There has been much debate on the use of cryptocurrencies such as bitcoin and ethereum as a legitimate form of currency and investment in Islam. Shariah law emphasises real economic activity based on physical assets and frowns upon pure monetary speculation, even though several shariah-compliant digital coins have been launched in the market.
Dr Ziyaad Mahomed, associate dean of executive education and e-learning at the International Centre for Education in Islamic Finance (INCEIF), observes that Islamic scholars around the world have mixed views on the use of digital currencies. They range from being permissible to something that requires caution to being prohibited outright.
To give context to the debate among scholars, Ziyaad says it is important for investors to understand the basic concept. “Cryptocurrencies are recognised as a medium of exchange within a community and are identified as tokens with digital signatures, instead of banknotes or physical coins. It requires some effort to solve the ‘crypto’ or a puzzle to identify the digital signature. Hence, the name cryptocurrency,” he adds.
“It is really easy to understand — the legitimacy and sustainability of a cryptocurrency is based on the legitimacy of the puzzle that backs it up. If there is no puzzle, then anyone can make currencies and sell them, which has happened before in Islamic history.”
Ziyaad explains that in the 9th century, the medieval Islamic world used the dinar (gold) and dirham (silver) as currencies, both of which were carefully measured and weighed. However, the dinar and dirham were not used in other places, so Muslims traders had to use different currencies.
In the 10th century, after Islam had reached China, Muslim traders learnt that the Chinese used paper money. Intrigued, the Islamic governors started printing money on papyrus.
Ziyaad says this eventually caused chaos as it was not difficult to process papyrus and there was no control over how much paper money with no intrinsic value could be printed. “The same goes for cryptocurrencies. If the currencies are unsecured, then anyone can create and trade them,” he adds.
However, Ziyaad points out that it does not mean that currencies need to have gold or silver as a store of value. While they were recognised mediums of exchange, they are not a requirement within the shariah framework.
“What is required is something called istilah, which means social concurrence (or mutual agreement). It is determined using a concept called ta‘amul, which means exchange activity,” he says.
“Historically, society has used cowrie shells to trade with as they are recognised as a medium of exchange. That begs the question, can a medium of exchange be defined as currency?”
From a shariah perspective, currency is what has been mutually agreed upon, says Ziyaad. From a conventional perspective, currency is what is considered legal tender in a particular country. So, some Islamic scholars say cryptocurrencies are not a legitimate form of currency unless they are considered legal tender in a country or until they become a global norm.
Ziyaad says scholars around the world have differing views of cryptocurrencies. “A large group of scholars say cryptocurrencies are permitted because of the social concurrence concept. But they also say this does not necessarily mean that cryptocurrencies can be recognised as a legitimate form of currency.
“Some South African scholars say cryptocurrencies are prohibited, but one of the most prominent scholars in the world — Shaikh ’Abdul Sattar Abu Ghuddah — says that it sits on the border of permissibility and prohibition. So, users need to exercise caution. His and other scholars’ issue with cryptocurrencies are their excessively speculative nature and security risk. These are strong arguments.”
The excessive uncertainty is due to the speculative nature of cryptocurrencies, which is driven by those who trade simply to make a profit on currency fluctuations, says Ziyaad. Today, many institutional investors are putting billions of dollars into various cryptocurrencies, effectively creating an artificial demand for them.
“Although it is just one individual or one fund buying US$1 billion worth of the cryptocurrency, it is a lot of money in the small cryptocurrency space. So, that cryptocurrency will appreciate without any real value. So, while the cryptocurrencies themselves can be permissible, the trading part of it may be arguable,” he says.
The other issue is security risk. Ziyaad disagrees with cryptocurrency proponents who say these digital tokens cannot be used for money laundering due to the transparency they provide. “The process is transparent, but the owners of the cryptocurrencies are pseudonymous rather than anonymous. The only information anyone has of them is their token ID,” he says.
“If you look at it from that perspective, anyone can buy and sell currencies and use them for nefarious purposes, unless cryptocurrency exchanges record the data of owners accurately.”
Nevertheless, Ziyaad acknowledges that any asset can be manipulated. Excessive speculation in any trade, either movable or immovable properties, can be illegitimate if it is highly speculative. Cryptocurrencies, however, are unique because not all cryptocurrencies are equal, he says.
“Their underlying structures are different, so you cannot say all cryptocurrencies can be painted with the same brush. Ethereum’s structure, for example, is similar to that of bitcoin in the sense of decentralised ledgers. But Ripple has created blockchains within a centralised environment. Others have actual underlying assets such as gold backing them. So, one has to look at it case by case,” he adds.
Ziyaad, who currently serves as chairman of HSBC Amanah Malaysia Bhd’s shariah board, has almost 20 years of global experience as an executive, consultant and scholar in Islamic finance and capital markets. His areas of focus include Islamic social finance, shariah issues, innovation and financial technology.
He believes that the potential for cryptocurrencies in Islamic finance is massive. For one, it would allow investors to participate in beneficial projects anywhere in the world, says Ziyaad.
“For example, digital coins can represent various sustainable development projects through a cooperative scheme. By investing in these coins, investors can diversify their portfolios with investments that not only give them returns but also make a difference in people’s lives,” he adds.
“From a shariah perspective, I think this is the ultimate goal — leveraging new technologies to benefit all parties in a legitimate, halal manner. This, I think, is the future of cryptocurrencies.”