The importance of cryptocurrencies inside the financial system grows as they gain acceptance. Numerous nations enact legislation to regulate and tax digital currencies, but there are still many unsolved concerns about how they should be regarded under Islamic law.
The Islamic financial system has been overgrown in recent decades, and it now has a market capitalization of $2 trillion. Non-Muslims from all around the world have also expressed interest in it.
On September 9, 2019, AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) issued a paper that includes a set of rules for the cryptocurrency industry as part of its updated Sharia Standard. The document provides valuable insight into how to view crypto assets via an Islamic worldview.
Can You Use Bitcoin or Other Cryptocurrencies in an Islamic Finance Framework?
The fundamental concept of Islamic finance is that it is impossible to impose interest. However, sharing profits or losses in commercial operations is a viable way to create money. As a result, they prohibit Islamic banks from lending money to someone who does not share their risk. The same logic holds for cryptocurrency.
Islamic finance refers to all financial operations that follow sharia law (Islamic law). It forbids the use of riba, which is the utilization of interest. Other essential ideas include risk-sharing and investment ban in destructive or immoral activities. The usage of cryptocurrencies has highlighted whether they may use it to trade or a unit of account.
This study aims to see if utilizing cryptocurrencies is permissible in an Islamic financial framework. The primary goal will be to identify any places where Islamic law and cryptocurrencies interact.
Cryptocurrencies In Islamic Finance & Economics, A Comprehensive Guide:
More than 2,000 cryptocurrencies and tokens are already available on the market. The bitcoin market is projected to be worth over 250 billion dollars. This amount is insignificant when compared to the world’s money supply (M1), which is over US$10 trillion, and total global financial assets, which are approximately US$700 trillion.
The legality of employing cryptocurrency in Islamic finance has been the subject of much debate. Cryptocurrencies are legal under Islamic law, according to some academics, since they have inherent worth (i.e., as a medium of exchange, store of value, and unit of account). Others claim that cryptocurrencies are prohibited since their speculative character might be seen as gharar (extreme uncertainty), maysir (gambling), or riba (risk) (usury).
In January 2018, Bank Indonesia released a statement clarifying that cryptocurrencies were prohibited in Indonesia. According to the central bank, cryptocurrencies do not fulfill the sharia standards since they lack inherent worth. Furthermore, they are susceptible to speculation and can be utilized for illicit activities like money laundering and terrorism funding.
In contrast to Bank Indonesia, Malaysia’s central bank said in April 2018 that digital currencies had been deemed illegal in the country, stating that they could not be considered legal cash. Thailand’s central bank, on the other hand, has said that it is interested in cryptocurrencies. It has stated that it is considering releasing its cryptocurrency, the Central Bank Digital Currency (CBDC), and exploring the potential of establishing a national cryptocurrency known as the “Baht.”
What Is The Islamic Stance on Money?
When it comes to money, people have differing viewpoints. Money is seen differently by different individuals. Some regard it as a tool to help them achieve their goals, while others see it for enjoyment. On the other hand, Muslims regard money as a valuable commodity that should be treated with caution and caution.
The Quran and Sunnah, Islam’s two primary sources, are to form the Islamic stance on money. The Quran and Sunnah both exhort Muslims to eschew greed and instead put their money to good use for finances.
The word “Islamic finance” refers to financial operations that follow Sharia law (the Islamic law). The Islamic finance and banking sector has risen enormously over the previous three decades, with assets totaling over 1.85 trillion USD. Cryptocurrency, a wholly digital form of money, is still in its early stages, although it has grown significantly in recent years.
Many Muslim and non-Muslim intellectuals and financial specialists have studied Islamic finance and offered their perspectives. Because Islamic finance has such a vast reach, many areas remain unexplored.
The link between Islamic banking and current technological advancements in the global financial system is one area that has received little attention. This study investigates the role cryptocurrencies can perform in Islamic finance concerning money. This opens with an overview of bitcoin technology and its potential applications in Islamic banking. This study examines how bitcoin technology complies with some Islamic money standards while failing to comply with others.
