Cryptocurrency and Islam
Bitcoin and the cryptocurrency market exhibit all of the classic characteristics of asset bubbles when compared to historical asset bubbles such as the 1999 DotCom bubble and the 1637 Dutch Tulip Mania (Authers, 2017; Phillips and Gorse, 2017; Sovbetov, 2018; Blau, 2018). What does Islam think about this new currency technology in the financial system?
Cryptocurrency in general
The majority of peer-reviewed scientific articles indicate that cryptocurrency has more disadvantages. William Goetzmann, a Yale University economist, was quoted in Silverman et al. (2017); states that due to the lack of intrinsic value and the prices of cryptocurrencies being driven by speculation, there is no way for cryptocurrencies to be valued fundamentally, making the market irrational.
The growth of the shadow economy, which leads to tax evasion, effectively destroys the concept of an integral state. Unsafe cryptocurrency Inability to identify financial transaction participants (anonymity, laundering of criminal proceeds, financing of crime, fraudulent activities, etc.), The exchange rate is highly volatile. Lack of a mechanism for benefit redistribution to address social challenges The loss of data in a cryptocurrency wallet makes any other method of withdrawing financial assets from it impossible. Uncertainty in regulatory matters, including illegality in some countries The increasing complexity of the cryptocurrency manufacturing process.
Last but not least, the disadvantage that cryptocurrencies eliminate the privacy of transactions and pose a risk to the traditional banking sector (Echarte Fernández et al. 2021).
Islam’s view on cryptocurrency
Studies on Islamic cryptocurrency are still in the early stages, discussions on the system are ongoing, and no agreed-upon model has been proposed, so more research is required (Hasan Erkan, Hasan Kazak, Orhan Çeker, 2020).
In general, the issue of cryptocurrency has sparked debate in the Islamic world, but we can see a similar situation in the rest of the world. There is no agreement on this issue, and there is still no universal “fatwa” (Sharia solution) that all Islamic representatives must follow.
It should be noted that, over the last four decades, Islamic banking and finance have emerged as one of the world’s fastest growing industries, with widespread acceptance among Muslims and non-Muslims alike. Islamic banking and finance are now viewed as institutions that strive not only to fulfill the religious obligations of the Muslim community, but also as an alternative to conventional processes that offer new values. Since its inception in the 1960s as an alternative to interest-based banking, Islamic banking, for example, has continued to grow and expand in terms of the number of institutions, asset size, and countries in which its products and services are available. One of the service products offered by Islamic banking is the purchase and sale of foreign currency, also known as forex or called al-sharf. Al-Sharf: a sale and purchase agreement of a currency denominated in other currencies, a sale or purchase of a foreign currency of the same or similar type.
The debate revolves around whether Bitcoins and other recognized forms of cryptocurrencies are commodities, money or currency, or financial assets. However, the blockchain technology, as the platform on which they are generated, does not appear to be a source of disagreement in Islamic law (Sharah) parlance.
Islamic institution on electronic currency
The International Academy of Islamic Fiqh (IIFA), a major Islamic institution, states in its statement on electronic currency: “Given the great risks involved and the instability of dealing with these currencies, the Council recommends further research and examination of issues affecting governance.” (IIFA, 2019)
Cons view of Islam on cryptocurrency
According to the findings of a 2021 scientific study, cryptocurrency is a rather contentious financial instrument: on the one hand, it has high investment appeal, but on the other hand, it is volatile and appears to be a risky financial asset (Shamil Shovkhalov and Hussein Idrisov, 2021)
Restrictions are based on examples of everyday life and relationships between Muslims at the dawn of Islam, such as the sale of an unborn camel in the womb, an uncaught bird, and so on. The Prophet Muhammad (peace and blessings of Allah be upon him) prohibited “garar,” as evidenced by various collections of hadiths 30. As a result, the cryptocurrency-related risk does not apply to “garar,” as it is not caused by information asymmetry, but rather by market conditions (Shamil Shovkhalov and Hussein Idrisov, 2021).
The purpose of money in Islam is to protect people, the social and economic system, and not to cause economic anarchy. For these reasons, the most significant issues with cryptocurrencies are that their equivalent is not based on an economic asset, there is no official authority to guarantee and support a public power such as the state that will ensure the security of a measure of value, its value is not stable, and it is vulnerable to manipulations and unnecessary speculations.
