THE HALAL AND HARAM ASPECT OF CRYPTOCURRENCIES IN ISLAM

by Sudais Asif

O
ver the past few years, we have often been exposed to issues related to
Cryptocurrency, better known as Bitcoin. According to the Deputy Governor of
Bank Negara Malaysia, Dato. Shaik Abdul Rasheed Abdul Ghaffour estimated a
total of RM75 million Bitcoin transactions, and other currencies were conducted every month
in Malaysia. However, despite the advantages of Bitcoin, which is said to be able to be used
as a means of payment and generate transparent transactions, it is also likely to be used by
irresponsible parties as transactions on the black market for activities such as the purchase
of firearms, drugs, and money laundering.

In addition, the nature of cryptocurrency, which is said to be unstable, vulnerable to

speculation and not recognized as a currency issued by national authorities raises the
question of the extent to which its use is permitted in Islam. What if some of the users make
investments using Bitcoin and from the Shariah point of view can they enjoy the profits? To
unravel all the questions today I will discuss the topic of The Halal and Haram Aspect of
Cryptocurrencies in Islam.

1.0 INTRODUCTION
Cryptocurrency is like real money but cannot be seen, held, or spent directly. It is an
encrypted digital currency, which is very accurate. Bitcoin is one of the hundreds and
possibly thousands of cryptocurrencies on the internet. Cryptocurrencies are digital
currencies that use cryptographic technology for security that makes them non-counterfeit
able. The price value of pure cryptocurrency is determined by market forces, namely the
supply and demand of users of this technology. Apart from bitcoin, there are various
cryptocurrencies that are considered, including Ethereum, IOTA, Bitcoin cash, Litecoin,
Ripple, Dogecoin and many others.

2.0 CONTENTS
Sudais Asif from Lahore College of Arts and Science, Pakistan presents his article ‘The
Halal and Haram Aspect of Cryptocurrencies in Islam’. In this article he argues that although
the technology of cryptocurrencies is Halal, different aspects contribute to deciding whether
the specific digital currency in question is halal or haram. Sudais Asif quotes that the Grand
Mufti of Egypt, the Turkish government, the Fatwa Centre of Palestine, and Shaykh Haitam
from the UK among others have regarded cryptocurrencies as haram whereas others have
regarded them as halal based on individual crypto vehicle, the protocols it uses and its
underlying conditions. The basis of deeming it halal according to Asif is that an underlying
asset is created when the crypto currency is mined. However, the condition of the underlying
asset being tangible is not discussed. The article discusses the crypto currencies in use and
how according to author these can be deemed halal or haram by Muslim investors.

2.1 ISSUES

2.1.1 Does Cryptocurrency Qualify as Money?

Although cryptocurrencies emerged eleven years ago, there is no consensus on how
to define them. Due to their various functions, it is difficult to define cryptocurrencies
as money, commodity, or security. Money, in the Islamic perspective, historically
should be based on physical assets, should be able to cover all activities, and is not
for speculation purposes. The issue of cryptocurrency as money is an interesting
issue. This is because cryptocurrency was based on cryptography in the financial
system. The value calculation of cryptocurrency is also based on an algorithm in the
system of the blockchain. The blockchain is claimed to have some advantages as it
is a safe, undeleted, complicated, and efficient system. To meet the criteria of a tool
of exchange or money in Islamic teaching, money must be stable, safe, and effective.
Cryptocurrency may have some money characteristics, but it needs further research
to see the characteristics of this money.

In economics, money is anything generally accepted as a medium of exchange.

Because, in concept, all goods or objects that are considered valuable and mutually
agreed upon by a certain group can be called money. When referring to this
definition, other cryptocurrencies can already be categorized as money. Because
indeed, another cryptocurrency was created as an alternative means of payment for
people who do not want their private data and transactions to be known by certain
authorities.

Cryptocurrencies offer many of the same functions as currencies that a country's

government issues paper. There are generally three main functions of money, which
are as a medium of change, a unit of account, and a store of value. Digital currencies
are an efficient means of exchange. Users can purchase goods and services using
digital currency units. Satoshi Nakamoto also claims that digital currencies can serve
as a store of value. Privately issued tokens have a value that can remain stable over
time. Account owners can use digital currency as a savings account for long-term
storage of value.
Of the three functions, cryptocurrency, in general, has qualified as a medium of
change because it almost meets all aspects of the requirements as a medium of
exchange among them. It is also accepted by the majority in a group in a certain
region, which claims it is stable and not easy to change in the extreme, trusted by its
holders, standardized, has the right denomination value, is easy to carry and transfer,
durable and not easily damaged, and has a safety net system.

But for the other two functions, it seems that cryptocurrencies are not able to meet all
the requirements to fulfil their functions as a unit of account because, in the future, it
is doubtful that they can be widely applied due to their inclusive nature. After all, they
transform into commodities from the medium of exchange. In full function as a store
of value, cryptocurrency in real terms still cannot be fulfilled. The difficulty of
cryptocurrencies as a tool for storing value is their high volatility. It is difficult to
mitigate the risk of volatile and drastically moving values.

