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2021 has been an unprecedented year (so far) in the cryptocurrency world when Bitcoin went up to an all-time high and broke the USD 60,000 mark in April.
And with a flurry of negative news surrounding crypto with the Chinese government banning crypto businesses and Elon Musk announcing Bitcoin is not environmentally unsustainable to name a few, Bitcoin price went down to its lowest year-to-date in May 2021 to almost USD 30,000.
Since then, many new investors and traders alike have exchanged hands, either jumping into the bandwagon in this ‘opportunistic bargain price’ or cutting their losses.
However, the elusive question remains – Are cryptocurrencies halal?
With the Muslim population now stands around 1.9 billion worldwide which consists about 25% of the world’s population, a unified stance on its permissibility may cause a strong shift in its adoption.
Today, we will take a closer look at the opinions of some of our Islamic scholars.
We will run through the top 3 popular reasons on both camps for you to weigh out the options, together with our local religious standing and sentiments at the end of the article.
Arguments on why Crypto may not be Halal
Reason #1 It has a high degree of risk and fraudulence
As it is not under the surveillance of any centralised or governing body, it risks exposing itself to manipulation and cheating.
There are many stories around how criminal activities and illicit funding are being funded with cryptocurrencies and having to afford to remain anonymous at the same time.
Some notable scholars that made this stand include Egypt’s Grand Mufti, Sheikh Shawki Allam,
Aside from that, as a cryptocurrency holder, you have to make sure you encrypt your deposits securely enough as you risk losing everything to hackers if you’re not careful.
It was reported that more than $11 billion were lost due to cryptocurrency hacking since 2011.
This is different from fiat currencies which are managed by the financial intermediaries (such as banks) and the sovereign monetary regulation (in Singapore, that will be MAS) and they have the moral responsibility to take care of it on your behalf.
Reason #2Some cryptocurrencies may contain elements of riba’ in the use of staking, margins and lending
There are some cryptocurrencies that are also used in the likes of Proof of Stake (PoS) or also known as Crypto Staking.
What is Proof of Stake?
Crypto Staking involves locking up your cryptocurrency for a period of time in return for a reward that is typically paid to you in the cryptocurrency itself.
To put simply, this sounds similar to conventional lending.
Hence from a conservative standpoint, you may consider it as “riba” where you loan out your capital in return of earning interests.
However, there are also reasons to believe that not all Crypto Staking is considered as such, but I’ll leave that argument for another article. Practical Islamic Finance did a good attempt to explain this.
Aside to PoS, cryptocurrencies are also being used in margin trading which involves leveraging and having access to larger sums of capital which is clearly haram too.
High uncertainty, volatility and speculative (Maysair)
Cryptocurrencies prices are deemed as highly volatile and not stable, and that brings another risk to the wider community.
In order for it to perform effectively as a currency, it has to have a certain level of stability.
This normally can be controlled through a government or a central issuer like MAS.
In the case of cryptocurrencies, they are created independently and they can function normally without any financial intermediaries (such as banks).
Additionally, its prices can swing high and low on a daily basis which is not an ideal mode of payment.
Imagine you are at the mercy of the currency exchange every second and waiting for the right moment for both parties to agree to a particular price to make a transaction.
Furthermore, we should not look at investing in cryptocurrencies like how we would invest in a company’s stocks or shares.
Think about it.
Unlike stock analysis where you can make a better forecast on how a company may perform in the coming financial year basing and extrapolating from existing earnings in past quarters, it is less obvious to do so for cryptocurrencies.
Hence, there are speculative behaviours of gambling (i.e. maysir) in which your gains may not be based on a concerted effort of analysis, and are merely on chances.
Some good examples will be the Reddit mania on how they can gather massive public support and create a FOMO (fear of missing out) for punters to make quick gains from meme cryptocurrencies, when fundamentally, it has zero to no value.
This is where our Muslim scholars have the most concern on and Muslims are advised to stay away from such speculative practices.
Arguments on why Crypto can be considered Halal
Before I move on to the next part, we need to understand that cryptocurrencies are not created equal.
While it is almost always better to be on the cautious side if you are not knowledgeable on the topic, painting cryptocurrencies with a broad stroke as non-Halal (or non-Shariah compliant) does not justify the technology being built upon behind-the-scenes.
As technology is getting more advanced and growing at an exponential pace than ever before, it is more crucial than ever for us to keep tabs and be at the forefront of it so as not to miss the next big opportunity.
And one of the biggest wealth creators is by being an early adopter or a strong believer of a breakthrough that could potentially impact our lives meaningfully.
