Is Cryptocurrency Haram in Islam? – A Guide for Muslim Traders

While no two cryptocurrencies are the same, they all share the following three features:

1. Independent people or groups issue cryptocurrencies—not central banks or governments. This is the first key difference between cryptocurrencies and traditional currencies. For example, Euros, US Dollars, and British Pounds are issued by their central banks (the ECB, Federal Reserve, and the Bank of England). In comparison, an individual or group named Satoshi Nakamoto (a pseudonym hiding their real identity) created the first true cryptocurrency, Bitcoin. Their goal was for Bitcoin to be free from government control.
2. Cryptocurrencies do not have intrinsic or legislated value—the worth of a cryptocurrency is what people are willing to pay for it in the market. This stems from the fact that central banks or governments do not issue cryptocurrencies. National currencies derive part of their value from governments legislating the currency as a legal tender.

3. Cryptocurrencies are stored on decentralized record-keeping systems. Conventional accounting uses centralized record-keeping systems controlled by a central authority. Cryptocurrencies changed that format to use decentralized ledgers without a central authority. The technology that allows this to happen is called Blockchain.

Islamic finance refers to financial transactions that comply with Sharia law, the body of religious laws based on the Quran and Hadith. Let’s cover some of the more important areas.

1. Money is a medium of exchange, not an asset. When money changes hands, there should be an underlying exchange of goods or services.

2. Islam prohibits paying or receiving interest (also known as Riba in Islam). This principle stems from the notion that money is a medium of exchange. Interest treats money as an asset—it is a charge on money itself without an underlying exchange of goods or services. That is why interest is prohibited in Islam.

3. Excessive uncertainty or risk (Gharar) should be avoided. The Islamic term “Gharar” encompasses the principle of uncertainty or risk. Gharar is a broad concept containing several aspects:
   1. When the claim of ownership is unclear or suspicious
   2. When the existence or characteristics of goods or services are not certain
   3. Where an outcome depends on pure speculation and excessive uncertainty, with the risk not being shared
   4. Where a transaction is based on a misunderstanding
   5. Where consequences are concealed due to a lack of transparency between parties, or a lack of information relating to the contract

4. Parties should share risks and profits proportionately. The profits and risks of a transaction or contract should be shared as far as possible, rather than one party claiming most or all the upside or bearing the full risk of loss.

5. Other equally important Sharia finance rules include the prohibition of gambling (Maysir) and the fact that commercial transactions should benefit society and refrain from supporting Haram activities, such as gambling or alcohol production.

1. Blockchain aligns with Islamic principles of trustworthiness and fairness. Blockchain transactions are recorded in an immutable public ledger, meaning nobody can tamper with or alter them once they have been recorded. This transparency and security align with Islamic principles.
2. Cryptocurrencies naturally avoid interest or Riba. In contrast, traditional banking systems rely heavily on interest-based transactions.

A consensus mechanism is a procedure to achieve agreement and security across computer networks. In blockchains, consensus mechanisms verify each blockchain transaction. In the cryptocurrency world, there are two prevalent types of consensus mechanisms: Proof of Work (PoW) and Proof of Stake (PoS). The key difference between PoW and PoS is how each validates and adds new blocks.

• Blockchains use Proof of Work (PoW) to validate transactions and add new blocks. It demonstrates that a program did the work required to propose a new block for the chain without attempts to alter the data.
• Bitcoin uses Proof of Work as its consensus mechanism.
• PoW is also known as “Crypto mining,” which refers to the reward for doing the work.
• PoW requires lots of energy, increasing as more miners join the network.
• PoW has long processing times as networks grow larger.

• Proof of Stake (PoS) evolved as a low-cost, low-energy-consuming alternative to PoW.
• PoS allocates responsibility for proposing new blocks to a participant node in proportion to the number of virtual currency tokens held. The rest of the network then verifies the block and adds it to the blockchain if there is consensus.

Cryptocurrencies contain both Halal and Haram aspects. Let’s look at arguments on both sides of the fence:

1. Blockchain technology ensures trustworthiness and security in transactions, a founding principle in Shariap law
   A. Cryptocurrencies are nearly impossible to counterfeit or double-spend.
   B. Because of their decentralized nature, no single authority can increase or reduce their supply at will, thereby ensuring more transparency in the market.
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2. Some Sharia experts see cryptocurrencies as digital assets, giving their owners utility within the cryptocurrencies’ ecosystems. This qualifies them as ‘Māl’ (wealth) from a Sharia perspective, making them permissible.

3. Cryptocurrencies are accepted as a medium of exchange. So long as people use and exchange them, they can be considered currencies, making them Halal.

4. PoW cryptos use vast amounts of energy to run. PoW cryptos, such as Bitcoin, would be even more environmentally damaging if more widely adopted because of the energy required to validate and add new blocks. Islamic finance stipulates that commerce should benefit society and be sustainable. For some, the PoW model does not comply with this aim.

5. According to some, cryptocurrency is not “real money.” It has no legislated backing as legal tender, and without intrinsic value, it is purely speculative, making it Haram.

6. Cryptocurrencies are sometimes used for illegal or haram activities. Crypto is often the avenue for money laundering, and its untraceable, anonymous nature makes it ideal for this purpose. This potential use of crypto makes it Haram in many eyes.

7. Cryptocurrencies are excessively volatile, which is against the Islamic principle of Ghara, making them potentially Haram.

8. Trading crypto is gambling because it has no intrinsic value. This again makes cryptocurrencies Haram in some eyes.

Islamic Cryptocurrency Projects and Halal Coins

As the demand for Sharia-compliant digital assets has grown, various groups have launched cryptocurrencies overseen by Muslim scholars to ensure they meet Sharia rules. For example, these cryptocurrencies are backed by real assets such as gold. The coin transactions are also recorded on decentralized ledgers through blockchain technology, which is considered an aspect of cryptocurrencies that helps make them Halal.

Case Studies: Cryptocurrency in Islamic Countries

Different Islamic countries have different regulations towards cryptocurrencies. Some have given them an outright ban, some allow their use but not by the banking system, and others have allowed cryptocurrency trading under their regulations. Here are some examples:

• Saudi Arabia 

Although cryptocurrencies are not illegal in Saudi Arabia, the Saudi Central Bank, SAMA, has warned financial institutions against using Bitcoin and said its dealers will not be guaranteed any protection or rights.

• United Arab Emirates

Its central bank does not yet recognize cryptocurrencies as a payment form. Still, it is working on new regulations for retail payment services allowing tokens.

• Pakistan 

Cryptocurrencies are not regulated in Pakistan. However, they are not illegal or banned.

• Indonesia

It is legal to trade and hold cryptocurrencies in Indonesia, but it is not legal as a payment tool.

Cryptocurrencies have aspects that are both Halal and Haram under Sharia rules. The key areas revolve around whether cryptocurrencies are considered a medium of exchange, elevating them to the status of money, or whether they are purely speculative tools without intrinsic value akin to gambling. Criminal enterprises use cryptocurrencies for illegal activities such as money laundering, potentially making them Haram. Proof of Work cryptocurrencies, such as Bitcoin, can be environmentally damaging because of their huge energy needs, contrary to Sharia principles requiring transactions not to damage sustainability.  However, at CoinHint, we contend that blockchain technology makes cryptocurrencies incredibly safe and fair, which aligns directly with core Islamic principles.