Solving the riddle of cryptocurrencies: A shari’ah legal analysis

The last three decades have witnessed astonishing developmentsin Fintech. A primitive
kind of mobile banking was offered by some European banks in late nineties. By the
end of the next decade, electronic currencies started becoming the norm. UK banks
were the first to offer contactless payment cards. By the end of twenties, the advent of
virtual/crypto currencies based on blockchain distributed ledger technology was born.
Prof. Evan has defined it as:

“A blockchain management system (BMS)—the most successful being Bitcoin—
is a self-contained system for transferring numerical values from one account
to another, such that no value is lost in transit between accounts, and doublespending is impossible.”

From its humble start as a decentralised currency, it is gaining momentum rapidly in
the financial world and is disrupting nationalized fiat currencies. Until 2017 10,000
businesses were using this technology.2
In Feb. 2020 Forbes released its list of top 50
companies including Amazon, BMW, Microsoft, Google, Facebook, JPMorgan, Credit
Suisse, Citigroup, Nestle, Walmart, etc who are utilizing the new genie.
3 The Chicago
mercantile exchange (CME) has already launched Bitcoin futures and is gearing
towards Ethereum futures.4
It is gradually moving towards becoming the ‘new normal’.
Moreover, listed Banks and other centralized financial institutions are dreading this
novel technology. Most financial legal entities are attempting to curb its legality while
other more pro-active nations such as China, Vietnam and Japan are trying to regulate
or even invent their own nationalized cryptocurrency. There is little doubt that over a
span of roughly 10 years most financial jurisdictions would be forced to adopt
currencies based on Blockchain technology. Those who enter soon with a safety
mechanism and sound regulation would have a larger chunk of the pie.
Over the last two decades, Islamic Finance has also proven its existence as a serious
player in the global economy. The Shari’ah has proved to be flexible in adopting
changing norms of society. It is equipped with a vibrant system of ijtihad which consists
of jurisprudential tools such as dharura (necessity), hajah (need), ‘urf and t’amul
(custom and usage), and masaalih mursalah (Public good). Muslim jurists have been
using Qiyas (analogy) to deduce solutions for newly emerging problems of their
respective times.5 Therefore, it is the responsibility of scholars to provide pragmatic
solutions on ways of dealing with virtual currencies, as the protection of property is
among the five objectives (Maqasid) of Shari’ah.

In this paper, I would first describe cryptocurrencies. I will then engage with the various
conflicting opinions of modern Shari’ah scholars, which includes arguments of those
who deem it against Shari’ah and counterarguments of permitters. I would argue that
the arguments against it are not well grounded or rely on external hazardous factors. I
shall also provide food for thought to develop a novel shariah complaint
cryptocurrency.

There is no single definition for all cryptocurrencies. For a layman who does not possess
technical knowledge of complex digital systems, it could be understood through its
characteristics.
The first paper on this topic was written by Satoshi Nakamoto whose identity is still
unknown.
The core characteristic of a virtual currency, among which Bitcoin is the
leader, is that it is a decentralized peer-to-peer digital cash system which allows
transmission of payments directly from one user to another without the intermediation
or trust of a third party. There is absolutely no link or regulation to any central authority
and is confined to its own specified network.
Second, it is digital and intangible, thus not based on an underlying asset and is divisible
indefinitely. Unlike any traditional currency, it is based on Algorithms which are
traceable on specific cryptocurrency community computers.

Third, it uses Blockchain management system (BMS) to provide security to the
program. They are based on cryptographic proof. Miners must solve a complex puzzle
while competing with each other. The transactions are then recorded in ledgers known
as blocks. Each block is verified and secured by peers who are awarded coins for this
task.
Fourth, they are presumably secure. Nakamoto asserted that the transactions are
computationally irreversible. The technology protects the parties from fraud. All
transactions are confirmed in a timeframe of 10 minutes by miners only. A
computational proof of the chronological order of transactions is generated through a
timestamp server. It is then added to the block as a Node and becomes permanent. If a
hacker intends to reverse the transactions, he will have to change the record in all the
Nodes. The Nodes are constantly validating the transactions so he would have to follow
the same sequence for tampering with them, which is virtually impossible. 10
In contrast, Huang argues that it is not 100 percent tamper resistant. If a collision of
more than 50 percent of computational power could be achieved, the block chain could
be hacked. It also depends on how well the cryptographic keys are managed. So, the
risk of theft is the same as centralised technologies. The probability is proven by
numerous incidents of Bitcoin thefts not only from wallets but at the stage of mining
process by manipulation and denial of services (Dos).
To unveil the Shari’ah aspects of cryptocurrencies, it is essential to understand the basic
concepts of assets and money in Islam.