Since cryptocurrency is a digital currency with no real physical form. In this aspect,
then cryptocurrency can be called worse than the fiat currencies that exist today due
to its unclear physical existence. This results in the high volatility of the value of
cryptocurrencies in the market which sometimes rises economically and then a little
later fall also to extremes. Why can this happen? In addition to being caused by the
laws of demand and supply, the absence of intrinsic value backing also exerts a
great influence, so the stability of the value of cryptocurrencies as a currency is
greatly affected by internal and external issues.

2.1.2 Is the Price Volatility of Cryptocurrency Leads to Gharar and Maysir?

Egypt’s Grand Mufti has issued a new fatwa banning trading of one of the world’s
leading cryptocurrency Bitcoin, declaring it forbidden in Islam. Turkish Religious
Authorities also mentioned that cryptocurrency is haram due to the openness of
potential for speculations. Those opponents of cryptocurrency today mentioned that
cryptocurrency contains high price volatility, and volatility to very high value
fluctuations. This is synonymous with speculation on price differences. So that the
intention to get results or profits from the price differences is included in the elements
of Gharar and Maysir if it is used for investing and trading cryptocurrency.
Referring to the Fiqh discussion regarding ‘Gharar’, it is usually referring to
something that is unknown like selling flying birds or fish in ponds, whereby the
possibility to catch them is very low. Entering the contract with the high probability of
loss could be deemed as prohibited Gharar and the expectation to gain profit only
based on weak assumption. Meanwhile, Maysir is defined by jurists as any action or
game that is associated with gambling whether for profit purpose or losing. The act of
trading in cryptocurrency is not prohibited because of risk taking act only since taking
risk is co-existence in human life but relied totally on luck distinguishes between good
and bad from Shariah view. Hence, crypto trading is an investment with skills and
knowledge that allows traders to predict the future trend of coins in the market.
Recognizing the pattern, judging correctly, scepticism, adaptability, self-evaluation,
right crypto categorization, and discipline are among common advice given by
experts to traders that also indicate dealing with crypto always come together with
knowledge of crypto movement analysis and so on.

There is an opinion that says high risk sale illustrates the high possibility of loss also
considered as Gharar. Apparently, the example of high-risk sale given by scholars is
selling an animal’s womb where the womb’s condition is unknown, and entails
expected uncertainty whether the womb will be delivered in perfect manner or in
worst case scenario it may die before delivery and the loss is borne by the buyer.
Contrarily, buying cryptocurrency normally done with purposes after forecasting the
future’s price or for ’buy and hold’ as an investment strategy. Furthermore, buying
crypto assets allows buyers to enjoy the ownership of the digital asset without having
any uncertainty in possessing it through the mechanics of Blockchain that ensures
transparency of transaction through its decentralized system. So, blaming
cryptocurrency as a Gharar asset is deemed inappropriate since the analogical
deployed in this case is also not accurate.

Being more than 10 years in the market, cryptocurrencies had gained popularity not
only limited among retail but also attracting big names and companies to invest in
these coins. However, popularity does not mean investors really understand the
price’s behaviour across time. Offering investors with high returns also comes
together with high market volatility and potentially to speculative bubbles.

If the critics are more on the speculative nature that surrounds this asset where the
volatility had taken place, the share market is also vulnerable to such speculation as
seen in any stock market today. In fact, the volatility also contributed by internal and
 external factors as happened to another financial asset. For instance, BTC’s price
spike to the new highs amounted to USD 44,200 after the announcement of Tesla’s
CEO, Elon Musk to buy this digital asset. However, on 12th May, Elon had
announced the suspension of selling Tesla’s cars with BTC that witnessed the falls of
several crypto’s prices whereby the difference between before and after
announcement was quite significant.

Despite the bearish market experienced by the crypto market since April this year,
the digital market is currently showing to restore its value in September after several
months in a shaky mood. The total market capitalization went back above USD 2
Trillion for the first time since last May.

Noting to discussion above, trading in crypto market is not identical to involve in

speculative activities whereby it may be like people who uses any currency also
vulnerable to act of speculators in financial market without their concern. The
existence of speculators is a norm in every market in this world. But to judge the
same consequences to traders or arbitragers as speculators is not really accurate.

Since price volatility in the crypto market is beyond human and authority control, it is
generated by the system that relies on supply and demand mechanisms. Hence, the
method of ceiling price determination is not applicable as explained by al- Qurtubhi,
the authority should control the market price particularly the necessaries by
restricting profit regardless of price movement for the benefit of consumers. However,
this idea may be argued due to the exclusiveness of crypto assets where it not
considered as necessary concurrently public interest could still be preserved.

