Banking Special Report

What Islamic Bankers Should Know About Virtual Currencies ?

Centuries ago in Asia, tea was a refreshing beverage not only appreciated for its medicinal properties, but also because it represented a form of money, as it was used as a means of exchange in trade. In addition to tea, throughout history, precious metals and other objects (such as shells, honey, rice, salt …) have been used for the same purpose: to facilitate value exchange between people.

The way in which currencies are presented has evolved so much that today in Russia, “whopper is not only burger that people in 90 different countries love – it’s an investment tool as well”, in the words of Ivan Shestov, head of external communications at Burger King. For the purchase of hamburgers, Burger King rewards its customers with its own cryptocurrency, Whoppercoin, which can be used to buy more burgers or to be traded online on a peer to peer exchange platform based on the blockchain.

This fact, besides representing an intelligent marketing strategy, reflects the explosion of cryptocurrencies that have sprung up lately to question the conventional money paradigm.

That said, according to this paradigm, what is money?

When this question is posed, it is common to imagine legal tender coins and notes of our country, when in fact this is just one of the forms money can take.

It is also common to answer that money is a means of exchange, when this answer does not allude to money’s nature but only to one of its roles. In addition to this role, the traditional monetary paradigm establishes that money also has to perform two more roles: serve as a unit of account and a store of value.

According to an International Monetary Fund Staff Discussion Note (2016), virtual currencies cannot be considered money, as they do not completely fulfill these three roles. Its use as a means of exchange is limited by its current small size and limited acceptance network. High price volatility limits their ability to serve as a reliable store of value. Apparently they are not used as an independent unit of account, since, rather than being used to measure the value of goods and services directly, instead they represent the value in fiat currency based on the virtual currency exchange rate.

And from an Islamic legal perspective, can virtual currencies be considered money? Do they fit into the Islamic financial industry?

The fact is that from the Islamic legal point of view, as expected, to date there is no consensus or a consistent opinion between Sharia scholars and other experts.

Arguments for and against its permissibility are used to justify opposing positions.

For centuries in Islam’s history, there have been scholars who have defended gold dinar and silver dirham as the only forms of Islamic currency.

 Its justification is based on some hadiths to declare by analogy that money must necessarily possess intrinsic value.According to this reasoning, even paper money is considered illegitimate since it lacks value per se. Consequently, there are scholars and movements today that advocate the return to the gold dinar (gold based system). In principle, from this point of view, virtual currencies could be delegitimized since they lack intrinsic value per se, as their nature is digital and not physical.

Other scholars deem the use of paper money as permissible, as long as its value is backed by gold (gold standard) or other physical assets. In line with this reasoning, would a virtual currency backed by gold be considered Sharia compliant? This question remains open for discussion.

 From another perspective, the recognized scholar from the Supreme Judicial College of Saudi Arabia, Abdullah b. Sulayman b. Mani, concludes in his study that “money is whatever is generally accepted as a medium of exchange, whether its value is intrinsic (e.g. gold and silver) or extrinsic (e.g. public confidence and government enforcement)”. He defends this definition by relying on a well-known fatwa of Ibn Taymiyyah: ”…the objective is not these coins (dirham and dinars) in themselves; rather, the objective is that they should be a standard for mutual transactions…. they are means by which mutual transactions are carried out, and this is why they serve as money … A pure means, the substance or form of which is not an objective in itself, achieves the objective, whatever it may be.”

This broad definition of money could cover virtual currencies, as long as the general public uses them with confidence as a means of exchange and not with other purposes contrary to Islamic finance principles. As the Islamic legal maxim states “matters are to be considered in light of their objectives”.

Therefore, M. Ibrahim Tayel from Central European University (Hungary) concludes in his study that Bitcoin protocol can be regulated according to the objective of the users and actual functioning on a case-to-case basis under Islamic business laws.

For instance, if people invest in Bitcoin for speculative purposes and the objective of hoarding their wealth, Mufti Faraz Adam (Director of Amanah Finance Consultancy) concludes in “Bitcoin: Shariah Compliant?” that these investments would fall short of fulfilling the spirit of Islamic finance, since they do not benefit the real economy. This can be extensible to other virtual currencies.

