Home Cryptocurrency Bitcoin and Islamic Finance: How Digital Assets Fit into a Sharia-Compliant Portfolio

Bitcoin and Islamic Finance: How Digital Assets Fit into a Sharia-Compliant Portfolio

by Serge Shlykov

Digital currencies have consolidated themselves into a handful of mid-level markets with an aggregate market capitalization. While their value appears to have stabilized, they are still in their infancy. Would a Sharia-compliant financial portfolio include digital currencies? Is bitcoin the future of Islamic finance? Or is blockchain technology the way forward?

Bitcoin has been gaining traction with investors who are interested in investing in Sharia-compliant assets. Many of us understand what Bitcoin is and how it works. Some are also aware that it is a digital currency that can be used for online payments. But, few understand the potential of its underlying technology, the blockchain. It is also a widely misunderstood concept that needs to be explained. It is a consensus database used by the Bitcoin network. It is not a physical object.

Bitcoin heralded the birth of the first truly global, open and free financial market in history. Not surprisingly, much attention is being paid to how Muslims, who make up almost a quarter of the world’s population, will deal with this market. On the one hand, Muslims are concerned about the position of cryptocurrencies in Islamic law. On the other hand, cryptocurrency developers and entrepreneurs from all walks of life want their work to reach a broader global market, and gaining approval from Muslim lawyers can facilitate this process. So, is bitcoin halal? What role, if any, should digital assets play in an Islamic investment portfolio? These topics are too broad to be covered in detail here. This article is just a starting point for those who want to learn more about the interface between Islamic finance and bitcoin.

Short and sweet

Islamic finance refers to the rules and regulations for ethical financial behavior in accordance with Islam. The position of bitcoin and other cryptocurrencies in Islamic finance is still an area of active research. Some scholars have ruled that bitcoin is permissible, while others oppose it. Further research is needed to determine the exact place of digital assets in Islamic finance. Currently, those interested in bitcoin should consider several factors before adding digital assets to their portfolio, including their level of knowledge, risk level, and building principles.

What is Islamic finance?

Islamic finance refers to all business and financial practices that are compatible with Islamic law, also known as sharia. Here are some of the key features:

  • Not interested. Interest-based transactions are prohibited. In Arabic, interest is known as riba, which literally means extra, i.e. an amount added to the principal of the loan.
  • No speculation. Gambling and gambling-like transactions are prohibited. In Arabic it is called maysir, which comes from the same root as yusra, meaning lightness. In other words, it literally means making easy money without work or investment.
  • No unnecessary risk. Transactions that are ambiguous or involve a high degree of uncertainty or risk are prohibited. In Arabic it’s called gharar.
  • Profit and loss sharing. The risks and rewards should be shared by all parties involved in the transaction, rather than one person bearing all the risks.
  • Links to the real economy. The transactions must relate to real goods or products. This means that most types of derivatives are not allowed because they are an abstract extension of fair value.

That sounds good in theory, but in reality it’s a little more complicated. One of the problems facing the Islamic finance industry is the so-called scholars for dollars. Some prominent Islamic scholars reportedly receive six-figure sums for their support. Due to questionable certification standards, Mufti Taqi Usmani, a leading expert on Islamic finance, declared in 2010 that 85% of the Islamic bond (sukuk) market was not Islamic. There are so many vested interests when it comes to finance. So it’s not surprising that someone is trying to manipulate the system. This means that bona fide investors should be particularly careful when choosing Islamic investments. Here is a summary of the debate surrounding bitcoin and cryptocurrencies among Islamic scholars. This discussion can help in understanding some of the key issues related to investing in digital assets from an Islamic perspective.

Is bitcoin halal? What do the scientists say?

Bitcoin and Islamic Finance: How Digital Assets Fit into a Sharia-Compliant Portfolio So far, Islamic legal scholars have different opinions on bitcoin.

Notification No 1: Bitcoin is haram.

