Undoubtedly, the emergence of cryptocurrencies has imposed the challenge of addressing their Shariah issues. These issues include the very permissibility of their issuance in view of the fact that they are not backed by real valuable assets or supervised by financial authorities, which makes their holders vulnerable to possible fraud and manipulative fluctuations in their values. Other issues include trading in them and whether or not they are considered as commodities subject to the injunctions pertaining to Riba as they apply to conventional currencies. In addition, they have potentially negative implications for the market, such as their use in money laundering, drugs trafficking, and other illegal dealings. This paper treats these Shariah aspects of cryptocurrencies.
TopIntroduction
The term cryptocurrency is a term used to describe a digital asset designed principally to function similarly to a regular currency - as a medium of exchange, unit of account and store of value - using encryption techniques to secure the transactions and to control the creation of additional units of the currency. Cryptocurrency generally operates independently of a central bank, central authority or government. There are hundreds types of cryptocurrencies although the most famous of which is Bitcoin, which came into existence in 2009.
Currencies are treated with the upmost importance in the Shariah. This is evident by the strict rules pertaining to their transactions, more so than any other asset. This is because Islam deems currency as the most important component of the economy, and the preservation and development of economy is one of the primary objectives of the Shariah.1
Similar to any economic system, Islamic economics recognises the following three economic functions of currencies:
Unit of account: the currency measures the value of any economic item; i.e. goods, services, assets, liabilities, income and expenses.
To maintain and protect these three functions of currencies, the Shariah governs them by several rules so that they remain safe from the manipulation of human greed. One of the most dangerous factors that may affect currencies is excessive trading, especially by means of derivatives when used for speculation. Excessive trading inevitably impacts their value and purchasing power, thereby impairing the first two functions of a currency, namely being a means of exchange and a store of value. When currencies are traded through options contracts, which simply require owning the margin to enter the options market, the enormous number of contracts executed on a currency will inevitably impact its purchasing power and possibly cause huge depreciation or appreciation of its market value. The 1997 Asian financial crisis provides a stark example, as the value of the currencies of certain Asian countries drastically depreciated after they were subject to excessive speculation. To prevent speculation on currencies, the Shariah commands that when a currency is sold against the same or another currency the transaction has to be effected on the spot, without any delay. This rule aims to prevent speculation since speculation involves future contracts, and future contracts on currencies are forbidden in Islam. The same rule applies to all assets that are basic and vital to the economy and human use and consumption, such as staple grains, oil and metals. No rule would protect these basic and necessary commodities from price manipulation like invalidating their future sales, especially when used for speculative purposes. Shariah text that pertains to this rule, such as: “[Sell] gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt hand to hand equal to equal” (Muslim, 1990, p 1211), may have been perplexing fourteen centuries ago, since no one would sell such assets on future basis since such a sale would serve no purpose at that time. However, reading them in the present time enables us to appreciate the wisdom behind this Shariah rule, as if this rule and its likes were in fact meant for our time; a time when people attempt to create enrichment opportunities for themselves out of the thin air in order to make profit, even if they come at the expense of the economy or the public interests.
In addition to impairing the first two economic functions of currencies, excessive trading causes high volatility in their values. A currency whose value is highly volatile will never be suitable as a unit of account to measure against which the value of other assets. Thus, excessive trading impairs the third function of money. Again, the Shariah protects this economic function of money by simply forbidding future sales of currencies. Interest also causes currency value volatility and depreciation, yet ironically, economists often quote interest as a tool to control the value of the currency, thereby making interest a cure to the very disease that it contributes to creating.