Friday, June 23, 2017

The reality of cryptocurrencies such as Bitcoin and the shari’ah rule regarding them

The following is the translation of an Ijtihad by Ustadh Abu Khaled al-Hejazi, please refer to the Arabic original for exact meanings.
Today, Bitcoin and other cryptocurrencies are proposed as alternate currency models compared to the traditional currencies such as the Dollar, Riyal and euro, albeit there are some fundamental differences between the two and the most important being that cryptocurrencies are a digital currency that exist only on the Internet without having a physical or tangible existence to it.
In addition to this there is no centralized organization that issues the currency and there is no real world asset that backs these currencies.
The users of these currencies can purchase the currencies through Cryptocurrency exchange websites on the internet and they can also convert these currencies back into traditional currencies.

Who issues cryptocurrencies?

Contrary to traditional currencies which are generally backed by assets such as gold or by other stronger currencies, cryptocurrencies are supported and generated by the users of the currency themselves. Anyone interested in creating a cryptocurrency requires an Internet connection attached to a computer where he can install the currency ‘mining’ software and he can then use the mining software to generate the currency. The ‘mining’ software utilizes the computational power of the computer to run an algorithm which upon successful completion creates a certain amount of the cryptocurrency. As the total amount of currency issued by the system increases, the algorithm becomes difficult hence leading to longer computation periods to generate the same amount of cryptocurrency.

Cryptocurrencies also have a limit to the total amount of currency that can be generated and this is to be able to maintain a controlled supply over the currency. For instance, the total number of bitcoins that can be mined is 21 Million BTC.

Where can Cryptocurrencies be used?

Cryptocurrencies can be used to trade on some ecommerce websites, in addition to this, they can be exchanged for physical currencies with people who are interested in purchasing them. Today cryptocurrencies have become a speculative trade with people investing millions in them because of their continuously increasing price. For instance, the cost of one of the more popular cryptocurrencies, Bitcoin was 14 USD in 2011 and it has increased manifold to reach 2800 USDin 2017.

The reality of Issuing Currencies & its shari Hukm

Each State adopts a specific unit of something, making it the basis to which goods and labour are related and by which they are measured. It coins the unit in a specific form and fashion which is specific to it along with a fixed weight and value. Societies have, from the earliest times, made this measuring unit from things with intrinsic value. They adopted gold and silver as a measure to which all goods and labour are related, because gold and silver have intrinsic value in the world at large. They have issued currency with a specific form and modeas well as a specific fixed weight and value.
The state which adopts gold or silver units as the basis for its currency follows the metallic system. If it makes the gold unit the basis for its currency which it issues as currency for itself, then it follows the gold standard. If it makes the silver unit the basis of its currency which it issues, then it follows the silver standard. If it makes both the gold and silver unit together as the basis for its currency, then it follows the gold and silver standard or the bimetallic standard.
As for the state which adopts paper currency such that goods and labour are exchanged with it, it follows the paper standard. If the paper it prints, as money and currency is representative of gold or silver, the state follows the representative paper currency standard. If the paper it prints and makes as its currency has gold or silver backing equal to a specific proportion of its value, it follows the paper currency standard of the secured type.
If the currency it prints, issues and makes as its money and currency is substitutable for gold or silver, nor backed by them, the country is considered to be following the compulsory paper currency or fiat standard.
The currency which was accepted and implemented by the Prophet (saw) was the Gold and silver currency i.e. Dirhams and Dinars. This Islamic currency fulfilled three important conditions.

Dirham & Dinar — The Gold & Silver currency of the Islamic Khilafah State

  • It was a basis to evaluate the goods & services, i.e it was a measure for prices and wages.
  • It was issued by a central authority which undertook the responsibility of issuing the dirhams and the dinars and it was not an unknown body.
  • It was widespread and easily accessible among the people and it was not exclusive to a group of people only.
After having studied the reality of a cryptocurrency, how it is issued and how it is utilized. I evaluate it in light of the above three conditions that should be fulfilled by any currency and I find that cryptocurrencies do not fulfill the three above mentioned conditions.
1.Cryptocurrencies are not issued by any centralized institution or established organization rather they can be issued by anyone who has the relevant mining software and a computer with an internet connection. Even if cryptocurrencies are termed as ‘currencies’ the reality of these currencies is that they are no more than digital asset which anyone with the capability can create and it has a price in the market which increases and decreases based on the demand and supply. Therefore, the rule of currencies does not apply on cryptocurrencies.
In short, Cryptocurrencies fail on the condition that the currency should be issued by a central organisations or a well-known body and not by a unknown body or people.
2.Cryptocurrencies are a digital asset which have no tangible reality except the trust and confidence of some people in it. In addition to this, cryptocurrencies due to their nature of being tied to the internet is strictly limited to a small group of the population.
In short, cryptocurrencies fail on the condition that the currency should be easily accessible and widespread, rather it is limited to a small group of people who believe in its value i.e. it is not a currency for the society.
3.The majority of the countries do not accept cryptocurrencies as a legitimate currency and therefore they cannot be used to purchase most of the goods and services.
In short, cryptocurrencies fail on the condition that the currency should be a basis to evaluate the goods and services, i.e to be a measure for prices and wages, rather it is a tool for barter with select goods and services.

