Cryptocurrency from Shari’ah perspective

Money is defined as anything of value widely accepted as a medium of exchange. It can be used as a store of value and unit of the account once it has been received. Money has long been used as an exchange rate since decades ago. The only distinction between now and then is the medium of exchange employed.

 

New revolutionary computing technology has been developed. Blockchain is a distributed ledger technology that allows for the transfer of value or data without using a central authority or a third party. Because of the cryptocurrency’s popularity, many experienced and influential business leaders in the financial services sector have predicted a competition between the Blockchain and fiat currency. In Islam, fiat currency is considered a suitable medium of exchange and is not regarded as a store of value like physical assets and commodities, whereas Cryptocurrencies may be deemed a legitimate medium of exchange.

 

Thousands of financial institutions, millions of investors, and entrepreneurs are taking advantage of the potential of Blockchain. In fact, Dubai has revealed its plan to become the Blockchain leader in both the private and public sectors by 2020. It is not surprising that central banks and regulators are interested in Blockchain technology. The South African Reserve Bank has formed a joint working committee to develop regulations for Blockchain and crypto-currencies. The International Monetary Fund (IMF) recently published a discussion document indicating that banks around the world should seriously consider investing in cryptocurrencies and other fintech opportunities to adapt to new technological demands.

 

What is Cryptocurrency?

Cryptocurrency is a digital file that can’t be copied or reused. Because Cryptocurrency can be used for trading, saving, and exchanging for other currencies, it is regarded as similar to any existing undocumented money circulating solely on the Internet.

 

Cryptocurrencies do not have any real-world assets to back them up. However, because no one has been able to hack the system, we can say that cryptocurrencies are pretty unique and may interest users looking for an alternative to fiat money. We occasionally hear about attempts to back cryptocurrencies with specific assets, particularly gold. However, in this case, the asset-backed Cryptocurrency will devolve into a standard mechanism for attracting investments backed by tangible collateral and will no longer be considered a cryptocurrency.

 

What are Digital Currencies?

The rise of Blockchain technology coincides with the rise of cryptocurrency, particularly Bitcoin. As a result, it is only fair to examine both elements separately to determine their compatibility with Islamic finance.

 

Cryptocurrencies, unlike fiat money, cannot be created out of thin air. The production of cryptocurrencies such as bitcoin necessitates significant effort and resources. This is known as “mining,” It involves individuals or entities using sophisticated computer equipment and software to solve complex mathematical problems using cryptography. This procedure yields two results:

 

• Ensure the network’s overall security.

• Increasing the supply of Cryptocurrency as a reward for miners’ efforts.

 

Because the Blockchain is a decentralized network, miners play an important role in transaction security. Because miners will be rewarded with cryptocurrencies for each successful block they secure, their interests will naturally be aligned. The value that validates the creation of cryptocurrencies is represented by the miners’ exertion of computing power, electricity, and time.

 

This is in contrast to the fiat system, in which governments and banks can print money on the spur of the moment with no corresponding injection of value. However, it is critical to note that fiat money is based on debt. As a result, whenever a bank makes a loan, it also makes a matching deposit in the borrower’s account, creating new money.

 

Shariah and Cryptocurrency

To determine whether Shariah considers cryptocurrency to be a currency and a medium of exchange, we will need to dig deeper into the actual definition of money as a medium of business and the meaning and views of Shariah. However, there have only been a few studies on this subject. Even from the standpoint of Shariah as a whole, as few studies have been conducted, this can be claimed.

 

Furthermore, because many cryptocurrency buyers are looking for a quick profit, this study will be beneficial for people to understand how it relates to Shariah. Of course, everything is legal as long as they profit from their cryptocurrency investment and do not violate human law. They, however, failed to seek Islamic law (hukm) on the subject. 

 

Money and Cryptocurrency an Islamic point of view

From an Islamic point of view, money is not recognized as a subject matter of trade. Nevertheless, there is an exception in some exceptional cases. For example, money is only a 10 medium of exchange since it has no intrinsic utility. Therefore, there is no room to profit by exchanging each money unit for another division of money in the same denomination. This is because both teams of money are precisely equal with one another.

 

There are three Islamic scholars’ perspectives on the meaning of money.

