Cryptocurrencies have unique features that make them unlike any other asset class, such as Forex or equities. For this reason, cryptocurrencies pose unique challenges to how Islamic scholars interpret Islamic (Shariah) laws to recommend whether trading or owning cryptocurrencies is halal (permissible) or haram (forbidden).
This article explores that debate. To be clear, it is a debate—unlike interest payments, or the consumption of alcohol, Islamic scholars and the Muslim community have not reached a consensus on whether cryptocurrencies should be considered Halal or Haram, and they maybe never will because of subjective interpretations of cryptocurrencies’ role in modern economies.
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To help us lay the foundation for understanding the debate, let’s start by learning some of the essential attributes of cryptocurrencies.
How Does Cryptocurrency Work?
Here are five key things to know about how Cryptocurrencies work.
- Unlike traditional currencies such as Euros or US Dollars, neither governments nor central banks issue cryptocurrencies. Instead, independent groups can create a cryptocurrency.
- A cryptocurrency is a digital or virtual currency stored on a technology called blockchain. In other words, the blockchain comes first, and a cryptocurrency sits on it.
- Blockchain technology is a decentralized record-keeping system. Unlike conventional record-keeping methods, such as financial records kept by accountants, a blockchain uses a computer network to make new entries visible to everyone. That means there is no central authority controlling a single ledger. Instead, everyone that is a part of the system controls a decentralized and shared record. Researchers invented the concept of blockchain to enable the creation of Bitcoin. Because blockchain technology is technically independent of cryptocurrencies, industries now use decentralized blockchain record-keeping systems for other reasons—for example, manufacturers use it for supply chain management, and governments have started experimenting with blockchain for health records.
- The first cryptocurrency was Bitcoin, launched in 2009. Today, Bitcoin is still the largest cryptocurrency, followed by Ethereum.
- In the case of Bitcoin, anyone can potentially create a new Bitcoin by solving a complex mathematical or cryptographic problem—this process is known as “mining.” Bitcoin mining uses tremendous computing power and energy to the point that mining is environmentally damaging. Because of the mathematical structure of Bitcoin, there is a maximum number of Bitcoin that can exist in the future.
Cryptocurrency is unregulated (mostly).
By their very nature, cryptocurrencies are not backed by real assets, governments, or central banks. Anyone can create a cryptocurrency and sell coins to the public with the right technology and team.
As you can imagine, when cryptocurrencies first appeared in the early 2010s, the industry was like the wild west, much like Forex was in the early 2000s. Slowly but surely, jurisdictions like the US and Europe have started to regulate aspects of cryptocurrencies. However, there is a long way to go—they are not regulated in the same way as traditional currencies. From that perspective, the public should be cautious and not assume they will receive the same protections with cryptocurrencies as regulated banks give to cash deposits.
Islamic Finance Principles
To provide a framework for the debate surrounding whether cryptocurrencies are halal or haram, let’s consider three main Islamic finance principles:
- Wealth must be generated from legitimate trade and asset-based investment. The use of money to make money is expressly forbidden.
- Investment should also have a social and ethical benefit to broader society beyond pure return.
- Risk should be shared.
To allow Muslims to act within these principles, there are several activities which are prohibited under Shariah law:
- Charging and receiving interest (riba).
- Investing in businesses dealing with alcohol, gambling, drugs, pork, pornography, or other areas that Shariah considers unlawful.
- Speculation or extreme risk.
- Uncertainty about the subject matter and terms of contracts—this includes selling something one does not own, e.g., short-selling.
Considering the above ideas of Shariah law, let’s look at the Shariah-compliant debate around crypto.
Why Do Some People Consider Crypto Haram?
Reason 1: Cryptocurrency is not money.
A defining feature of a currency is that it acts as a medium of exchange or store of wealth. Many Shariah experts believe that in the modern world, only governments or their central banks can issue currencies that meet the defining features of money. Because cryptocurrencies operate outside the realms of governments and the banking system, many Islamic scholars do not view cryptocurrencies as a true currency category. Remember, even though cryptocurrencies can be an “alternative investment asset,” that does not make them an “alternative medium of exchange,” i.e., the widely accepted definition of money.
