The Liberty Finance aptly noted that 25% of the world’s population; nearly two billion people practice Islam.
It’s reputed to be the second largest religion in the world. Yet, this enormous population has been excluded from decentralized finance. What about DeFi and Cryptocurrency going against Sharia law?
What are the Islamic financial principles and why are some crypto(s) deemed haram? Are decentralized financial tools considered hala and if so, which ones and why?
These and many others questions have more often than none divide Muslim Scholars, expert in Islamic Finance and many others, with each providing different solution from different vantage points.
The perspectives make the bugging open ended, debatable and not a kind of Yes/No stance.
Perhaps, cryptocurrency is one of the wonderful invention of the 21st Century, coming closely after the internet revolution and other invention of significance.
A wonderful invention or “financial Instrument” in the sense of its so many unanswered questions, inferred cum implied answers among other things surrounding it.
As of 2023, data reveal that global crypto ownership rates at an average of 4.2%, with over 420 million crypto users worldwide.
Just as the consumers from countries in Africa, Asia, and South America were projected to most likely to be an owners of cryptocurrencies, such as Bitcoin, in 2023.
This conclusion was reached after combining 55 different surveys from the Statista’s Consumer Insights over the course of that year.
Nearly one out of three respondents to Statista’s survey in Nigeria, mentioned they either owned or use a digital coin, as opposed to six out of 100 respondents in the United States.
This is a significant change from a list that looks at the Bitcoin (BTC) trading volume in 44 countries: There, the United States and Russia were said to have traded the highest amounts of this particular virtual coin.
Nevertheless, African and Latin American countries are noticeable entries in that list too.
But are there insightful guide to lay hold on from the holy books most especially Qua-ran, to lay hold on, on the subject matter of discuss?
As a complete book, reputed to having an accurate record of the past and setting the pace for the future, like on any other subject for which it has always been an encyclopaedia of truth, it does offers some insightful tips on money, and management matters.
One of such, is Quran 2: 276: “Allah will deprived usury of all blessings, but will give increase for good deeds of charity” a foot note explanation of the above pointed out that Allah’s messenger, cursed the accepter of interest and it payers, and one who record it, and the two witness; and he said they are equal.
Islam is clear on some social, economic and political issues. For instance, the free market principle is not an Islamic principle.
Islam considers commodities that can be used as currency: Gold, (Dinar), Silver ( Silver Dirham), Dates, Wheat, Barley, and salt.
The mentioned six items are derived from a hadith – Gold, Silver, Dates, Wheat, Barley, and Salt and were used for money in barter system; as the items mentioned in Hadith, also known as Sunnah money.
On the other side, paper money or electronic money can be used as long as, it is backed by one of these commodities at a ‘fixed exchange rates’ (in order words the paper is just a contract stipulating that the bearer can redeem the paper for a fixed measure (weight) of that particular commodity.
It is interesting to know that until 1971 most of the currencies of the world were backed by gold.
However, only, government could redeem paper, not an average citizen. The price of commodity is set by the market as long as fiat currency (paper) is not used.
The price / value of commodities can be manipulated, adjusted by the creators of fiat money (by virtue of the market law of supply and demand).
What remains indisputable is the fact that, as interest in Bitcoin and cryptocurrencies rises, so have the questions of Muslim investors wondering if they can invest in them while adhering to the principles of their faith.
In particular, is cryptocurrency halal — that is, “permissible” according to the Quran – or should ethical Muslims put their money elsewhere?
In the following paragraph, I shall present scholarly thought on the subject of our examination leaving the critical definition to your discretion. .
In 2018, Mufti Muhammad Abu Bakar, a Sharia adviser and compliance officer at Blossom Finance in Jakarta, published a popular paper that affirmed that bitcoin is halal, a paper which many believe could be the reason for the surge in the price of bitcoin that followed.
Shortly after the paper titled ‘Shariah Analysis of Bitcoin, Cryptocurrency, and Blockchain Mufti Muhammad Abu-Bakar’, was published, a mosque in London started accepting Bitcoin for donations and Zakat contributions.
Today, many Islamic scholars and jurists that sit on the boards of national advisory teams, such as in Egypt and Turkey, do not consider cryptocurrency as halal for various reasons.
Mufti Taqi Usmani, a former judge of the supreme court of Pakistan, is representative of this side of the debate.
“Currencies are originally a medium of exchange, and making them a tradable commodity for profit earning is against the philosophy of Islamic economics”, Mufti Usmani said, ‘In Shariah, there is no valid reason to accept bitcoin or other cryptocurrencies as a currency. It is just an imaginary number, which is generated through a complex mathematical process. It is purchased for gambling or speculations, and used in illegal or unlawful transactions”.
But to Mufti Shawki Allam, the current Grand Mufti of Egypt, agrees.