This is the reason why cryptocurrencies such as Bitcoin are not considered a currency from a Shari’ point of view.

As for the sale and purchase of Cryptocurrencies.

Cryptocurrencies are no more than an asset, however this asset is issued by an unknown source i.e the asset has not backing in other words it is not a real asset. In addition to this, cryptocurrencies are a big domain for fraud, deception, speculation and cheating and therefore it is not allowed to trade in it i.e. it is not permitted to buy or sell them.

The conclusion is that cryptocurrencies such as bitcoin are only ‘assets’ issued by an unknown (majhool) source which have no real value and no real backing and therefore is open to speculation and fraud and an opportunity for the colonialist capitalist countries especially America to exploit such things so as to plunder the resources of the people.
This is the reason why it is not allowed to purchase cryptocurrencies due to the shari’ evidences that prohibit the sale and purchase of any unknown ‘majhool’ asset, and the evidences for this are:
1.Abi Saeed Al Khudri Reported
نهى رسول الله صلى الله عليه وسلم عن شراء ما في بطون الانعام حتى تضع ، وعما في ضروعها الا بكيل او وزن وعن شراء العبد وهو آبق ، وعن شراء المغانم حتى تقسم وعن شراء الصدقات حتى تقبض وعن ضربة الغائص
“The Messenger of Allah (ﷺ) forbade selling what is in the wombs of cattle until they give birth, and selling what is in their udders unless it is measured out, and selling a slave who has fled, and selling spoils of war until it has been distributed, and selling Sadaqah until it has been received, and what a diver is going to bring up.”
[Reported by Ibn Majah, Tirmidhi, Ibn Shaybah, Ahmad, Dar Qutni, Bayhaqi, Ibn Hazm]
2.Ibn Abbas reported
عَنْ ابْنِ عَبَّاسٍ أَنَّ النَّبِيَّ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ نَهَى عَنْ بَيْعِ الْمَضَامِينِ، وَالْمَلَاقِيحِ، وَحَبَلِ الْحَبَلَةِ
“The Prophet (saw) forbade the trade of Al-Madameen, Al-Malaqeeh and Habal al Habala.” Reported by Tabarani.
Al-madameen is the sale of what is in the wombs of female camels. Al- malaqeeh is the sale of the breeding qualities of camels” (i.e. for stud). Habal al Habala was a transaction in the days of ignorance where A man would buy the unborn offspring of the unborn offspring of a she-camel.
3.Nafi reported from Umar that the Prophet (saw) said
عن نافع عن ابن عمر قال : نهى النبي — صلى الله عليه وسلم — عن بيع الغرر وقد أخرج مسلم النهي عن بيع الغرر من حديث أبي هريرة وابن ماجه من حديث ابن عباس والطبراني من حديث سهل بن سعد ، ولأحمد من حديث ابن مسعود رفعه : لا تشتروا السمك في الماء فإنه غرر وشراء السمك في الماء نوع من أنواع الغرر ، ويلتحق به الطير في الهواء والمعدوم والمجهول والآبق ونحو ذلك
“The Messenger of Allah (ﷺ) prohibited the Gharar sale” and Muslim reported that the prophet (saw) prohibited the sale of ‘gharar’ in the hadith by Abu Hurairah And Ibn Majah reported about it in the hadith by Ibn Abbas and Tabarani reported it in the hadith by Sahal bin Saad and Ahmad reported it in a marfoo hadith by Ibn Masood: Do not buy the fish in the water because it is gharar and purchasing fish in the water is a type of gharar, and this is linked to the birds in the air and anything that is unknown (majhool) or non-existent (ma’doom), and the run away slave and so on.
