Decrypting Cryptocurrency – IV
Islamic Rulings on Bitcoin and Altcoins
(Shaykh Dr Sajid Umar, Standing Shariah Committee, Islamic Council of Europe (ICE), Interviewed by Usman Malik)
Continued from Decrypting Cryptocurrency – III: Characteristics of Money in Islam
U: With the preliminary concepts covered, moving on now to the fiqh of cryptocurrencies, tokens and NFTs, let us start with bitcoin and altcoins. In a recent video you mentioned four views of contemporary Islamic scholarship: (1) Haram; (2) Permissible as a currency; (3) Haram as a means but not as ends; (4) Permissible as an asset but not a currency. Could you take us through these views in more detail?
S: Before we discuss these rulings, it is important to understand what exactly these rulings entail as well.
What I mean by this is the following. Let us say a scholar rules that crypto-coins are allowed. What are they actually saying? Are they saying that short-selling cryptos is allowed? Or are they suggesting that day trading – despite its propensity towards volatility – is allowed? Or are they saying it is something allowed to own, with certain conditions?
In the same breath, regarding the scholars who say it is haram: are they saying the idea is haram? Or are they saying it being used as a currency is haram (for whatever reasoning they have), which could be because they view the matter to be the right of the state, or because it has no legal recourse or regulation? Or it may be because the masses have intentions with it which do not conform to the values of Islamic law. All of these are really valid concerns, and could also make anything we all agree to be permissible in normal circumstances forbidden…
So it is important that these matters are ironed out so that the rulings are not shared by the general public prematurely.
In terms of the different views, then you are correct:
Some have concluded it to be haram, and this conclusion is due to it being viewed as a currency. And to my knowledge, we have reputable scholarly councils in Palestine, South Africa, and the UK adopting this view. There are also some scholars in the Middle East who share this opinion. In terms of Turkey, their official fatwa body ruled trading with them to be incompatible with the shariah during the time the fatwa was released. It is interesting though how they worded their response.
Some have concluded that they do not have a view on it per se. Included in this camp are some of my teachers, who are fiqh specialists and have a recognised voice in Islamic Finance internationally. However in terms of trading them, they have ruled short selling and day trading – where the ambiguity is too high – as being forbidden, and this would be the ruling with anything traded in a contradictory manner to the laws of the shariah.
Some have said it is permissible as a currency. This is if people take it as a currency between themselves through the concept of istislah – whereby a group unites upon something being a medium of exchange and a standard of value. So upon this view, as long as the crypto-coin achieves the threshold of thamaniyyah intersubjectively, then it can be purchased, sold, and used, and the rules of zakah and riba apply.
Some have said it is forbidden as a currency, but only as a means, and not an end, and this is because the notion of haram is of two categories. The first is that which is haram in and of itself, like alcohol and riba. The second is that which is haram because of its high propensity to lead to that which is haram in and of itself. The benefit of this distinction is appreciated by students of legal theory, in that the second category of haram can become permissible temporarily during abnormal circumstances. So during abnormal and exceptional circumstances, crypto-currencies can be used as money, and when things return back to normal, they cannot. This view is held by some scholars in the Middle East, and as you can see, it is based on the understanding of cryptos being money.
Some have said it is permissible, but as an asset, and not a currency. They say this because they are of the view that in this day and age cryptos meet the requirements of maliyyah, which we discussed earlier. This means that it is considered a form of wealth today; if it is not illegal, then it meets the requirements of taqawwum, which we also discussed earlier, and this means that it can be traded. But again, I have no doubt that these scholars are not saying that it can be traded unconditionally. This view is held by some scholars in the Middle East as well.
And then there is the view that I mentioned in my 2018 guidance on crypto-currency, which can be found on my website. I also have a recent video on the topic, where I have said that it is a distorted currency. In essence, the outcome of this view will be the same as the 5th view, along with many conditions…and the reason why I highlight it in passing is for the sake of precision and because:
a) The crypto-arena itself separates between cryptos that were issued to act as coins, and other units which were released to be a token representation of an asset or service, for example.
b) Furthermore, scholars within Islamic law have spoken about the concept of customary money (naqd al-urfi). And we observe today that over 10,000 companies accept cryptos as a form of payment customarily.
So from this angle it carries the traits of a form of money. This is because none of these companies consider themselves to be engaged in barter trade or offsetting the price of the transaction via the receipt of an asset when they accept crypto as a counter value during a transaction. Rather they consider themselves to have sold something, and having received the payment for it in the form of a crypto.
U: Why do you call it a distorted currency?
S: For several reasons, from among them are:
1) Thamaniyyah has not been achieved yet, at least not at the required level for me for these currencies to assume the appropriate characteristics of money from a fiqh perspective.
So, for example, money should be a standard through which the value of other things are determined, like the price of your home and car, not to mention the cost of your school fees, bills, taxes, etc…but do we see trade today occurring in a manner which is based and priced upon crypto-currency as a norm? Not to my knowledge.
Now you could say that over 10,000 companies accept crypto in the form of payments, and I considered this during my deliberation. But in reality what percentage does this make up in terms of the aggregate percentage of companies world-wide?
