Is money is money is money? While this appears like a troll-like, joke question, the answer is a bit more complex than that. Religion can play a big part in the governance of financial systems. Islam in particular has very clear guidelines based on Islamic principles. As Bitcoin enters mainstream adoption across the globe, one begs the question: Is Bitcoin complementary with Islamic banking and finance?

Intrinsic value of bitcoin

Islam requires any currency to hold intrinsic value before it can be considered permissible. In other words, money that is created out of thin air is not (halal) money, because it is not backed up by any commodity of actual value. In case you are new to the financial sector, know this: it is common, a standard practice, even, for financial institutions to create money without intrinsic value.

In order to decide whether bitcoin holds intrinsic value, one must look at its qualities in comparison to other types of commodities which Islam permits. Two great examples are gold and silver. During the course of history, these precious metals have been used as currencies, in the form of the gold dinar and the silver dirham. Some countries around the world still accept it as legal tender.

While bitcoin can only exist electronically, it shares a lot of qualities with gold and silver. Both are mined, scarce, value dictated by supply and demand, and can be used as currency on its own. This handy infographic illustrated this point.

Is bitcoin ‘money’?

Can you call bitcoin ‘money’? Well, bitcoin is used as a medium of exchange - you can use it to pay for products and services. Bitcoin is also an economic standard and measurement of value - the price fluctuates based on market supply and demand. For all intents and purposes, bitcoin is certainly used as money.

However, Mohammad Mahmoud Ibrahim Tayel argued that bitcoin lacks one quality that money should have - public confidence, as evidenced in its volatile nature. In his short thesis for the Central European University entitled ‘Can Bitcoin be Self-Regulatory Legal Tender: A Comparative Analysis of United States, European Union, and Islamic Legal System’, Tayel said:

“If we assumed that Bitcoin is analogous to the gold and its precise cause is its moneyness, then definitely Bitcoin is not eligible to resemble gold/silver in cyberspace on basis of a mere limitation or deflationary nature, especially that these two features have not established the precise cause which is the public confidence, but rather created an injury for the holder and the users alike due to high volatility”

This is similar to the opinion of the Malaysian fatwa (religious opinion) council, adding that bitcoin is not suitable to be used as currency because there is an element of extreme speculation, and lack of authoritative body. Considering that Malaysia is one of the global leaders of Islamic finance, and serves as an authoritative body in providing Islamic guidelines in Malaysia, this view cannot be easily dismissed. Professor Dr. Monzer Kahf, an expert in Islamic finance and economics in Qatar Faculty of Islamic Studies also released a fatwa citing low confidence and high chance of manipulation in the open market (unclear by what he means by this) make bitcoin/cryptocurrencies unsuitable to serve as currency. It should be noted, however, that both these statements were released in 2014 (April and June, respectively) - right after bitcoin price decreased into half its value within a matter of months.

Significantly, both of these fatwas did not outright say bitcoin is impermissible. One can theorise that as bitcoin volatility slows down and more accountability bodies are established (especially to address fraud cases), not much else can make bitcoin ‘un-Islamic’, per se. It would be interesting to get newer updates from Islamic religious scholars on bitcoin as currency, as it gathers more public confidence, helped in part by the maturing of blockchain-based technology in the financial sector.

Compatibility of bitcoin in Islamic Banking and Finance

Islamic banking and finance must follow the principles of Islamic law. Two of the main principles are: the collection of interest (riba’) is forbidden, and loans must be based on profit/loss sharing.

Charles W. Evans analyzed virtual currencies with the requirements of Islamic Banking and Finance in his paper, published in the Journal of Islamic Banking and Finance. In the abstract, he wrote:

“While intended as a narrow financial and economic analysis, and not as an in-depth analysis of the subtleties and nuances of Shari'a as they relate to banking and finance, it shows that a BMS (blockchain management systems) can conform with the prohibition of riba (usury) and incorporate the principles of maslaha (social benefits of positive externalities) and mutual risk-sharing (as opposed to risk-shifting). It concludes 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.”

Evans further compared bitcoin to fiat currency and argued that bitcoin is a better alternative, as it is free of riba’ and value discounting, enters the circulation at a predictable rate (thus preventing hyperinflation), and can be expected to enable transactions for goods and services (ie. serve as money, unlike fiat money which can sometimes - though rarely - be declared invalid based on the whims of a leader. Case in point: General Ne Win, who demonetized the Myanmar currency… twice).

So far, Bitcoin application in Islamic banking and finance is very limited - only one such example can be found. In 2015, Matthew J. Martin launched Blossom Finance, a microfinance institution based in Indonesia that used the principle of Mudharabah, or Syariah-compatible financing system.

Conclusion

Based on the above reviews of academic papers, Bitcoin is not incompatible in Islam. Bitcoin can conform to principles of Islamic finance, particularly being free from the influence of riba’ (interest), incorporates the principles of mashala (social benefits of positive externalities), and mudharabah (mutual risk-sharing).

In terms of bitcoin’s legal status as ‘money’ in Islam, religious scholars did not declare it as impermissible, but mainly cautioned against its volatile nature. If volatility is out of the picture, one may make the informed opinion that bitcoin is halal as legal tender.

There are a lot of potential for Bitcoin applicability in Islamic banking and finance. With only one type of product currently available, the market is far from saturated to serve the world’s 1.6 billion Muslim population.