Bitcoin and Islam: What do the experts say?
As a company operating in countries with significant Muslim populations, we are naturally very interested in how Bitcoin is viewed in Islam. Our guest post author and acclaimed financial journalist Suraya Zainudin talked to an award-winning Professor in Islamic Finance to find out more.
We were very fortunate to spend some time with Professor Emeritus Dr. Rodney Wilson, recipient of the prestigious 1435H IDB Prize in Islamic Banking & Finance and a faculty member at Durham University and The Global University of Islamic Finance (INCEIF).
Dr. Wilson’s view is that “there are no Shari'a objections to bitcoins for payments and receipts”, however he added that it is inadvisable for the economically vulnerable - such as those with low income or the financially ignorant - to hold the currency without understanding the risks associated. “The principle of risk sharing is fundamental to Islamic finance, but investors need to understand exactly what risks they are sharing”.
In summary, Muslims who are interested to discover Bitcoin's potential and advantages must first be aware of its risks and disadvantages. This will also satisfy the concept of gharar, a concept in Islamic finance to describe 'unknown, uncertain, and excessive risk-taking', which is generally prohibited in Islam.
Let’s look at some additional relevant information on Bitcoin's risks and advantages, specifically considering the Islamic perspective.
Bitcoin has many potential advantages: it is a fast, secure and near-free way to send value to friends and family both locally and internationally. Additionally, it is great for online purchases, provides both privacy and transparency to consumers, and puts consumers in control of their money (by allowing them to store it themselves in digital format, or choosing a provider like Luno who can do it safely on their behalf).
In our discussions we also received more clarity on how Bitcoin can comply with many aspects of Islamic banking and finance. For example:
It conforms with the prohibition of riba (usury)
Charles W. Evans, who analyzed virtual currencies with the requirements of Islamic Banking and Finance a paper published in the Journal of Islamic Banking and Finance wrote that '...Bitcoin or a similar system might be a more appropriate medium of exchange in Islamic Banking and Finance than riba-backed central bank fiat currency, especially among the unbanked and in small-scale cross-border trade.
It incorporates principles of maslaha and mutual risk-sharing
In the same paper, Evans wrote that 'BMS (blockchain management systems) … incorporate the principles of maslaha (social benefits of positive externalities) and mutual risk-sharing (as opposed to risk-shifting)'. BMS is the underlying structure behind Bitcoin and other cryptocurrencies.
It can potentially be used as a parallel currency (with fiat)
“Bitcoin can be a parallel currency , instead of a replacement currency”, said Dr. Wilson. Cash is definitely not going anywhere anytime soon – its wide acceptance is secondary to none. However, bitcoin can be used together with fiat in a complementary manner. This way, bitcoin users get to make use of the advantages of each currency, depending on their needs. For example, fiat can be used in stores, while bitcoin can be used to cheaply transfer money from one country to another.
It can potentially be used as a hedging tool to protect wealth/investment
“I can imagine that bitcoin would be an attractive option (for an individual to hold as a hedging tool) if the currency issued by the state is facing problems, like Zimbabwe or Venezuela” said Dr. Wilson.“People already turn to gold and other precious metals to protect their wealth (when the state currency loses value).” As an investment, the professor said, “Bitcoin can have a place in a diversified currency portfolio, but over-reliance on it would be a risky strategy for investors. The greatest risk is of depreciation against major currencies as there is no central bank to provide support.” Basically, don't keep all your eggs in one basket.
Bitcoin sometimes has a bit of a bad reputation, mostly driven by bad media coverage, some of which we debunked in our article here. That said, like most financial instruments and technologies it does come with some specific risks:
It is volatile
Bitcoin is considered a highly volatile currency. In 2013 (dubbed 'The Year of Bitcoin' by Forbes), it's value fluctuated with extreme highs and lows. It started at $13 per bitcoin, went as high as $1150, then crashed to $520 in the span of a few short months. Even though bitcoin is currently experiencing a period of stability (the first half of 2016), Muslims who are interested in bitcoin must be aware of its high risk – as much as it can go up in price, bitcoin also has the potential to lose significant value, fast.
There is lack of Bitcoin-accepting merchants, although this is changing
The very appeal of Bitcoin is that one does not need to rely on third-party services like banks or payment processors to transfer funds to another person. However, not many merchants accept bitcoin as payment yet, which limits its usage as currency. This is somewhat mitigated by Bitcoin debit cards, which allows Bitcoin wallets to be linked to payment processors (usually Visa or MasterCard) to allow wider acceptance. All said, there are currently more than 150 000 merchants globally that accept Bitcoin, and the number is increasing every month. Considering bitcoin is a new currency less than 10 years old, we say just give it more time, it’ll happen naturally as more people use it.
It has potential for abuse
Like any other currency, products and services bearing the Bitcoin name have been used by unethical scammers and cybercriminals to profit from innocent people, especially from the financially ignorant. Considering that Bitcoin transactions are fast and cannot be reversed, bitcoin users do not have the option to dispute and recover the money once it is sent. This is an unfortunate side effect of the currency's positive attribute.
There is lack of regulatory body
Bitcoin's decentralised nature means that it does not fall under the jurisdiction or responsibility of any state. There is no formal regulatory body. “If there were a formal regulatory body, we wouldn't even know where to place the institution,” joked Dr. Wilson, referring to bitcoin's stateless nature. This makes it hard to address Bitcoin-related fraud cases.
Reputation as 'criminal's currency'
When bitcoin was used to purchase drugs in the movie 'Dope', the Bitcoin community praised the movie's contribution to bitcoin's visibility instead of actively dispelling a popular misconception that bitcoin is used solely and exclusively for criminal activities. While Bitcoin can be misused online, its anonymity is a myth because it is possible to trace transactions. Also, newer regulations in place are making anonymous bitcoin transactions much harder.
Bitcoin in Islam: the conclusion
Too many Bitcoin enthusiasts focus on Bitcoin's advantages without much explanation on its disadvantages. Excessive risk-taking or gharar is financially dangerous for Muslims and practitioners of other religions alike. However, with enough understanding, Bitcoin usage itself is Shari'a compliant. It is halal – or at least, fatwas did not declare it as impermissible.
The takeaway for Muslims interested to use bitcoin? If you are informed enough to consider all the risks and rewards, feel free to buy, hold, and use it. If you think the bad can outweigh the good, then don’t.
Let’s also take a moment to appreciate how this philosophy works with pretty much everything else in life.