And then there is another reality which must be considered with regards to these companies listed as firms that trade in crypto-currencies: are they basing the price of their service or product with crypto-currency or actual fiat money? The vast majority price their product in fiat currency and simply take the equivalent in crypto…
-Furthermore, some of these companies advertise that they accept crypto, but they do not mean bitcoin, but rather stable coins, which are a type of crypto that is supposed to be pegged to actual fiat money. These units are supposed to be the crypto representation of an actual dollar, riyal, dirham, or pound. And the idea of a stable coin is diametrically different to the idea of bitcoin and other altcoins like lightcoin, etherium, dogecoin, and so on…this is because they are not just supposed to represent actual fiat money, but also provide the resource efficiency of the blockchain during transactions.
I would like to make a verbal footnote here please. I read something recently regarding stable coins sold on the coin base platform, where users were promised that each stable coin represented an actual dollar. However, this promise ended up not being true, as some of the stable coins were representations of commercial paper and corporate bonds! So here is another reason why we must exercise caution and not to lose balance on this whole crypto discussion; we must not prematurely exercise harshness towards the scholars if they hold the view that these cryptos are impermissible.
– Another point is that regarding the countries which recognise bitcoin (aside from el-Salvador, as I have not looked into the details of the press release today), we must ask: do they recognise this crypto as a currency or a financial instrument which can be taxed? Something being recognised as a financial instrument does not make it a currency, especially from an Islamic perspective. So if we see trends on social media that a country has recognised a form of crypto, for example, and see its price going up, we should be cautious. Before becoming a victim of fear of missing out syndrome (FOMO), do the necessary research and see exactly what is being said!
2) Volatility is another issue. And this is connected to the earlier point regarding thamaniyyah, because from the characteristics of money is that within its environment, the value it represents should not be subject to constant spikes and crashes…For this reason we do not see deferred transactions being priced with crypto-currencies yet, which shows their deficiency in being a means for the preservation of wealth and maintaining the financial positions of transacting parties in an adequate way. And this is an important function of money – not just in the present – but especially today.
3) Currencies cannot be something available to a few people, or at amounts not suitable to take care of the transaction needs of the human race. This was another factor in deeming it to be a distorted currency, and not a currency.
4) In addition to this, I also call it a distorted currency because the notion of money needs to incorporate other fundamental concepts today. As we now live in a global age with different values and systems in domination, having poor regulation with no to little legal recourse regarding what people consider today the base of their livelihood (money) can lead to much harm on a mass scale. Undoubtedly, a faqih or mufti has to look at matters from all angles, and ensure that the objectives of the shariah with regards to the preservation of wealth and the economy are preserved.
With poor regulation, a problem arises, namely how society can control the problem of excess liquidity. This problem has been compounded with cryptos being released at a dime a dozen now, and should be a major concern if they are to be considered money. At the opening of our webinar we spoke about how dangerous too much buying power can be to the marketplace and the livelihood of society.
And with no legal recourse currently available, much of constitutional law with regards to trade and commutative contracts would need to be reinterpreted or changed. How sustainable is that?
So these ideas collectively are behind the idea of crypto currencies being a distorted currency.
U: What would you say to those who point out that volatility—to varying degrees—exists in fiat currency as well?
S: This is something I have contemplated after considering bitcoin to be a distorted currency.
But first, allow me to say that fiat money cannot be the only benchmark for us when looking at innovation in the financial domain. This is because when President Nixon unpegged the dollar from its equivalent in actual gold, that was not ideal either. Even those who consider these cryptos to be forbidden say it was not ideal.
We have to look at this discussion anew and base our ideas regarding it using better benchmarks, like the gold standard, which prevented currencies from being created from nothing and kept them dependent on a source of supply.
However, in answering your question, in terms of unacceptable volatility; then I am talking about it in light of the entire ecosystem. Yes, currencies experience change in price daily, and that is because people trade in it. This is not something supported by the values of the shariah with regards to money quite frankly, as money should never be treated as an asset. Yes, the Shariah allows the exchange of currencies due to need, but it does not endorse trading it in this way. And please note that I did not say it is ?ar?m in my representation of the shariah on the matter. Again, perhaps we can sit down in the future to discuss forex trading and its legal ruling. The Financial Advisory and Consultancy at ICE has already asked for convening a discussion on pensions, and in sha’ Allah we can add this topic to the list.
But in terms of this point, yes, fluctuation (or volatility) does happen to the pricing of these currencies. However, we do not see the overall ecosystem being affected due to this on a daily basis. If prices of different forms of wealth change due to currency volatility, then it is rare; alterations may occur yearly, bi-yearly, or even quarterly in abnormal circumstances, such as when Brexit happened and trust was lost in the pound. Thus, prices do change, especially if the wealth being priced is something imported.
The point is that these daily changes in the price of the currency do not remove the currency from the circle of stability, if that makes sense.
And if it does actually for prolonged periods, then that currency loses its credibility as a currency, as we said with the Zimbabwean dollar in the early nineties.
To be continued at Decrypting Cryptos – V
Reproduced with permission from A Master Class on Decrypting Cryptocurrency