The definition of a sale contract according to Muslim jurists is:

“The exchange of Maal in consideration of Maal with mutual consent”

Therefore, any permissible Islamic asset should qualify to be a Maal. The definition of
Maal varies according to different schools of interpretation. Nevertheless, two qualities
seem to be the core value of the concept.
First, it must be desirable amongst the people and they assign a value to it. Items such
as humans are excluded from the list as they are not desired as tradeable commodity.
Desirability should also be coupled with taqawwum, which means that the asset should
not be unlawful in shariah. Thus, transactions involving wine, pork and other haram
items would also be void.
Second, the asset should be storable in a way where it could be retrieved when needed.
Thus, a bird in the air or a fragrance passing through does not qualify for a Maal.

Classically, Intangible assets were not considered Maal, specially according to some
Hanafis. The difference of opinion seems to be that of time, as those assets did not pass
the above mentioned two tests. With the emergence of certain intangible assets,
opinions naturally changed. It is for this reason the famous Hanafi jurist Ibn Abideen
clarified that an asset could not be disregarded as Maal just because it is not ‘Ain
(Material). In present times most jurists do not restrict Maal to tangible assets. Thus,
gasses, electricity, data, goodwill and shares fall in the category of Maal.

Throughout history Mankind has utilized different mediums of exchanges. A divisible
item of exchange was required to replace barter system to arrive at a common
denominator which would solve the problem of double replacement of wants. This gave
birth to money in its different forms. Shells, leather, cowry, barely, salt all have been
used as money.16 Later, the bi-metallic standard became the norm for centuries
throughout the world. Marwan (695) was the first Caliph in the Islamic world to mint
coins with state seals. In this way money was regulated. The Mamluks (1468-1517) introduced Fulus
(copper coins). After the 18th Century, paper currency was gaining
acceptability globally mainly due to its convenience. The Ottomans also introduced
paper money by the name of qaimah. In the year 1914, it was declared as the only legal
tender.17 One could easily deduce that the concept of currency in Islamic Financial law
(IFL) is not rigid, nor it is restricted to only bi-metallic standard.

A. Money according to economists and Islamic jurists:
Modern Economists have assigned five fundamental qualities for a commodity to be a
money. We shall call it ‘the money test’. The jurists also seem to agree with these
qualities, except there are some differences in the interpretations.
Firstly, it must have mass acceptance. This is called ta’amul, which could be general
(‘aam) or limited (khaas). Imam Muhammad –the disciple of Imam Abu Hanifa–
conditions it to be wide-spread. On the contrary, Abu Hanifa and Qadhi Abu Yosuf
view that acceptance of a community or even the two parties is sufficient.18 According
to Usmani the opinion of Muhammad is the preponderant (Mufta bih),
as the former
opinion could result in rampant corruption, unchecked money-laundering and misuse
of money for illegal activities.
Other conditions are the divisibility, uniformity, durability and mobility. If it is also
rare, which allows small quantity to have larger value and as also stable it would make
an item ‘good money’.
Therefore, if any commodity such as virtual coins gains
acceptance as a medium of exchange, it would perfectly pass the money test.

As Bitcoin is the dominant virtual currency, the literature on Shari’ah rulings mostly
engages with this. I would detail the arguments on this specific type, which could serve
as a test for other cryptocurrencies.
Islamic scholars are divided on the Shari’ah ruling on Bitcoins. Many influential
scholars forbid trading in these currencies. Shaikh Assim Al-hakeem, the grand Mufti
of Egypt Shawki Allam,
the prominent UK scholar Haitham Al Haddad, Mufti Taqi
Usmani.
Although the latter has clarified that he is expressing his opinion and is not
issuing a verdict.
On the other hand, we find recent works by some modern Islamic scholars and muftis
who are inclined towards allowing cryptocurrencies, although, they have attached strings
to this permissive notion. Mufti Barakatullah, Adam,
Abu bakr and Paracha
fall into this category.

The permitters are than further divided into two groups. The first group considers it a
property but are of the opinion that it has not yet fulfilled the criterion of a currency.
While the second group elevates it to the status of Thaman ‘Urfi (customary currency).

A. First opinion: Pessimistic:
The above-mentioned scholars who consider Bitcoin Haram or illegal have raised the
following core objections:

1) It is intangible.
2) It does not enjoy legal tender.
3) The issuer is unknown, and it has no central regulatory authority
4) It facilitates money laundering and other illegal activities.
5) Due to its volatility, it contains gharar (uncertainty)
6) It is similar to gambling. Miners attempt to solve puzzles. If they succeed, they
gain, otherwise they lose their effort and resources.