4.Muslim reported from Jabir Ibn Abdullah that
عَنْ جَابِرِ بْنِ، عَبْدِ اللَّهِ قَالَ نَهَى رَسُولُ اللَّهِ صلى الله عليه وسلم عَنِ الْمُحَاقَلَةِ وَالْمُزَابَنَةِ وَالْمُعَاوَمَةِ وَالْمُخَابَرَةِ — قَالَ أَحَدُهُمَا بَيْعُ السِّنِينَ هِيَ الْمُعَاوَمَةُ — وَعَنِ الثُّنْيَا وَرَخَّصَ فِي الْعَرَايَا ‏-رواه المسلم
The prophet prohibited Al-Muhaqalah, Al-Muzabanah, Al-Mukhabarah, and Al-Mu’awamah. (One of the narrators) ‘said: Sale years ahead is Mu’awama, and making exceptional but he made an exemption of araya.
Mukhabarah is when a wasteland is given by a person to another he makes an investment in it and gets a share of the produce. Muzabana is selling of fresh dates on the tree for dry dates with a measure. Muhaqala is selling the standing crops In the field for a customary measure.
5.Muslim reported in his Saheeh from abu Hurairah who said
أخرج مسلم في صحيحه عَنْ أَبِي هُرَيْرَةَ، قَالَ: «نَهَى رَسُولُ اللهِ صَلَّى اللهُ عَلَيْهِ وَسَلَّمَ عَنْ بَيْعِ الْحَصَاةِ، وَعَنْ بَيْعِ الْغَرَرِ»
“The Messenger of Allah (ﷺ) forbade Gharar transaction and Hasahtransactions.”
Tirmidhi also reported a similar hadith from abu Hurairah
وأخرجه كذلك الترمذي عن أبي هريرة…”بيع الحصاة
وَمِنْ بُيُوعِ الْغَرَرِ بَيْعُ السَّمَكِ فِي الْمَاءِ وَبَيْعُ الْعَبْدِ الآبِقِ وَبَيْعُ الطَّيْرِ فِي السَّمَاءِ وَنَحْوُ ذَلِكَ مِنَ الْبُيُوعِ ‏.‏ وَمَعْنَى بَيْعِ الْحَصَاةِ أَنْ يَقُولَ الْبَائِعُ لِلْمُشْتَرِي إِذَا نَبَذْتُ إِلَيْكَ بِالْحَصَاةِ فَقَدْ وَجَبَ الْبَيْعُ فِيمَا بَيْنِي وَبَيْنَكَ
The prophet prohibited the ‘hasah’ Transactions. The Hasah sale is when the seller says to the buyer: ‘When I toss the pebble at you, then the sale between you and I is final.’ “The Gharar sale is the sale of ambiguous and unknown (majhoolghayr maloom)) which includes selling fish that are in the water, selling a slave that has escaped, selling birds that are in the sky and similar type of sales all of which are prohibited.
The evidences that we presented all indicate in clear terms the prohibition of the ‘Bay asSineen’ i.e selling the produce of a tree two or three years in advance for it is a sale of something that does not exist at the time of the contract. The evidences also show the prohibition of the sale of the fruit and the crops before they are clearly visible, as these are all from what is called as ‘bay al Gharar’’ The gharar sale’ or the sale of Majhool i.e the unknownand this is clearly applicable on the reality of cryptocurrencies such as Bitcoin and Ethereum as they are assets which have no known source and have no backing because they are not issued by a centralized organization, and therefore it is not permissible to buy and sell cryptocurrencies.
Abu Khaled al-Hejazi
29th Ramadhan 1438
 24th June 2017


