I wrote this on quora to discusw Islamic perspective on cryptocurrency.
A major issue is that almost all classically trained scholars in Islam (rightfully) spend most of their time learning the essentials of the most important disciplines- akida, fiqh, hadith, tafsir, seerah, and other traditional disciplines. It takes time to understand how the modern currency system functions, and with the rigorous schedule of most Alim programs, there is simply not enough time to gain an in depth understanding of the nature of the financial and monetary system and its inter relation with Islamic law.
One study published by researches at the International Islamic University of Malaysia conducted a survey of sharia scholars to determine the extent of their understanding of the monetary system. It was administered as a quiz, and I believe almost none of the participants did very well. The study can be read here:
http://www.emeraldinsight.com/doi/abs/10.1108/H-01-2017-0013?&af=RAs far as I know, so far scholars have been divided. Generally most fatawa I encountered considered it as permissible, but with the recent steep increase in value, a few fatawa have come out against bitcoin and cryptocurrency in general in the past couple of months. A lot of the assumptions are based on misunderstandings or lack of understanding of the underlying technology and its uses. I’ve tried to list a few of the issues that the fatawa against blockchain bring up:
“It does not have a form or existence.”
The vast majority of dollars in existence have no physical form- they exist only as bits of data in a bank database. Why are there no fatawa (legal rulings) condemning the non-physical nature of this money? Is it because some of the dollars (less than 10%) have physical existence? In that case, a great many physical bitcoin have been produced, called Casascius coins. If the lack of a physical existence were a criteria for the validity of the use of an asset for cash, then we would have to apply the same standard to bank accounts.
2. “It does not have a government or authority regulating it.”
Bitcoin is regulated, albeit by consensus. Modifications to the code base must be accepted by the community. Likewise, a government or a private company is also a community of individuals, albeit with a different structure of government. If a decentralized network is not allowed in Islam, I have yet to see the proof from Quran or hadith.
3. “Investing in it is akin to gambling.”
This is absolutely true, if a person doesn’t understand what they are investing in. Investing in the stock market, which is allowed by nearly all Islamic scholars as far as I know(providing the company is compliant with Islamic law), is also akin to gambling if someone randomly buys a stock hoping to get rich. However, if a professional analyst studies the underlying indicators of companies and invests in a balanced spread, this is very different than blind investment.
The stock market is essentially a joint venture. Cryptocurrencies/blockchains are also like a joint venture, which is a quintessentially Islamic form of business. It is a well known principle in the cryptocurrency community that the value of a cryptocurrency is to some extent a reflection of the developer community behind it. When someone purchases a cryptocurrency, they are supporting the increase in market price of that currency, which empowers the developers who are working on it.
This is very different than pure speculation on something like wheat futures contracts, because in the case of a classic futures contract you are simply betting on an event in the future. When you invest in a cryptocurrency, you are becoming part of the community that develops something with real utility. Cryptocurrencies are used to transfer and store not only monetary value, but also information in the form of contracts, and to increase the efficiency of various business practices. This is a HUGE difference between cryptocurrency and gambling, and this alone should mean they cannot be considered to be the same thing, but there’s more.
When investing in cryptocurrency, there is a very real chance that everyone involved will win. With gambling, someone is going to lose. For example, if I agree to buy 100 kilograms of wheat Farmer Yahya in one month for $50 dollars, if the price is $60 dollars I win. If the price is $40 dollars, I lose. There is no scenario where both I and Farmer Yahya win. This kind of practice is not allowed in Islam.
However, with a cryptocurrency, there is the real possibility that I purchase the cryptocurrency, which leads to its value increasing. The people developing that cryptocurrency therefor have more money to put into its development by selling off some of their shares, and they use it to develop an App that makes it easier for people to buy and sell property, resulting in big savings for real estate agents. When people realize that it can be used for this, more people buy it to support the value, because they know demand for the currency will increase, causing its price to increase.
So yes, the value is highly speculative, but since that speculation is based on real future potential and since the possibility exists for everyone to win, it is quite a bit different than gambling.
4. “It is anonymous so it can be used for crime or terrorist financing.”
Well then, we should switch a centralized system in which everyone has a bank account controlled by the government, and cash and gold are illegal. Gold can likewise be transferred anonymously simply by using a mask, so do we want to try to outlaw gold, although it is sunnah to use gold as currency?
A principle in Islam is that “There is no obedience in unlawful matters.” This means that we are not required to obey rulers if they command us to do something that is against the teachings of Allah and his Messenger, sal Allahu alaihi wasalam. Since most of the governments in power today are not ruling in line with Islamic law, it is not permissible to give governments complete control over our money- rather we should support them in the good that they do, and advise them against whatever evil they do and refrain from supporting it.
5. “It is too risky, and will cause people to lose money”
This is a valid point, and some of the Islamic scholars who allowed bitcoin specified that it was allowed on the condition that the person investing understood the risks involved. A common statement in the cryptocurrency community is “Invest only what you can afford to lose.”
The purpose of Islamic law is to protect people, and guide them towards what is beneficial and away from what is harmful. Investing excessively in risky ventures could lead to very bad outcomes, so it is necessary to exercize caution. However, if a person understands what they are getting into and can afford to lose their investment in the event that it doesn’t work out, what is the problem in this?
Likewise, if someone invests in a difficult ocean voyage, knowing full well that the ship could sink and all of the merchandise lost, it would not be wise to invest so much that their family would be left destitute in the event of such an accident. Does this mean that ocean voyages are haram? Obviously not.
6. “It is like a pyramid scheme”
Cryptocurrencies have some properties of pyramid schemes. The people who get in first tend to make a lot more money than those who get in later. However, the pyramid scheme has an important difference, in that each person further down the ladder has to pay the person above.
In a cryptocurrency you buy something, like bitcoin, that has real uses, and you are never required to pay anything to the people who are already invested in the pyramid scheme. The increases in value are proportional to the number of people using it, which is actually the same reasons that the US dollar or even gold have value as a means of exchange.
7. “It’s like a ponzi scheme.”
A ponzi scheme is a scam in which someone offers big returns on an investment, and then pays those returns to the first investors using funds gained from the later investors.
The problem with this is that with a Ponzi scheme, the person or people running it are not actually doing what they say they are doing, for example, using some innovative trading strategy to earn big returns for investors. Dishonesty is a basic part of it.
By contrast, most blockchains are completely transparent, from the code underlying them, to the communications of the developers building them, and they give rise to applications that can be used for real things, like transferring money internationally, accounting, maintaining credit records, creating certificates of authenticity, loyalty programs, storing data, legal services like escrow, and much, much more. The value may be volatile and speculative, but this is because no one knows exactly how much can be done with blockchains, and how the future is going to play out.
The simple fact is that bitcoin, blockchains, and cryptocurrencies are going to change the ruling structure of the world. People whose position depends on this structure do not want to see this change. Blockchains can be used, like any internet technology, for purposes that are accaptable according to Islamic law, or for purposes that are unacceptable. It is up to the people using blockchains to learn the difference between right and wrong and to act accordingly, and it is up to Islamic scholars to gain a better understanding of the financial system to be able to guide those who are less well versed in the Islamic sciences towards ways of utilizing blockchain and any technology for the benefit of Muslims and all humanity.