Some scholars like Taqi Usmani, Assim al-Hakim, Haytham Haddad and others have ruled that it is haram, i.e. forbidden. Almost all of them mentioned insecurity or gharar as the main reason for their opinion. In other words, because the future of bitcoin is uncertain, they feel it is too risky to recommend as an investment. Almost every scholar who believes bitcoin is haram has stated that there is nothing behind it. This is due to the requirement of Islamic finance that transactions should be linked to the real economy. This opinion may be based on an incomplete understanding of the nature of bitcoin mining. In fact, the value of bitcoin is directly related to the price of energy, since energy consumption secures the network. It also takes energy consumption to produce a new bitcoin, which means it doesn’t fall under the concept of creating money out of thin air, which is haram. To be fair, there is a huge amount of speculation going on with crypto assets, and many people have lost large sums of money hoping to get rich quick. There is also no denying that the largely unregulated nature of digital asset markets makes them more vulnerable to fraud and manipulation, which creates additional risks.

Communication No 2: Bitcoin is halal.

However, Mufti Muhammad Abu Bakar has published a study in which he points out that the fact that an asset is used for a haram activity does not mean that the underlying asset becomes haram. Abu Bakar is one of many scholars who believe that investing in bitcoin is halal. Mufti Faraz Adam is the author of a detailed study on bitcoin that addresses many of the objections of scholars who have spoken out against bitcoin. He concludes that bitcoin investments and profits can be halal. The Fiqh Council of North America has also unanimously acknowledged that bitcoin is halal, although it has not commented on other cryptocurrencies. Amanie Advisors, an Islamic investment advisory firm chaired by Dr. Mohamed Ali Elgari, a professor of Islamic economics at King Abdulaziz University in Saudi Arabia, has published a white paper claiming that Ethereum (ETH) is halal. They based this conclusion on the fact that Ether, Ethereum’s own currency, is the token used to access the service – the Ethereum app and the Smart Contracts platform. Of course, bitcoin can also be seen as a gateway to the Bitcoin network, which specializes in the storage, preservation and transfer of wealth.

Advice 3#: Lottery.

Some scholars, such as Salih al-Munajid, have taken a more conservative approach and have not classified bitcoin as halal or haram. Munajid said schemes such as compulsory charity (zakat) would apply to bitcoin as to gold or dollars, but added that further guidance would depend on discussions between experts in Islamic law, economics and technology.

Islamic finance and Bitcoin Do digital assets have a place in an Islamic investment portfolio?

For Muslims who feel that the arguments for bitcoin are stronger than the arguments against, bitcoin and other digital assets may be a good investment opportunity. Bitcoin is trying (with some success so far) to solve a problem that is especially common in Muslim-majority countries: inflation. The inflation rate in the Muslim world is more than twice the world average. This makes it a particularly attractive investment option in many countries compared to holding savings in cash. Bitcoin and Islamic Finance: How Digital Assets Fit into a Sharia-Compliant Portfolio Residents of countries suffering from currency instability have long considered the US dollar a safe haven, but the dollar is no longer immune to inflationary fears. Gold bullion remains a reliable store of value, but it lacks some of the versatility of cryptocurrencies. Bitcoin in particular is an attractive option for wealth preservation in areas with corrupt and totalitarian regimes. In the event of geopolitical instability, cryptocurrencies may be the only way to get assets out of countries with restrictive capital controls. Gold is the most proven protection against inflation, but in some cases bitcoin can offer investors some of the desirable characteristics of gold, with added versatility. The fact that digital assets like bitcoin can solve so many problems means that their popularity and value are likely to grow in the future. However, there are a few things you should consider before investing your money.

Are you investing or trying to get rich quick?

Like stocks, buying digital currency is an investment. Acquisition and ownership support value, and value supports the development and use of assets. In most cases, it must be held for at least two years to be profitable. Digital currencies are notoriously volatile and it can be difficult to survive periods of volatility if you are not sure of the fundamentals of your investment. It is important that you do your research and know what you are investing in. Most people who have lost large sums of money investing in digital currencies didn’t know what they were investing in and hoped to get rich quick. This is reminiscent of the classic description of gharar by the Islamic scholar Ibn Hazm, namely a transaction where the buyer does not know what he has bought.