Depending on the cryptocurrencies, unless there are clear-cut reasons to believe that it is non-halal such as technology built upon interests (riba) or excessive leverage, we should look at it objectively and delve deeper into it.
Let’s dive right in.
Using cryptocurrency, such as bitcoin, as a mean of exchange,is similar to fiat currencies today
First of all, we need to be very clear about the use case of the cryptocurrency in question.
In other words, we need to understand its purpose and how it will be used.
This will help to remove the uncertainty (gharar).
Ever since the first ever bitcoin transaction recorded in 2018 with 10,000 bitcoins for 2 pizzas, its acceptance has been widespread as an alternative mode of payment to fiat currencies by mainstream businesses.
This includes companies like PayPal, Coca-Cola Amatil and Restaurant Brands International, the parent company to Burger King and Popeyes.
Some may argue that it does not have a status of legal tender.
In other words, bitcoin may not officially be acknowledged or recognised as the national currency by the laws.
For example, our Singapore dollar notes and coins are the legal tender in Singapore, backed by the Monetary Authority of Singapore (MAS) assets.
However, the main criteria for money in Shariah is its acceptability by people – regardless it is imposed by the government through laws, or through widespread voluntary acceptance of people.
The technology behind cryptocurrencies, such as Bitcoin, aims to solve the problem of the need for a central issuer or an authority in the first place
To begin with, we need to ask ourselves why there is a need for a central issuer or an authority in the first place?
To put it simply, we need someone that we can trust.
A middleman, or a 3rd party, to facilitate our transactions.
Without trust, many things in this world such as transactions between two parties will be hard to execute, or simply cannot happen.
But what if we can remove this trust-based model and replace one without any 3rd party involved yet the trust is maintained (or even strengthened)?
That is the case for bitcoin.
Here is an excerpt from the bitcoin whitepaper (which you can read it full here):
In the case of bitcoin, it is mathematically impossible to manipulate the laws and the rules that govern it, such as the mining and transaction process.
Additionally, Bitcoin uses the blockchain technology that is much more secure than any centralised system employed by government or central banks, and they are starting to see its value and adopt the blockchain technology into their system themselves.
There is also concern in Shariah regarding money on the preservation and protection of wealth (Maqasid al-Shariah).
Our history has repeatedly told us how fiat currencies have succumbed to financial crises numerous times over the past century.
Wealth was destroyed by the government and central banks from hyperinflation in Germany in 1923, Greece in 1944, Hungary in 1946, Indonesia in 1999 and Zimbabwe 2008.
In fact today, cryptocurrency has become a more reliable mode of transaction in Venezuela than the government mandated bolivar because of 1,300,000% inflation.
To put that into context, your bread in Venezuela which used to be $1 costs $13,000 in 2018.
You see that right.
The use of cryptocurrencies for an unlawful purpose does not make the thing itself become unlawful
According to Hadrat Anas (Allah be pleased with him), Prophet Muhammad s.a.w. has prohibited the sale of grapes before they come dark i.e. before it ripens.However, he did not forbid the production or trading of grapes for lawful purposes.
Similarly to cryptocurrencies and fiat currencies, these unlawful actions of money laundering and the use of illicit purposes are external factors which are beyond our control as an individual.
In fact, the largest money laundering till date was with US dollars, through Wachovia, one of the largest US banks, laundered for close to USD390 billion dollars.
In Singapore context
PERGAS has made a stand with regards to how Shariah rules should be applied as.
If a cryptocurrency is seen as a utility token (i.e. means of exchange), for example Bitcoin, then it is permissible so long it abides to the Shariah rules.
On the other hand, if a cryptocurrency is categorized as an equity or security token as they have a store of value (i.e. like stocks and shares), then they will be considered permissible if they abide by the Shariah rules on equity.
Our nation’s Islamic statutory body MUIS, to my understanding, has not explicitly acknowledged or disavowed cryptocurrency as permissible money.
Often than not, they are taking a stand on merely warning the public to to exercise caution and be aware of the risks involved.
Having said all these, nothing should be taken away from the opinions from our religious bodies and scholars who have studied it extensively too.
Ultimately, we should understand that their intention (niat) is to protect our wider community and ummah.
Now It’s Your Turn
I’ve laid out the reason for the arguments on the halalness of cryptocurrencies and bitcoin.
Now I want to turn it over to you.
Would you consider staying on the conservative side for now (i.e. not invest) or take a measured approach and invest in one?
Let me know in the comment section below to hear your thoughts.