Cryptocurrencies in general involve various Shariah issues covering the very permissibility of their issuance in view of the fact that they may not possess the features of a valid currency from a Shariah perspective. In fact, Shariah recognises and advocates the three economic functions of currencies being a medium of exchange, a unit of account and a store of value. If one or more of these functions is impaired in a currency then it is not a valid currency. Moreover, the Shariah has its own way in protecting these functions. It engulfs the trading of currencies with special rules intended to ultimately protect these functions. Most importantly, the Shariah does not allow future contracts on currencies in order to curve speculation.
Gold and silver are not the only valid currency
In the past, gold and silver were the primary if not the sole currencies in the world. The Shariah rules of currencies were then formulated on the assumption that currencies were gold and silver only, and some Shariah texts came to state that the exchange of gold and silver should be subject to some rules in order to avoid Riba. When the Muslim scholars attempted to rationalize the subjection of these two metals to these rules, they could conclude that gold and silver were used as currencies, as if they were suggesting that currencies in general, regardless of their nature, would have to be subjected to these rules. However, at that time they could not envisage any other commodity replacing gold and silver as currencies, and therefore, some of the Fiqh statements came to imply the applicability of these rules to gold and silver only.
Nevertheless, Shariah does not limit the concept of money (currency) to gold and silver, but rather it recognizes whatever people use as currency, but Shariah then engulfs this currency with some rules in order to protect its economic functions and ensure fairness in its deals and transactions.
Shariah Characteristics of a valid currency
From a Shariah perspective, the following can be considered as conditions for a valid currency, so whatever currency meets these conditions can be deemed as valid currency and thus acquire the known Shariah rules pertaining to currencies.
- Protection of its value
If the currency does not have an intrinsic value, i.e. it does not have a value on its own in isolation from the value legally assigned to it by the central bank, then its technical value has to be safeguarded by virtue of some rules and regulations, in order to protect people dealing with them from fraud and excessive fluctuations in their values.
- Wide acceptability
This is to ensure that the currency will effectively play its perceived role as a means of exchange, a store of value and a unit of account.
- Relative stability of its value
The economic functions of currency will not be appropriately discharged if the currency value is highly volatile. However, if the described economic functions of a currency are only temporarily or exceptionally impaired or suspended due to some war or natural calamity then this does not disqualify the currency as being basically valid.
Does Bitcoin fit the Shariah standards of a valid currency?
If the above characteristics are fulfilled, then dealing in the new currency regardless of its nature, being digital or whatsoever, is acceptable and subject to the same Shariah rules of the regular currency.
In terms of Protection
Although some economists have voiced concerns that Bitcoin could be a Ponzi scheme, reports by official institutions have excluded this possibility. A report by the World Bank in 2014 concluded that bitcoin was not a deliberate Ponzi scheme. The Swiss Federal Council, after examining some concerns that bitcoin might be a pyramid scheme, concluded that “Since in the case of bitcoin the typical promises of profits are lacking, it cannot be assumed that bitcoin is a pyramid scheme.”
However, Bitcoin are mined electronically and can be kept on a hard drive. They could be subject to hacking and could be lost. Their transactions are recorded in a blockchain. The blockchain is a public ledger that records bitcoin transactions but without any trusted central authority. Besides, in the blockchain, bitcoins are registered to bitcoin addresses whose creation is done through picking a random valid private key to be assigned to the bitcoin address. Disclosing this address will not compromise the safety of the bitcoin, but disclosing or losing the private key is the problem. If the private key is lost, the bitcoin network will not recognize any other evidence of ownership, and the coins are effectively lost. In 2013 one user claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he unintentionally discarded the hard drive saving his private key.
In terms of acceptability:
The legal status of bitcoin varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed its use and trade, others have banned or restricted it.
In terms of stability of its value
Bitcoin has been very volatile, especially in 2017, ranging from about $1000 to $20000, and in December 2017 it doubled in value then lost around 50% of its value!
Prior to this, and according to articles quoted by Wikipedia, “the price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2. In the latter half of 2012 and during the 2012–13 Cypriot financial crisis, the bitcoin price began to rise, reaching a high of US$266 on 10 April 2013, before crashing to around US$50.On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242.In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was under US$600”. The diagram below depicts the high volatility of Bitcoin.
In conclusion, it can be said that despite the absence of Shariah objection to the creation of a new currency like Bitcoin, it is found that bitcoin is lacking some of the necessary characteristics of a valid currency from a Shariah perspective. Its value is technically not intrinsic, and as such it has to be supervised by a trustworthy financial authority in order to protect its user from a possible fraud or manipulation, which is not the current cause with Bitcoin. Besides, its value has been drastically volatile, which has not been the case with any conventional currency. Moreover, the acceptability of Bitcoin has been limited even within one jurisdiction; if not illegal at all. All these together will disqualify Bitcoin from being a valid currency from a Shariah point of view, basically due to its failure to discharge the economic functions of a currency.
Kaushik Basu (July 2014). “Ponzis: The Science and Mystique of a Class of Financial Frauds”.
“Man Throws Away 7,500 Bitcoins, Now Worth $7.5 Million”, (29 November, 2013), CBS DC.