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Cryptocurrencies in the World of Islamic Banking and Finance

Islamic banking and finance systems are based on Islamic Law or Sharia principles. Islamic Law outlines what a halal business or financial transaction is. Among other things, it forbids all transactions that lead to injustice or the exploitation of any party to a contract. It also prohibits paying or charging interest on loans and emphasizes there should always be equitable and ethical financial transactions. Sharia laws also prohibit the acquisition of an asset where one party wins and another loses. So, how does this all tie into cryptocurrencies?

Prohibitions on Uncertainty and Gambling

“Gharar” is broadly used to describe uncertainty, hazard, fraud, risk, and deceit that lead to losses or destruction. In Islam, it refers to transactions or objects whose description or existence is uncertain.

Being digital in nature, one could argue that the existence of a specific cryptocurrency is uncertain. Also, because of their volatile nature and how they are traded, cryptocurrencies introduce uncertainty and make it difficult to know the outcome of a transaction beforehand. Either party can make a profit or loss, with both aiming for the former. This is speculation that is very similar to gambling, something many Islamic scholars cite when discussing whether or not crypto is haram or halal.

Profit-Loss Sharing

Islamic finance principles also emphasize profit-loss sharing between lenders and borrowers. They both share the investment risk and the profits and losses. With cryptocurrencies, this rarely happens. Once a digital asset is sold, all profits and losses arising from future trades belong to the current holder, who is the buyer.

Even though this remains a sticking point for many cryptocurrencies, some have figured this out to ensure they remain halal. A team of Islamic finance and technology experts have developed a coin based on a profit-loss sharing model that makes it Sharia compliant. Additionally, this coin does not support interest-based lending. The result is the investor sharing the profit and losses of the venture rather than receiving interest on their investment.

The Question of Utility

Even though there are strong arguments supporting cryptocurrencies being haram due to their speculative nature, many Islamic scholars hold a contrary view. Mohammed AlKaff AlHashmi, a co-founder of Islam Coin, has said that Islamic financial laws are smart and flexible enough to accommodate cryptocurrencies. He said that even going into business is speculative, but Sharia Laws still allow Muslims to do this.

However, he says a cryptocurrency can only be considered halal if it has real-world utility and is not only used for speculation and trading. Additionally, the underlying architecture must follow Sharia law to ensure it is compliant.

Stablecoins have emerged as a great example because they back and finance real assets, which meets the requirements of Sharia Law. These assets include existing currencies, gold or other assets.

Cryptocurrencies are already divisive enough, with many people saying they are the future and some saying their volatile nature makes them a risky investment. There is also the issue of having to comply with Islamic finance laws to be considered halal. Developers, scholars and Islamic finance law experts are already developing various solutions while keeping Sharia laws in mind when developing them and their architectures.

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 1/27/2024

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