Reason 2: Cryptocurrencies are only speculative without intrinsic value. Therefore, they are a form of gambling.
Cryptocurrencies are solely mathematical constructs sitting on digital networks. Without the tangible backing of a government or central bank, many Islamic scholars argue that cryptocurrencies, by definition, have no intrinsic value. Without intrinsic value, some Islamic scholars view cryptocurrencies as solely speculative instruments with purely hypothetical value. That leads them to reason that trading cryptocurrencies is gambling, which is haram or forbidden under Shariah law.
Reason 3: Cryptocurrencies are used for illegal activities.
Because cryptocurrency allows for direct “peer-to-peer” transactions made via the internet, only two parties are involved in the activity. No banks, governments or intermediaries are necessary. This makes cryptocurrency transactions much more anonymous. It is important to note that cryptocurrency dealings are not one hundred percent anonymous—law enforcement agencies have found ways to track cryptocurrency transactions.
Criminals are drawn to the increased anonymity of cryptocurrencies. As a result, Bitcoin, for example, has a significantly high proportion of illegal use, such as money laundering or drug trafficking. Some market experts even argue that the only reason to want to use cryptocurrencies rather than traditional currencies is for illegal activities.
Reason 4: Cryptocurrency is a high-risk investment.
Cryptocurrencies have exceptionally high volatility compared to traditional currencies. Let’s compare Bitcoin to the world’s most widely traded Forex pair, EUR/USD. Since the Euro started trading in Jan 1999, EUR/USD has had a range of 0.83 to 1.60. In other words, the Euro’s entire range from its lowest point to its highest point saw it double in value. And this range played out over decades, not months. In comparison, Bitcoin moved from under $10 a coin in mid-2011 to $69,000 at its high in November 2021, over 7,000 times higher! It then lost 75% of its value in only a few months. Imagine the Euro gaining value against the USD 7,000 times over or losing 75% of its value in a few months! European economies trying to import raw materials or export goods would be unable to function. The volatility of Bitcoin prohibits it from working as a regular currency. Bitcoin is also extremely volatile compared to established equity indexes such as the S&P 500. Shariah scholars often cite cryptocurrency’s excessive volatility as another reason they are haram.
Reason 5: Cryptocurrency is not regulated.
The crypto space is generally unregulated, and as such it has attracted some dubious actors who have launched coins or other ancillary crypto services which are either complete or partial scams.
Now let’s examine why some Islamic finance experts consider cryptocurrencies permissible, or halal.
How Can Cryptocurrencies Be Halal?
Reason 1: Contractual certainty.
Under Shariah law, a contract is valid if a contractual consideration is present, known as “mal.” That means there must be an exchange of something that can be owned, stored, and traded. Cryptos are real digital assets that can be owned and stored electronically in digital wallets. They can be traded on exchanges, which some countries now regulate.
Reason 2: Free of interest (riba).
Cryptocurrencies do not have a built-in element of interest or riba. Of course, not having interest does not automatically make cryptocurrencies halal—other attributes can make them haram. However, much of the international capital markets revolve around interest payments, and having an asset class without interest is a big plus for Shariah-conscious investors.
Reason 3: Volatility is not haram by itself.
While cryptocurrencies are used to speculate and take excessive risk, some experts state that volatility is not enough of a reason to consider cryptocurrency as haram. Volatility is present in all markets, and excessive risk is often taken because investors do not manage their capital correctly. For example, an equity trader might put too much of their capital into a single stock that does not perform, thereby damaging a large part of their account value. However, that does not make equity investing haram. Investors can put smaller amounts of their capital in a cryptocurrency because of its volatility, thereby not taking excessive risk.
Reason 4: Illegal use of cryptocurrencies by others does not make it haram.
Criminals use traditional currencies like US Dollars or Euros for illegal activities. It’s not as if criminal usage of money only started with the introduction of Bitcoin in 2009! Similarly, for decades, criminals have used stocks to make trades using insider information. Islamic finance experts that consider cryptocurrencies halal point to the motive of the investor being haram and not the underlying asset itself as haram.
