Bitcoin and cryptocurrencies are intriguing because they are very different from the traditional financial systems we use today. One particular subject people have pondered is whether or not bitcoin complies with the religious law that forms a part of Islamic tradition — otherwise known as Shariah Law. This week a microfinance firm based in Indonesia, Blossom Finance, published a 22-page working paper that concludes that “bitcoin qualifies as Islamic money, except where it is banned by a local government.”
Is Bitcoin Halal or Haram?
Over the past few years since the creation of bitcoin, many people have wondered if cryptocurrencies are compatible with Shariah-compliant finance. Islamic banking has a lot more rules that apply to profit sharing, loss bearing, leasing, safekeeping, and more. For instance, Shariah Law specifically prohibits usury which is called “riba” or collecting interest paid on loans. Bitcoin and cryptocurrencies have come into question over the years concerning whether or not they comply with Islamic banking. Just recently this past December a Muslim cleric declared that owning bitcoin was compatible with Islamic finance. However other clerics have disagreed with this opinion and Egypt’s top Islamic cleric had issued a fatawa (religious edict) against bitcoin.
Blossom Publishes a 22-Page Study on Bitcoin and Islamic Finance
This week news.Bitcoin.com spoke with Matthew J. Martin, the founder of the startupBlossom Finance that uses cryptocurrency to help Muslims with Islamic financial law. Martin and Blossom’s internal Shariah advisor and Shariah compliance officer, Mufti Muhammad Abu Bakar, published a study that concludes bitcoin does qualify as Islamic money, unless a local government forbids the use of digital currencies. The research explains an in-depth analysis of the various legal opinions (fatawah) on the subject of Islamic banking and bitcoin.
Martin explains that even though cryptocurrency interest continues to grow there is a lot of confusion among Muslims who make up close to a quarter of the world’s population. Many individuals have asked Martin if bitcoin and other cryptocurrencies comply with the set of rules followed by Muslims in accordance with the guidelines of the Quran.
“Contrary to popular myth, Shariah law is not a single set of rules; it’s is a scholarly field subject to differing interpretations and opinions on various matters,” explains the CEO of Blossom Finance. “Several recent fatawah issued by prominent Muslim scholars offered incomplete or contradictory opinions on the topic. With all the confusion out there, we wanted to offer clear guidance supported by solid research that benefits both laypeople and practitioners of Islamic finance.”
I’ve had so many people ask me ‘Is Bitcoin halal or haram?’, and the honest answer is ‘it depends’. Bitcoin is not just a currency, but it’s also a transaction and payment network. And blockchain itself is a whole category of technology with wide ranging applications.
National Law Supersedes Shariah
Martin clarifies that bitcoin qualifies as Islamic money as being a “customary money” but national law supersedes Shariah permissibility. For instance in Germany, Martin explains that bitcoin is recognized as a legal currency and therefore qualifies as Islamic money in Germany. But the Republic of Indonesia published guidelines this past January that declared all payments within Indonesia must be in Indonesian Rupiah.
“However, this clarification should not be seen as an anti-bitcoin stance — the same legal tender laws in Indonesia also forbid gold, silver, US Dollars, and Euros — It remains legal to buy and sell Bitcoin in Indonesia,” Blossom Finance details.
Bitcoin With the Shariah Principles of Money, but ICOs Are “Uncertain and Not Advised”
The founder of Blossom emphasizes that bitcoin technology is highly aligned with the Shariah goal of reducing excessive uncertainty. Moreover bitcoin’s compatibility with the Shariah prohibition against fractional reserve banking.
“Blockchains prove ownership of the asset – it proves you actually have the money you’re sending in a transaction. Conventional banking literally loans money into existence, and that is completely incompatible with the Shariah principles of money.”
Blossom’s study does research the clarity of initial coin offerings (ICOs) and if they comply with Shariah Law. At the moment Blossom Finance states “ICOs are highly uncertain, and not advised.” This is because one of the key goals of Shariah is the preservation of wealth and understanding that individuals should not invest more than they are willing to lose.
“ICOs, or initial coin offerings, often lack clarity on: a) what are investors actually buying, and b) what are the investors’ rights,” the report concludes.
Many such offerings likely fall afoul of having gharar, meaning, excessive uncertainty, and therefore do not qualify as permissible Islamic investments.
The 22-page working paper which discusses the subject of bitcoin and Islamic finance compatibility in great detail can be found here.
What do you think about cryptocurrencies complying with Islamic finance? Let us know your thoughts about this subject in the comments below.