Cryptocurrency and Sharia Law (Islam): A Comprehensive Examination

Cryptocurrency and Islam

Cryptocurrency also referred to as virtual or digital currency has emerged as a significant player in the financial industry. Since its inception in 2009 with Bitcoin paving the way, numerous other cryptocurrencies have been developed. Each Cryptocurrency possesses unique attributes and applications. However, there exists substantial debate and interest surrounding the compatibility of cryptocurrencies with Islamic law.

This article explores the intersection of Cryptocurrency and Islam from both an ethical and financial perspective, drawing insights from various academic journals and Islamic scholars.

In a recent development, the Federal Sharia Court has issued an instruction to the government of Pakistan regarding usury. The directive calls for the elimination of interest from the country's economy and the establishment of a non-usury Islamic economic system within a five-year timeframe. This announcement has generated a sense of optimism among the people and scholars of Pakistan. It is hoped that this initiative will free Pakistan from the grip of usurious banking systems and lead to the Islamization of the economy. This is indeed a welcome development, aligning with the teachings of the Holy Qur'an, where Allah Almighty has declared the sale as halal and usury as haram (Al-Baqarah: 275).

Efforts are underway to abolish the usurious system and practically implement an alternative non-usury Islamic economic system. However, there is a growing concern regarding the promotion of cryptocurrency in the name of Islamic finance and the Islamization of the economy. Some government committees, members of Shariah Advisory Committees, and certain Muftis associated with various financial institutions and banks have shown a significant interest in advocating for the legitimacy of cryptocurrency. This interest intensified after American Professor Charles Evan's "Bitcoin in Islamic Banking and Finance" research paper was published in the Journal of Islamic Banking and Finance in 2015.

What is Cryptocurrency?

Cryptocurrencies derive value from technology and trust, which could be considered a valid form of intrinsic value. Financial Transactions and Cryptocurrency Islamic finance has a well-established framework for conducting transactions in line with Islamic principles. When it comes to using Cryptocurrency for financial transactions, there are considerations worth exploring.

Transparency and Accountability

Cryptocurrencies operate on a decentralized blockchain, providing a high degree of transparency and accountability. This aligns with the Islamic principle of clear and honest financial transactions. Dr. Zeeshan Hasan's research highlights that the traceability of Cryptocurrency transactions can be viewed as a positive aspect from an Islamic perspective.

Asset-Backed Tokens

Some initiatives aim to tokenize real assets such as gold or real estate to create digital currencies. This concept can adhere to Islamic finance principles, as mentioned in the paper "Islamic Fintech Start-ups and Cryptocurrencies" by Dr. Ehsan Nikbakht.

Avoidance of Riba

Cryptocurrencies offer the possibility of conducting transactions without interest, as they are not issued or regulated by central banks. This can be a significant advantage from an Islamic standpoint, as it adheres to the prohibition of riba.

Young scholars from madrasas and Muftis working in Islamic finance have actively propagated the idea that cryptocurrency can serve as an alternative to the usurious system and is a valuable tool in the Islamic economy. This propagation has led to the training of scholars and Muftis who promote cryptocurrency as a solution and salvation from the existing usurious banking system.

List of Common Terms and Vocabulary of Cryptocurrencies

However, this situation raises concerns, especially when the essence of cryptocurrency is recognized as a form of speculation and, in some aspects, a form of gambling. One would expect such activities to be discouraged, rather than promoted, especially within Islamic institutions.

Islamic Perspective on Cryptocurrency

The Islamic perspective on Cryptocurrency is multifaceted, touching upon various aspects such as financial ethics, speculation, and monetary transactions. Let's delve into these considerations and consult academic literature and Islamic scholars for guidance.

Sharia-Compliance

To assess the permissibility of Cryptocurrency, it is crucial to evaluate whether it complies with Sharia law. According to Dr. Zeeshan Hasan, in his paper "Cryptocurrency and Islamic Finance," the key principles of Sharia, including the prohibition of riba (usury) and excessive uncertainty (gharar), need to be examined concerning Cryptocurrency. Many scholars argue that cryptocurrencies like Bitcoin, which do not involve interest and are based on a blockchain ledger with a transparent history, can be deemed Sharia-compliant.

Speculation

Cryptocurrency markets are known for their volatility, leading to concerns about excessive speculation. A study by Dr. Aftab Ahmad Siddiqui, titled "Cryptocurrency Investments: A Sharia Perspective," emphasizes the importance of avoiding speculative behavior, which is considered haram (forbidden) in Islam. It suggests that Cryptocurrency investments should be made with a clear and justified purpose, not solely for speculative gains.

Digital Assets as Currency

Islamic finance principles often require currency to have intrinsic value, which Cryptocurrency does not possess. However, an article by Dr. Ibrahim Warde, titled "The Islamic Challenge of Cryptocurrencies," argues that the traditional notion of intrinsic value might need to be reevaluated in the context of digital assets.

These young Muftis have been influenced by the idea that cryptocurrency is a complex technical subject beyond the understanding of traditional scholars. In response, scholars proficient in English and associated with the media have been actively promoting cryptocurrency. They have even issued Fatwas supporting cryptocurrency, leading to a growing number of young people in Pakistan investing in these digital currencies. Some institutions have even introduced courses to teach how to buy and sell cryptocurrencies.

The Mysterious Fate of an Ancient Civilization: A 5,500-Year-Old Nuclear Enigma

In response to this propaganda, scholars have divided into three categories: those who endorse cryptocurrency's legitimacy, those who choose to suspend judgment, and those who declare cryptocurrency as illegitimate. These divisions are concerning and indicate the influence of cryptocurrency advocates in Islamic circles.

The scholars endorsing cryptocurrency as a solution for Islamic finance have promoted it vigorously. They have presented arguments on how cryptocurrency can undermine the usurious system and bring economic equality to society. Yet, the scientific foundations of these arguments are questionable.

It is important to note that not all cryptocurrency is widely accepted in the international community as a legitimate form of exchange or a unit of account. Many argue that it does not meet the basic characteristics of a currency. Several scientific studies have shown that cryptocurrency is highly speculative and risky and does not provide the same level of stability as traditional assets.

List of 13 types of Qalb (Hearts) are mentioned in the Holy Quran

Conclusion

The relationship between Cryptocurrency and Islamic principles is a complex and evolving matter. While some aspects of Cryptocurrency align with Islamic finance principles, such as the avoidance of riba and transparency, there are also concerns about speculation and the absence of intrinsic value. As the technology and its applications continue to evolve, the debate within the Islamic community and among scholars will persist. It is crucial for individuals considering Cryptocurrency investments or transactions within the framework of Islamic finance to consult scholars and financial advisors with expertise in both areas.

Furthermore, researchers and Islamic finance experts should continue to explore the ethical and financial dimensions of Cryptocurrency to provide clarity and guidance to the Muslim community.