How Islamic Finance Works & Why It Is Gaining Momentum:
Islamic money is driven by Islamic economics and on which Islamic law is built (Sharia law). Two fundamental precepts of Islamic law forbid interest-bearing loans and highly speculative ventures.
This interest restriction has resulted in developing alternative products that are Sharia-compliant and adhere to Islamic values, including profit-sharing, cost-plus financing, joint ventures, and leasing.
The primary distinction between Islamic and conventional finance is that traditional financial firms maximize profits and shareholder wealth. In contrast, Islamic financial institutions are concerned with fulfilling social obligations and accomplishing sustained development according to Sharia principles.
There are already around 250 Islamic financial institutions in 75 countries worldwide.
The Islamic Financial System and Bitcoin:
What about Bitcoin now? Is it compatible with our current financial system? Is it compatible with the Islamic system?
A central bank or a financial institution does not back bitcoin. It does not have a central authority because it is built on decentralized technology. The new currency was created to replace the fiat currencies that we are all familiar with. As a result, Bitcoin does not fit the Islamic concept of money.
Remittances to home nations are the most common use of Bitcoin among Muslims since it is cheaper than regular fund transfers like Western Union or MoneyGram and does not involve confidence in third parties or even having a bank account.
Finally, since Bitcoin has no inherent value, it cannot be termed money (no use-value, no exchange value).
The Islamic Financial System’s Position On Cryptocurrencies:
The National Investor (TNI) examines whether cryptocurrencies are Shariah-compliant for use in stock holdings to improve decision-making processes and provide a more fantastic choice of alternative investments to our Muslim clients.
As alternatives to conventional currencies, Cryptocurrencies have lately grown in popularity as an alternative investment market. Satoshi Nakamoto created the notion of a peer-to-peer electronic payment system based on mathematical proof and presented Bitcoin, the first cryptocurrency, in 2008. The popularity of numerous digital currencies has risen due to this innovation.
Despite the fact that cryptocurrencies have grown in popularity, with a rising number of individuals trading and investing in them, they are currently unregulated by any central bank or government. As a result, there are worries about their dependability and application.
The next question is whether it may incorporate cryptocurrencies in a Shariah-compliant portfolio. Numerous experts think that because a central bank or government does not support cryptocurrencies, we cannot consider them lawful or Shariah-compliant.
So, can cryptocurrencies be part of a Shariah-compliant portfolio? Because a central bank or government does not guarantee cryptocurrencies, many experts feel we cannot consider them lawful or Shariah-compliant.
To clear this up, we must first comprehend what digital currencies are and how they work. Currency is a unit of account in the Shariah framework, whereas commodities like gold and silver function as value stores.
What Islam And Bitcoin Have In Common:
The fact that both Islam and Bitcoin are decentralized is one of their most popular and shared characteristics.
Both Islam and Bitcoin are peer-to-peer systems: members of the religion have the authority to make changes, while a network of miners manages Bitcoin’s blockchain.
In addition to being decentralized, Islam places a significant emphasis on charity. As a Dubai-based Islamic financial expert put it, “One of Islam’s cornerstones is charity. We have a great charitable culture in Dubai.”
Many Muslim nations, such as Saudi Arabia, lack a financial system, preventing citizens from opening bank accounts. If a Saudi Arabian wished to transfer money to someone in another nation, they would have to use a third-party intermediary such as Western Union or MoneyGram, which would charge both the sender and the receiver fees. People may transmit money straight from their wallets to each other using Bitcoin without paying any fees to third intermediaries.
People are curious about digital currencies for a variety of reasons, not only macroeconomic issues. It’s a question of religious belief for many.
While many individuals argue how Bitcoin may be an issue for central banks or governments on internet forums, few people analyze cryptocurrencies from a religious standpoint. I received no response when I asked individuals on Twitter whether they knew of any studies on the issue.