 

  • According to the first group, money is made of gold and silver.
  • The second group regards money as minted coins regardless of the metal they are made of.
  • The third group of scholars, on the other hand, stated that gold and silver are real, and this group accepted any form of money as long as it met specific monetary requirements.

 

Cryptocurrency is a substitute for fiat money as a medium of exchange, such as USD, MYR, etc. It is, however, intended for the sale of digital information via a process made possible by certain cryptographic principles. On the other hand, Cryptography is a process used to secure cryptocurrency transactions and control the creation of new coins. Simply put, Cryptocurrency is a digital currency. Furthermore, it is a decentralized system, which means no centralized authority.

 

Different scholars on Cryptocurrency

Sheikh Dr. Adnan Al-Zahrani, ex-chairman of Al-Jazeera Bank’s Shari’ah Supervisory Board, says: “Cryptocurrency is one of the currencies/money that have emerged as a result of the process of creating and developing capital. In other words, it began as simple barter, then progressed to gold and silver coins, then to paper money, and now to virtual cash in the form of cryptocurrencies. This is normal “.

 

Dr. Monzer Kahf, an expert in Islamic economics and finance and a Professor at the Qatar Faculty of Islamic Studies, believes that bitcoin, like any other currency, is money within its community and that exchanging it for other currencies is subject to the same conditions as exchanging currencies, which are:

 

1) The exchange should be done on the spot, without leverages or futures contracts.

 

2) No currency speculation, i.e., the exchange must have a real reason to buy or sell other than the idea of currency for currency.

 

Even though he accepts bitcoin as payment, he has little faith in it because, like other currencies, it is vulnerable to manipulation once it is traded on the open market.

 

“I am convinced that cryptocurrency can be an effective tool for further developing Islamic finance,” says Mufti Abdul Qadir Barakatullah, a member of the Shari’ah Committee at Al-Ryan Bank, formerly the Islamic Bank of Great Britain. Furthermore, he recalls the rule among Muslim scholars that any commodity perceived by society as a means of payment must be perceived as money.

 

On the other hand, some experts are opposed to cryptocurrencies. For example, Sheikh Imran Hussain, a modern and well-known Muslim scholar, believes that any currency lacking intrinsic value cannot be considered good money. As a result, only gold or silver money, in his opinion, can meet the criteria of

 

Professor Ahmed Kamel Midin Meera, former dean of the Institute of Islamic Banking and Finance at the International Islamic University of Malaysia and author of the book Islamic Golden Dinar, believes that for digital currency to be accepted in the Islamic financial industry, it must have a monetary commodity as a measure of value. Therefore, according to him, paper notes or electronic currencies must have a standard weight to be accepted, and they must be redeemable with an average weight, such as gold. Otherwise, it is unjust and is fiat money.

 

Bottom line

In Islam, fiat currency is considered a suitable medium of exchange and is not regarded as a store of value like physical assets and commodities. On the other hand, cryptocurrency may be viewed as a valid medium of exchange and thus shariah-compliant; however, due to such currencies’ various forms and denominations, a more thorough investigation is required from a shariah standpoint.

 

FAQ’s

 

What is the Shari’ah ruling on purchasing bitcoins?

Even though there are many unintended consequences associated with electronic money, such as volatility and speculation, we cannot categorically prohibit its use because the aforementioned negative indicators are already present in the markets in most cases.

 

What is the Shariah judgment on bitcoin/currency?

Shariah refers to usury in Bitcoin/currency, whereas the country’s concern with Bitcoin is stability, how it can be absorbed in the economy, fiscal effects, and so on. Although Bitcoin is Shariah-compliant, it may harm money laundering, leakage, and other harmful activities in the country.

 

What is the Shari’ah ruling on purchasing and selling electronic money (bitcoins) and mining?

It is permissible for anyone who has lawfully obtained electronic money to use it. One of the previous facts stated that digital or electronic currency is distinct from paper money or standard coins. As a result, purchasing this electronic money is treated as a regular currency exchange. Despite their significance, fatwas and expert opinions cannot be considered reliable as scientific research.

 

What are the current academic perspectives on cryptocurrencies?

Until now, there hasn’t been a lot of current thinking from academics on the subject. The majority of the opinions are about whether their countries accept it for use or not, and the majority are government opinions. Nonetheless, there is no specific hukm regarding the use of cryptocurrency.

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