Evidence of work versus evidence of parts

Most digital coins use one of two consensus protocols to ensure security: Proof of work or proof of parts. The question of which of these elements is most appropriate for a sharia-compliant portfolio remains open. As described above, one of the arguments is that a proof of work requires labor (energy consumption), so it is related to the real world. Evidence of action consumes less energy, but can be more easily disconnected from the real economy, which can be a problem from an Islamic point of view. However, some will argue that evidence of work wastes energy. This is a hotly debated topic that may be worth investigating before investing. The main currencies with proof of work are Bitcoin (BTC), Dogecoin (DOGE), Litecoin (LTC) and Monero (XMR). Proof-of-share currencies include Ethereum (ETH), Cardano (ADA) and Polkadot (DOT).

Digital assets with embedded interest

A number of digital assets are of interest at the protocol level. It is difficult to consider these investments as halal by any standard. Assets that fit this description include Maker’s Dai (DAI), a decentralized Steblecoin tied to the dollar, and a number of other decentralized financial tokens (DeFi) related to growing plants. Yield farming is a means of providing liquidity to decentralized markets by offering users incentives to act as market makers. Mufti Faraz Adam believes that most harvesting methods in agriculture today are based on interest. Assets with such characteristics include Uniswap (UNI), Sushiswap (SUSHI), Pancake Swap (CAKE), Aave (AAVE) and others.

What is the level of risk?

The Islamic scholar Sami as-Suwaylem has described gharar in a slightly different formulation: it allows for two possibilities, the least desirable being the most likely. This view of gharar can be applied to risky investments in general. There are thousands of small and unknown crypto-currencies. Some of these can increase in value very quickly, but these small coins are notoriously dangerous. It’s probably best to stick with investments that have a proven track record and are backed by reputable investment and technology experts.

The beginning of a long journey

Bitcoin and Islamic Finance: How Digital Assets Fit into a Sharia-Compliant Portfolio In essence, digital currency represents a new method of organizing humanity. Decentralized protocols like bitcoin can align incentives for large groups of people around the world and make them work together. This technology has enormous uses, both for good and bad. This article is merely an introduction to investing in digital assets in light of Islamic finance. There is still a long way to go to understand how digital currencies should be invested and used ethically. Ideally, proper application of the principles of Islamic finance can preserve and increase wealth and have a positive impact on the development of this emerging asset class. Related Articles: Subscribe to the Bitcoin Market Journal to stay up to date on all things digital assets.

Frequently Asked Questions

Is Bitcoin halal or haram in the Islamic banking and finance an overview?

In the modern world, every person is looking for some kind of financial security, at least a little bit. Most of us are not religious enough to accept the full brunt of Islamic financing, but we do know that the three pillars of Islam are the principles of equity, honesty and transparency. Does Bitcoin fit into these three pillars? The answer is definitely yes. In fact, Bitcoin is the first Islamic cryptocurrency. Bitcoin is a digital currency that is used to buy and sell goods and services. Like any currency, it is widely accepted for payments. But the global nature of bitcoin makes it a unique cryptocurrency. It was first traded in 2009, and its value soared in 2012, peaking that year at more than $1,000 per coin. Bitcoin has since fallen to $200, but it continues to draw new buyers.

Is investing in Bitcoin halal?

If you are new to Bitcoin, you are no doubt wondering where the best place to buy your coins is. The answer is a bit tricky, because the coin has taken on an identity of its own. The cryptocurrency is often used interchangeably with the term “digital asset” or “virtual currency”, but the two terms are quite different. The halal market is huge. According to a leading Islamic finance website, there is approximately $5.1 trillion in halal investment products globally. That’s a staggering amount of money. What’s the average investor to do?

Is ethereum halal in Islam?

Bitcoin was created in 2009 to be a decentralized digital currency. It has been hailed as a way to break the shackles of oppressive governments and enable people to avoid charges of money laundering and receiving stolen property. But is digital currency completely halal in Islam? Is ethereum halal in Islam? This question could be easily dismissed. After all, the cryptocurrency is inextricably linked to its blockchain which is not Sharia-compliant. But there is more to it than meets the eye.

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