“In my opinion, trading in cryptocurrency is haram,” Mufti Allam said. “This is because it is not approved by legitimate bodies, such as Treasury Departments of States, as an acceptable medium of exchange. Such currencies lead to ease in contraband trade and money laundering, and they amount to gambling”.
The Directorate of Religious Affairs in Turkey also believes that “since cryptocurrencies are open to speculation, mostly used for illegal deeds, and far from state auditing and supervision, their trading is not appropriate at this point, in the light of Shariah.”
It is true that cryptocurrencies are not under the control of a central authority. Even though many countries are seeking to regulate the use of cryptocurrencies, they remain, by their very nature, decentralized. As a result of the decentralisation and anonymity of cryptocurrencies, some bad actors have indeed used them to facilitate illegal transactions.
“The illicit use of cryptocurrencies are predominantly associated with money laundering purposes, the (online) trade of illicit goods and services, and fraud,” according to Europol, the Eu’s agency for law enforcement. An academic study published by Oxford Academic in 2019 also found that 25% of bitcoin users are involved in illegal activities, valued at $76 billion annually, constituting about 46% of all bitcoin transactions.
Furthermore, the Islamic Economic Forum, of Islamic Economists and Jurists, argues that “a cryptocurrency is permissible as long as it doesn’t breach Islamic prohibitions on interest, contractual uncertainty, and gambling,” says Dr. Humayon Dar, the director general of the Cambridge Institute of Islamic Finance and an Islamic finance product development specialist.
Dr. Humayon also agrees, even though he believes that the ambiguity and uncertainty around cryptocurrencies should lead to caution in assigning them any “halal” tag.
According to Sharia law, a contract is valid if there is a consideration, referred to as Mal. That is, there must be an exchange of something real that can be owned, possessed, stored, and traded. Since cryptos are real digital assets that can be owned, possessed, and stored on wallets and traded on exchanges, some Islamic scholars consider them halal.
Other Scholars also posited that the absence of interest (riba) is a core principle of Islamic finance.
Since cryptocurrencies do not charge interest, some Islamic scholars consider them halal. While cryptocurrencies are speculative, some experts, such as Mufti Abu-Bakar, a scholar of Islamic Jurisprudence, have argued that all financial assets are speculative. Even stocks, which are widely considered as being “halal”, can have significant volatility.
However, when it comes to Finance or investment concern, does religion matters?
Indonesia, the world’s largest Muslim-majority country, has banned cryptocurrency trading.
The Indonesian Ulema Council cited “elements of uncertainty and harm” within cryptocurrency, and the fact that it doesn’t have “a physical form, a clear value, [or] a known exact amount.”
The implication is that cryptocurrency that meets governmental rules will be allowed.
Another Islamic scholar, Dr Anas Amatayakul, advises that Muslims avoid buying or trading cryptocurrency “for now.” This leaves room for further innovation in cryptocurrency for Muslims — better regulation and less volatility may make the use of Crypto more permissible.
The most direct cost of widespread adoption of a crypto asset such as Bitcoin is to macroeconomic stability.
If goods and services were priced in both a real currency and a crypto asset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities.
Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a crypto asset, while expenditures remained mostly in the local currency, or vice versa.
But what is the position of the International Monetary Fund (IMF) about the subject of Cryptocurrency?
IMF has laid out a nine-point action plan for how countries should treat crypto assets, with point number one a plea not to give cryptocurrencies such as Bitcoin legal tender status.
The global lender of last resort said its executive board had discussed a paper, “Elements of Effective Policies for Crypto Assets,” that provided “guidance to IMF member countries on key elements of an appropriate policy response to crypto assets”.
Such efforts have become a priority for authorities, the fund said, after the collapse of a number of crypto exchanges and assets over the last couple of years, adding that doing nothing was now “untenable”. The top recommendation was to “safeguard monetary sovereignty and stability by strengthening monetary policy frameworks and do not grant crypto assets official currency or legal tender status.”
The IMF had hit out at El Salvador in late 2021 when the central American country became the first to adopt Bitcoin as legal tender, a move since copied by the Central African Republic.
Other advice, which comes as G20 decision-makers meet in India, included guarding against excessive capital flows, adopting unambiguous tax rules and laws around crypto assets, and developing and enforcing oversight requirements for all crypto market actors.
Countries should also establish international arrangements to enhance supervision and enforce regulations, the IMF added, as well as set up ways to monitor crypto’s effect on the stability of the global monetary system.
Outlining its executive board’s assessment, the IMF said directors welcomed the proposals and agreed the widespread adoption of crypto assets “could undermine the effectiveness of monetary policy, circumvent capital flow management measures, and exacerbate fiscal risks”.
They “generally agreed,” too, that crypto assets should not be granted official currency or legal tender status, and though strict bans of assets are “not the first-best option,” a few directors thought they should not be ruled out.