This isn’t to suggest that there isn’t anything to say about Bitcoin and Islam. Both, it turns out, has some similarities that make them appealing to some believers.
A Guide to Sharia-Compliant Cryptocurrency:
In the case of cryptocurrencies, there is Islamic banking and finance that is not Sharia-compliant. In the Middle East, It is illegal to use or trade cryptocurrency. This is because trade value that isn’t backed up by tangible assets is considered by speculative gambling with no fixed value, which is prohibited.
There are several firms in the United Kingdom that offer Sharia-compliant cryptocurrency services. These businesses adhere to Sharia law by investing in real estate and paying interest to their investors.
Due to its lack of tangible backing and usage for unlawful activities.
Critical Evaluation of Treatment of Cryptocurrency by Shariah Audit Boards:
Shariah Audit Boards are in charge of an Islamic Financial Institution’s Shariah compliance (IFI). IFIs can operate under the Islamic finance framework, which is under control by Fiqh Al-Muamalat, a collection of principles and norms. The prohibition of usury, which encompasses interest-bearing transactions, is one of the framework’s most significant characteristics.
Cryptocurrencies have recently grown in popularity, particularly among Muslims. However, because of their probable usurious character, there has been discussion about whether cryptocurrencies are permitted in Islam. Various Shariah Audit Boards have released varied views on the admissibility of cryptocurrencies based on their interpretations of Islamic principles thus far.
This study aims to conduct a critical evaluation of the literature on the treatment of cryptocurrencies by Shariah Audit Boards. This will involve a critical examination of how various scholars have defined money in Islam and a comparison of cryptocurrencies to regular money.
The research will also examine how Shariah Audit Boards have handled other cryptocurrencies-related concerns, including trading, mining, and initial coin offerings (ICOs).
There is no mistake that Bitcoin has been leading the way in cryptocurrencies. This digital currency has grown in popularity over time as a result of its capacity to provide rapid, secure, and low-cost cross-border transactions.
On the other hand, Bitcoin does not fit the standards of Islamic banking as a financial instrument. This is possible if we can provide a good and legitimate answer to the following cryptocurrencies-related issues: Riba (interest), Gharar (uncertainty), and Qimar (gambling). There has been much debate over whether cryptocurrency should be halal or haram. Some people regard it a tradeable commodity, similar to gold and silver. Others view it as an investment, similar to stocks and bonds.
Cryptocurrency’s Usage In Islamic Banking:
Cryptocurrency’s usage in Islamic banking is with certain limitations. This is because the notion of cryptocurrency itself is incompatible with Islamic banking rules. The central bank, on the other hand, has consented to do research into the use of Bitcoin in Islamic banking under certain conditions.
Wakalah (agency), Murabahah (cost-plus), Mudharabah (profit sharing), and Ijarah are the four forms of contracts in the Islamic financial system (leasing). Because bitcoin does not employ a physical item as a means of exchange, the first two contracts prohibit its usage.
For example, when dealing with bitcoin, we’re dealing with a number or an account balance, not an actual commodity.
Cryptocurrencies have for a long time as a threat to financial stability. As a result, governments and central banks are becoming skeptical about cryptocurrencies. In this sense, the Financial Action Task Force (FATF) report from 2016 was ineffective in tackling crypto-related risks since it did not cover crypto-assets and made no mention of stablecoins.
Despite this ostensibly pessimistic attitude toward cryptocurrencies, Islamic finance specialists have recently investigated whether cryptocurrencies are consistent with Islamic finance rules. The findings of these surveys have been diverse, but they all point to mainly favorable attitudes toward cryptocurrencies.
Regulators in Muslim nations have also changed their minds as they assess what kind of regulation has to safeguard consumers while building their digital economies. Some governments, such as Bahrain and Malaysia, have already issued cryptocurrency-specific guidelines, while others, such as the UAE and Qatar, intend to do so soon.