Mufti Abdul Kadir Barkatulla, who has served as a Member of the Sharia Committee at banks such as Al Rayan Bank and Lloyds TSB, adopts a neutral position. He claims that “any money or currency is neither halal (permissible) nor haram (impermissible)”. He adds that “Islamic Sharia Law is more concerned with morality of financial transactions rather than its form or modus operandi” and that “the exchange and transfer of values with justice and through legitimate means is the main concern of Sharia, not the form or shape of the medium”.

According to the American scholar Joe Bradford,Bitcoin and other cryptocurrencies are permissible because there is nothing found in them which necessitates they are impermissible”, in line with the well-known principle of Islamic jurisprudence that states “everything is permitted unless specifically prohibited”. For him, the question to be asked is not whether Bitcoin is permissible but instead “what are the parameters that regulate the use of Bitcoin under Islamic law”. He adds, “anything impermissible about cryptocurrencies comes from how they are used, whether that be through sale, purchase, trade, or mining. To mitigate any of the dangers and risks associated with this impermissibility the Islamic laws of currency exchange must be applied.”

In the specific case of Bitcoin, Professor Jan A. Bergstra from the University of Amsterdam, concludes in his study “Bitcoin and Islamic Finance” that “mining (Bitcoins) involves some form of gambling which might be criticized from the perspective of Islamic finance”, since the rule of mining is a random, chance-based process.

Professor Charles W. Evans from Barry University (Florida), in a research article published in Journal of Islamic Banking and Finance, concludes that “Bitcoin or a similar system might be a more appropriate medium of exchange in Islamic banking and finance than interest-bearing central bank fiat currency, especially among the unbanked and in small-scale cross-border trade”. He also points out that virtual currencies “conform to the prohibition of riba (usury) – as Bitcoin does – and incorporate the principles of maslaha (social benefits of positive externalities) and mutual risk-sharing (as opposed to risk-shifting)”.

Rodney Wilson, Emeritus Professor of Economics at Durham University (UK), claims that “there are no Sharia objections to Bitcoins for payments and receipts”, as long as those interested in it are aware of its risks and disadvantages, in order to avoid gharar.

Regardless of the opinions on this matter, some Islamic finance institutions have already begun experimenting with different virtual currencies.

Blossom finance, an Islamic microfinance firm based in Indonesia, uses Bitcoin to move money cheaply across borders. In the words of its founder, Matthew J. Martin, “Bitcoin helps us reduce the cost of investing capital overseas and returning it profitable. This ensures more money goes directly towards helping build and grow small businesses rather than service fees just to move money around”.

There is even a self-proclaimed Islamic Bank of Bitcoin, which claims to offer interest free loans and shared profit / loss joint ventures in the Bitcoin community.

Another noteworthy fact is the establishment of the Islamic Finance & Cryptocurrency Think Tank (IFCC) in London. In 2016, the organization arranged the first ever leadership summit to explore the potential applications of cryptocurrencies in relation to the Islamic banking and finance industry.

But one of the greatest breakthroughs in the Islamic finance sphere is the creation of OneGramCoin (OGC). OGC is a gold backed digital token that has been considered Sharia-compliant by Al Maali Consulting Group. It has been developed by the Islamic FinTech OneGram together with GoldGuard, a Dubai-based online gold trading platform. Each coin is backed by one gram of gold at launch and is redeemable for gold or equivalent fiat money. This achievement opens the door to cryptocurrency trading in the Islamic financial market.

 There are also other cryptocurrencies that claim to respect Islamic financial principles, such as ArabCoin, another digital token linked to a physical stock of gold.

Considering all of the above, we can conclude that, in order to properly assess the legitimacy of virtual currencies from an Islamic perspective, it is not only necessary to possess knowledge concerning Islamic law and finance, but also technology. It is important to understand the technology that enables these currencies to issue a well-founded opinion. Despite the controversy that virtual currencies can raise, what is clear is that the technological innovation behind them, i.e. blockchain, offers a great opportunity to develop new Islamic financial services or improve existing ones. Innovation has played a significant role in Islamic finance industry growth since its inception, but today more than ever it is imperative to keep developing technological innovations in harmony with the demands of the digital era.

As we could see in relation to the permissibility of virtual currencies, so far we can find numerous conflicting personal viewpoints subject to discussion, but perhaps only in the consensus (ijma) lies the truth, as shown by the nodes connected to the blockchain.

3 Responses

  1. good article . Something that all islamic banker should read

  2. Fatimaz made it clear and very precise ….very knowledgeable

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