According to a study conducted in the world’s most populous Muslim country, cryptocurrency is extremely volatile and has limitations to being called “money” because it is limited and used for speculation, which is prohibited in Islam. According to the findings, Muslims are hesitant to use cryptocurrency as money or a transaction currency. Because of this, it is expected that cryptocurrency will not grow rapidly in Muslim countries (Dodik Siswantoro , Rangga Handika , Aria Farah Mita, 2020).
Money, according to Islam, is only used for exchange, not for speculation or trading with the intent of profiting. Profiting from money trading on purpose is considered usury (riba) (Sanusi, 2002). In contrast, referring to the preceding phenomenon, people would prefer to keep “good” money rather than use “bad” money for transactions.
Other scholars have stated that the current dispensation in the operation of cryptocurrencies can be transformed to be Sharia compliant with precious metals backing, further deepening the discourse on the workings of cryptocurrencies in terms of Sharia compatibility issues (gold and silver). This viewpoint is shared by those who believe that money, including current fiat money, should have intrinsic value. As a result, a proposed Sharia Compliant Precious Metal Cryptocurrency (SCPMC) is seen to be more relevant to the attainment of Islamic law objectives (Maqsid al-Sharah) due to its wealth preservation and store of value attribute.
Pros view of Islam on cryptocurrency
Oziev and Yandiev (2018) investigated Bitcoin’s conformity to Islamic teaching and discovered that it lacks emitter, monetary control, and transparency. Some Islamic scholars hold opposing views on the subject. According to the Shariah Review Bereau (2018), cryptocurrency and tokens are permissible as money because they meet exchange transaction habits as well as other requirements such as maal (property), man-fa’ah (usufruct), haqq (right), and dayn (liability). Additionally, there are some distinctions between coins and tokens. Tokens vary in appearance, but their function as a medium of exchange is the same. According to Amalin (2018), cryptocurrency fulfilled for money exchange is transparent and clear regulation for trading. It is free of usury (riba), which is prohibited in Islamic teaching. Similar to Zain (2018), he stated that Bitcoin can be used for illegal transactions because it is unregulated by central banks.
The work finds that cryptocurrencies would generate three advantages over all forms of money including gold through: establishing a unified financial system through its standard decentralization, being rarer than gold and its significant mitigation of inflation. It is also noted that the prevalent foreign exchange risk resulting from the underlying activities (rather than the currency itself) is free from speculation (Gharar). (Mustapha Abubakar, M. Kabir Hassan and Muhammad Auwalu Haruna, 2019).
Another study found that cryptocurrency is suitable and fulfills the terms of the contract, as well as buying and selling in Islam (Gazi Amalin, 2018). If there are regulations that can regulate the cryptocurrency trade, cryptocurrency can be classified as a sharf. The element of gharar (uncertainty) can be avoided by having clear regulations. The statements and regulations issued by the government and the national shariah board are critical in providing legal certainty, particularly for Muslims.
Cryptocurrency in Indonesia, a most populous Islam country
The Indonesian Commodity Futures Trading Regulatory Agency (Bappebti) has announced that licenses for physical crypto asset traders will be suspended as of August 15, 2022. Circular Letter №208/BAPPEBTI/SE/08/2022 contains this announcement. According to Bappebti Regulation №8 of 2021 on the Guidelines for the Implementation of Physical Market Trading on Futures Exchanges, the organization issued regulations governing the conduct of physical crypto asset market trading. The policy, which goes into effect on October 29, 2021, includes eight requirements for physical crypto asset traders regulated by Bappebti. Tokocrypto and Indodax are two of the 24 companies that have already received a license to trade physical crypto assets.
References:
Shamil Shovkhalov and Hussein Idrisov, 2021
Hasan Erkan, Hasan Kazak, Orhan Çeker, 2020
Dodik Siswantoro , Rangga Handika , Aria Farah Mita, 2020
Mustapha Abubakar, M. Kabir Hassan and Muhammad Auwalu Haruna, 2019
GAZI AMALIN, 2018
Marsya Nabila, 2022
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