Reason 6: Cryptocurrencies are already used as currencies by some.
Shariah scholars that support cryptocurrencies as halal argue that the lack of a central authority strengthens their value as currencies. It means no single authority can manipulate the money supply, ensuring market transparency. Furthermore, many are already using cryptocurrencies as mediums of exchange, even if it is not a dominant vehicle. For example, some companies accept cryptocurrencies as payments for goods and services. This already gives cryptocurrencies purchasing power, where buyers and sellers use them to facilitate transactions.
Is Cryptocurrency Halal or Haram?
Both sides of the debate have supporters qualified to issue fatwas and have put forward intellectually sound arguments. This makes it difficult for ordinary Muslims to decide either way. Cryptocurrencies are new, and as they evolve—for example, more parts of society accept them as payments or governments fully regulate cryptocurrencies, or new types of cryptocurrencies emerge—the debate will also evolve. It is conceivable that muftis will issue new fatwas based on new market conditions in the future.
At the present time, Shariah-conscious investors must decide individually whether to proceed with cryptocurrencies or not. Of course, not all cryptocurrencies are the same—you may deem some halal and others haram. And the decision may depend on how you wish to use cryptocurrencies. For example, is it for speculation or purchasing goods and services? These factors will affect your decision.
Fatwa on Cryptocurrency—Opinions of Shariah Scholars
A fatwa is a legal ruling on a point of Islamic law (Shariah) given by a qualified faqih (Islamic jurist). A jurist that issues fatwas is called a “mufti.”
The following is not a comprehensive review of fatwas regarding cryptocurrencies—instead, it is a sampling of ideas in the field.
- January 2018: Egypt's top Imam, Sheikh Shawki Allam, the grand mufti, endorsed a ban on trading in Bitcoin by declaring it "forbidden" by Islam. He said, “Bitcoin carries risks of “fraudulence, lack of knowledge, and cheating. Bitcoin is forbidden in Shariah as it causes harm to individuals, groups and institutions. It is used directly to fund terrorists.”
- February 2021: Mufti Faraz Adam wrote in his book, “Introduction to Islamic Fintech,” that he regards many cryptocurrencies as digital assets and that cryptocurrencies with a lawful utility can be deemed as property from a Shariah perspective. Later in his career, he states, “Bitcoin will be a currency as long as people use and exchange them. A system which is acceptable among people is sufficient to establish a currency in Shariah.” Because there are various types of crypto-assets, Mufti Faraz recommends screening them for Shariah compliance before investing. His screening criteria are:
- Legitimacy screening—ensure that the specific cryptocurrency is a genuine project, not a scam.
- Project screening—ensure that the project is Shariah compliant, e.g., does not require interest.
- Financials screening—ensuring that it meets the financial criteria for Shariah compliance if it is an equity-based token.
- Token screening—understanding the Shariah compliance of the token.
- Staking screening—understanding the Shariah compliance of the staking mechanism.
- September 2022: Abdulkader Hallak, a wealth advisor at Sarwa, a Dubai, UAE-based firm, believes that volatility is an insufficient reason to consider cryptocurrency as haram. He believes the motive of the investor matters more. He says, “If you’re not using any leverage or CFDs, and you’re not gambling and taking excessive risk, then this draws the line. What is your goal behind investing in crypto? Is it to accumulate your wealth? Are you using crypto as a store of value? Then that’s okay.”
Bottom Line
Both sides have solid arguments as to whether cryptocurrencies are halal or haram.
Those that deem cryptocurrencies to be haram (forbidden) cite that they have no intrinsic value, are purely speculative, are excessively risky, do not fit the definition of a currency, and are mainly used for illicit purposes. Experts that consider cryptocurrencies to be halal believe that even though they are volatile, that does not make them haram. and that many people already use them as currencies to buy and sell goods. Thus, cryptocurrencies already act as money. They also argue that cryptocurrencies are real digital assets that can be owned and stored and traded, which fits the Shariah definition of “mal” or property.
Different Muftis have given divergent fatwas and opinions on cryptocurrencies. The debate is fluid and evolving.