sssaaajjjiiiddd said...

Jazakallah khair , needed the Islamic perspective on this.

Unknown said...

Bitcoin: Digital Money-Digital Cash-Virtual Currency-P2P Money(An emerging product of Capitalism economic system)
Bitcoin is a crypto currency, digital and experimental currency invented by a group of programmers under the name of Satoshi Nakamoto. Bitcoin was introduced in the digital world in 2008 and released as open source software in 2009. It is referred to as a P2P (Peer to Peer), electronic payment system and transactions take place between users directly without any intermediary.
Bitcoin as Money and a Medium of exchange: It has been invented as an
alternative form of Money that anybody can use to transact with one another
without the involvement of sovereign entities, financial institutions, or banks. Now question raised that how has Bitcoin served the function of money? Generally economists consider money to be an instrument that serves as a medium of exchange, a unit of account, and a store of value. Let’s see, how Bitcoin has fulfilled these three conditions.As a medium of exchange, Bitcoin must be accepted as payment for a set of goods or services, or other assets. A user is willing to accept a fiat money as payment and others will be willing to accept it for the same. Unlike regular fiat money or paper
currency, Bitcoin is not backed by any sovereign entity. Therefore as medium of exchange, Bitcoin has to rely solely dependable on the part of private agents. Global Market Perspective: Total Companies profiled-52
Countries like Australia, United States, Canada and United Kingdom etc have legalized bitcoins operations within their territories. While countries like China,Japan and India etc have adopted a restrictive approach. China has restricted only
financial institutions from dealing directly in bitcoins without making it illegal. Bitcoin or Digital Money: It’s legal or illegal in India United States and other countries started regulating bitcoins but in India it remains
unregulated as the Reserve bank of India (RBI) is currently keeping a vigil on this digital currency that is going popularity among internet users. On December 24th, 2013 RBI issued a press release on virtual currencies as a medium for payment is not authorized by any Central bank or monetary authority. Further RBI has
cautioned on digital currency traders and users to various security related risks such as hacking, malware attack etc. While RBI has not legalized bitcoins, it has declared them unauthorized as of now. RBI is currently examining the risks
associated with usage, holding and trading of digital currencies under the extant legal and regulatory framework of India, including foreign exchange and payment system laws and regulations. However investors in virtual currencies will not enjoy
the safeguard under the Securities and Futures Act and the Financial Advisers Act. Indian Bitcoin Startup: Bangalore based bitcoin startup, Unocoin has raised $1.5 million fund from a mix of Indian and U.S investors. Presently Unocoin has 100,000 users and more than 30 employees who have been in operation since December 2013. Another Bitcoin startup, Zebpay is India’s first leading Bitcoin Company to launch
simplest mobile Bitcoin wallet app enables bitcoin transactions using mobile number without any complexities to understand bitcoin addresses, taking backups or fear of losing bitcoins. Using Zebpay wallet app users can buy, sell, store and spend bitcoin
using by mobile number and a 4- digit pin. Though the use of Bitcoin is gaining momentum in international market and domestic market in India but there are a number of issues which remain unanswered.
· Is Bitcoin an Investment or Gambling?
· Can it become a viable currency?
· Can it beat against fiat currency in future?
…Written by....
Ittefaque Khan

Anonymous said...

Jazak Allahu Khairan

Anonymous said...

So according to Ustadh Abu Khalid, trading in all modern fiat based currencies are also haram, as they are not backed by gold or silver....?

Syabab said...

> Cryptocurrencies are no more than an asset, however this asset is issued by an unknown source i.e the asset has not backing in other words it is not a real asset.

cryptocurrencies are not just bitcoin. It's possible to have cryptocurrencies with backing usually when anonymity is not needed. Maybe it's better to rephrase it specific to bitcoin instead

Question: Since the algorithm behind generation of bitcoin is open sourced and any changes to it is handled in democratic way, would it still be considered majhool? Can this reality be compared with vending machine where we trust the machine to fulfill our purchase based on how we understood it would work?


Anonymous said...

> cryptocurrencies are a big domain for fraud, deception, speculation and cheating and therefore it is not allowed to trade in it

Isn't that also happen in fiat money? Are we not allowed to trade in it as well?

Islamic Revival said...

It is permitted to use fiat currencies today. However, the Islamic State's currency must be backed by real gold and silver.

This is explained in the books, The Economic System of Islam and Funds of the Khilafah State. You can download them from:

Mu'aawiyah Tucker said...

I read the above and I have to make the following observations.

this article exhibits clear signs of ignorance regarding the reality of Bitcoin, blockchain based currencies. This ignorance is shown by the distinction made between it and gold as it relates to its purpose. Gold and silver are rare metals that have been agreed upon by the people as an medium whereby value/work can be exchanged. If I plow the fields of my neighbour with the agreement that he would build my shed, that's an exchange of 'work'. I could plow the fields for a bag of wheat, gems or whatever. As long as I can use that same thing later on in exchange for something else. What makes it useful as an exchange of work is it's limited quantity and it's acceptable value. But essentially, it's a complex way of recording and exchanging 'I owe you's'.

Bitcoins is just a means to record the exchange of value or I owe you's. The blockchain is exactly that. A chain of blocks, each block just a list of transactions between wallets. These transactions are collected, passed through a process whereby each block generates a block with unique ID and sycronises that throughout the network so as to prevent data manipulation and curruption. Each computer on the bitcoin network takes part in processing transaction and syncronising it throughout the network. As a result they are rewarded with bitcoin for both maintaining the network and for the electricity they use. This is exactly the same as minig gold. You exert effort and resources to get access to this limited resource. Fiat currency is not limited and is centralised, meaning open to manipulation. Gold cannot be manipulated as you cannot invent it from thin air. It's only source is through mining. And even then, there is still a limited amount of gold on planet earth. This is a direct parallel to bitcoin. Limited in its resource and only achieved through effort of mining.

Bitcoin is more close to the way in which money existed at the time of the prophet than fiat money and everything that bitcoin was accused of in that article actually fits fiat money and not bitcoin.

This fatwa needs re-visiting.

Mu'aawiyah Tucker