3.0 SOLUTIONS

3.1 Development of Shariah Compliant Cryptocurrency

With the passage of time, there emerges a new halal cryptocurrency model that is believed
to be able to accommodate the setbacks of conventional cryptocurrencies. Some experts
posit that the blockchain technology utilized in cryptocurrencies are not against Islamic law.
On the other hand, others suggest that there should be a change in the development of
digital currencies following the Islamic perspective. The problem of haram being halal, halal
being haram, permissible being sunnah and so on will not stop in life in this world. Syariah is
essentially aimed at creating benefit both in this world and in the hereafter.
3.1.1 OneGram Cryptocurrency
The OneGram cryptocurrency is a digital currency that is backed by a gold asset,
where each gram of gold represents one coin. Its development starts in May 2017
and is domiciled in Dubai. Considering the stability of OneGram assets and
commodities, about 1.8 billion people have considered using the business platform of
the gold coin. Thus, it has entered seven countries including Malaysia. The spot price
of the digital currency depends on the current market value of gold. Thus, the usage
and market demand add a premium to the value of the OneGram currency.

Therefore, the OneGram has a three-valuation component to ascertain its total

market price. The first portion is the Gold Value (GV), which is determined by the
spot price of gold. The second portion is the current value of the Transaction Fees
(TF) reinvested to purchase more gold, which is determined by the level of utilization
of the OneGram coin. Then the third portion is the Economic Value (EV) that is being
determined by the market demand.

Considering the transaction aspect of the OneGram, each transaction creates 1%

transaction fee, up to a maximum of OneGram token. The OneGram is different from
other cryptocurrencies because 70% of the generated coins are reinvested to
purchase more gold to grow the quantity of gold that backs each token. Thus, as
transaction volumes upsurge, then more gold is deposited to the vault. All OneGram
investors share from the profit due to uplift in the value of each unit. As such, after
some time, the value of each OneGram token rises naturally. This makes OneGram
a distinctive cryptocurrency and a reliable store of wealth whose worth increases
continuously.

Further, development and operation of the OneGram investment are funded using
25% of the fees generated. Meanwhile, 2.5% is assigned to charity donation and
another 2.5% is allocated for miners’ rewards. In order for OneGram to have liquidity
and rapid real-world adoption, some strategies including; i) Gold guard platform for
redeeming gold in relation to the issued OneGram coins is provided ii) a novel
payment gateway called YalaPay, is launched for OneGram coins iii) a Gold guard
MasterCard debit card (Liquid Gold) for OneGram liquidity is created.

The OneGram ecosystem employs the KYC (Know Your Customer) concept to have
background information of its investors to deal with bad activities. It also has the gold
guard company, which handles the gold storage and an Accounting and Auditing
 Organization for Islamic Financial Institutions (AAOIFI), which provides the rules
guiding the cryptocurrency. Further, as mentioned earlier, the cryptocurrency is
backed by gold. Thus, the issue of uncertainty, speculation and volatility of the non-
shariah-cryptocurrency has been addressed. Therefore, the OneGram can be
considered as a shariah compliant cryptocurrency in terms of uncertainty and
volatility.

4.0 CONCLUSION
Muslim scholars are divided on the legality of bitcoin into two groups. The opponents of
cryptocurrencies believe that any currency that does not have intrinsic value cannot be
considered as valid money, and only gold or silver money can meet the criteria of the
Shariah. Moreover, for any digital currency to be accepted by the Shariah, it has to be a
measure of value and it has to be a monetary commodity, and there must be a standard of
weight on paper notes or electronic currencies to be recognized and it has to be redeemable
with a standard weight like gold. If not, it is just fiat money. Conversely, the proponents of
legality of using bitcoin from a Shariah point of view believe that there is no clear evidence
indicating that bitcoin is against Islamic principles. The fluctuating value of cryptocurrency is
not sufficient to make it impermissible from the Shariah point of view as even fiat money
encounters the same problem internationally.

5.0 POINT OF VIEW

Accepting cryptocurrency as Shariah compliant investment asset in today’s world is a
reasonable idea with scientific evidence. Even though cryptocurrency is categorized as
another financial asset class, the benefits could mitigate the risk arise from investment in
financial markets which also represents one of the advantages brought by this digital
currency. Gharar and Maysir are not main obstacles since its nature and behaviour could be
understood, predicted, and forecasted whereas it like shares and funds provided the crypto
does not represent Ribawi commodity otherwise it should adhere to Shariah parameters in
trading Ribawi item. Volatility and speculative manners also seen as problematic attributes
that may jeopardize traders’ wealth; however, the attributes are not built naturally in the coin
but from external factors such as market and other variables. Nevertheless, the usage of the
crypto asset must be ensured aligned with Shariah requirements and principles by avoiding
any forbidden activities and deemed non-compliant with Shariah.

I personally think that the solution of developing the OneGram Cryptocurrency as a Shariah
Compliant Cryptocurrency is a good idea and intervention by Muslim country. This is
because there is regulatory authority of Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI), which provides the rules guiding the cryptocurrency. Further,
as mentioned earlier, the cryptocurrency is backed by gold. Thus, the issue of uncertainty,
speculation and volatility of the non-shariah-cryptocurrency has been addressed. Therefore,
the OneGram can be considered as a shariah compliant cryptocurrency in terms of
uncertainty and volatility. The technological developments should not be ignored. These
tools might be used in favour of Muslims. Halal cryptocurrencies can be developed jointly by
Islamic countries, and this can help the countries support each other in terms of trade and
borrowing. Hence in my point of view, cryptocurrencies might be a suitable tool for Muslim
countries.