, the ethical aspects are key in dictating whether it is permissible or not. The motive behind trading cryptocurrencies may carry as much weight as the details of the actual trade. When a person considers trading cryptocurrency primarily to take advantage of other traders, that’s going over an ethical cliff. This type of behavior would probably be thought of as haram, or sinful.
Islamic ethics prescribe being fair, honest and transparent in all transactions. Market integrity Responsible traders are not market manipulators Traders should not engage in activities that are harmful to others, such as manipulating the market or deceiving/defrauding others. Know that cryptocurrency has been used for illicit purposes, including money laundering and funding terrorism. Why you should use best practices Take every precautionary measure to make sure none of your work gets involved in these illegal, underhanded actions.
To trade cryptocurrency ethically, everyone—including traders and platforms—need to consult with well-informed academics and advisors. Keep track of what’s happening in crypto today. Understand the risks and ethical concerns inherent in these digital assets. Speculators can get into cryptocurrency in a legal and prudent manner. They can do so provided they adhere to Islamic ethical principles.
Evaluating Trading Platforms Like Binance
The decision of which trading platform to use is a major consideration for Muslims looking to dip their toes into crypto. Platforms such as Binance, Coinbase and Kraken provide a comprehensive suite of capabilities, including spot trading, futures trading and staking. There is a caveat – not all of these services are Sharia-compliant.
It is important for Muslim traders to deeply evaluate trading platforms. They must ensure that these platforms are used in accordance with the ethical framework defined by Islamic law. This means steering clear of platforms that provide interest-bearing accounts or allow for margin trading. Seek out platforms that uphold values of transparency and security. Second, make sure they have a clear and proven record as a compliance-first regulatory body.
Platforms have started to roll out Sharia-compliant services, like Islamic accounts that don’t accrue or charge interest. With crypto-compatible features built in, these accounts can be a desirable option for Muslim traders who want to invest in cryptocurrency while maintaining their faith-based values. Before opening an account with any trading platform, do your research. Look to trusted, unbiased experts scholars to ensure you’re making the right decisions.