B. Second opinion: Qualified to be a crypto-asset:
Firstly, The basic criterion for something to be a Maal is the desirability and storability
test. Bitcoin qualifies for the first test because of the BMS technology support, proof of
work (PoF) protocol, borderless payment with minimum transaction fee and its
decentralized nature. The numbers mentioned in the introduction of this article are
sufficient to prove its desirability. As far as storability is concerned, the coins (also
called XBT) are encoded and stored on a public ledger and are retrievable when
needed.
Secondly, they are mathematically impossible to manipulate. Whereas recently hackers
stole USD $1 billion from the Federal reserve. Although, there are incidents of
blockchain security being breached as well, but these are rare. Most of the Bitcoin theft
has been committed by hacking the keys or the wallets. It is possible to counterfeit
banknotes as opposed to Bitcoins. Hence, the storability of BMS is greater or at least
equal to that of central banks.
Thirdly, Maal is not required to be tangible as elaborated above in detail.
Fourthly, ambiguity in the originator of an asset is not an impediment for Maal. What
matters is its permanency and security. Moreover, advocates of virtual currencies argue
that instead of a live issuer, we have the algorithm which is issuing and securing the coins
better than human authorities. It is proved to be more efficient than SWIFT
network.
Fifthly, in Islamic jurisprudence, the unlawful use is an external factor that does not
render a commodity Haram, until there is a beneficial use for it. For instance, Poppy
is widely used for illicit drugs, but it is not ruled Haram as it has other medicinal uses.
However, excessive utilization in illegal means could be banned as a preventive
measure (sadd-us-Zari’ah). Many cryptocurrencies like funfair (casino gambling
cryptocurrency) would certainly be prohibited, as their prime utility is Haram.
Lastly, it is argued that Bitcoins are not produced out of thin air, rather they have an
asset on their backs which is electricity. I would suggest that using the tool of electricity
and their puzzle-solving expertise, the effort of miners to mine coins, could be
structured as ju’ala. One could call it e-mining. AAOIFI standards have defined it as:

“It is a contract in which one of the parties (the Ja’il) offers specified
compensation (the Ju’l) to anyone (the ’Amil) who will achieve a determined
result in a known or unknown period.”

Evans Brilliantly structures the relation between community miners as Musharakah
where the miners who share their resources and expertise are partners. They share the
benefits and costs for maintaining the system.
Despite being Maal according to this group of scholars it has not attained either mass
acceptability (t’amul) or legal tender. Therefore, this could not be regarded as money
just yet. This is the opinion of some South African Muftis and fatwa centres. Mufti
Faraz held this opinion in his first concept paper.

C. Third opinion: Optimistic:
The arguments of these scholars (mentioned above) are very pertinent and modern.
They present juristic and pragmatic answers to the questions raised above.
In Principle, there is no single definition for money in Islamic law. Any asset which is
benefitting the community could be treated as money. Here, the fundamental
assumption of permissibility (Ibahah) would apply which is the hallmark in Islamic
Jurisprudence.
Historically, a legal tender has never been a requirement for money. Before AH.,
there was no legal tender. Thus, caging it in a centralized regulation would defeat its
very purpose which was a decentralized P2P payment system.

Alternatively, currency could be established by gaining acceptability among the masses
as discussed above. The Barter system was considered a valid medium of exchange on the
same basis. Furthermore, global acceptance is not a condition. For example.
Japanese ¥ is a valid currency in Japan, but not accepted in other parts of the world.
Likewise, Bitcoin, Ethereum, Ripple and other such currencies have gained acceptance,
and are considered a unit of account within their respective eco-systems.
Another issue is the Gharar (uncertainty) factor. In Islamic jurisprudence Gharar is
further categorized into two types. Excessive and trifling. The former is prohibited
while the latter is permitted. It is concluded that any kind of ambiguity which does not
habitually result in disputes in a certain market falls in this category.  On top of that,
huge fluctuations, and volatility in the rates of Bitcoins is an external factor which is
not Gharar. Many fiat currencies and commodities have witnessed immense
fluctuations, but this did not abrogate their value.
Lastly, as obeying the rule of law is a fundamental principle inspired from the Quran
and Sunnah, all cryptocurrencies which are banned in any jurisdiction would not be
allowed to be traded. However, the silence of a state law on its permissibility would not
render its trade haram.

Although the definition of permissible assets, money, Gharar and its details like ‘urf,
and t’amul are noticeably clear in Shari’ah, but its application to modern
Cryptocurrencies, whose technical aspects are overly complex is a cumbersome task.
On top of that, the volatility in prices, usage for illegal means, non-regulation by
governments, trust deficit, and its floating in unchartered waters has cautioned many
scholars to permit them.
However, some scholars who are specialized in Islamic financial law, have tried to
understand the mechanisms in depth are optimistic regarding its permissibility. I have
argued that the arguments of the latter group are sound and convincing.
Some pro-active private start-ups have launched shariah complaint cryptocurrencies. In
2017 a tech. company in Dubai has launched the first Gold-backed virtual currency by
the name of ‘One Gram’, where one gram of gold is on the back of each coin. This is
in coordination with the desirable notion of IFL.
This is paper is not an exhaustive fiqh analysis on the subject, future developments,
acceptability or presumed hazards would pave the way for more concrete and in-depth
research.