Permissibility of using cryptocurrencies in the Muslim world

Interest in cryptocurrencies is shown not only by ordinary users, but also by huge financial organizations. A study by the Infosys Finacle consulting agency shows that about 69% of banks are experimenting with cryptocurrencies, and the average amount of investments in projects related to blockchain technologies in 2021 exceeded $ 7 billion. Considering that more than 17% of all financial organizations in the world are participants in the global market of Islamic finance, the question of compliance of new technologies and financial instruments with the requirements of Sharia and the permissibility of their use by ordinary Muslims and Islamic financial institutions becomes more than obvious. In this article, we will talk about the main provisions of Islam that answer questions about the possibility of using cryptocurrencies by the muslims.

Sharia requirements for money and financial relations between people

There is no clear text with a special set of requirements for the characteristics of money and the way they are handled in Sharia. And therefore, the compliance of cryptocurrencies with the norms of Islam is almost always based on the opinions of authoritative Muslim theorists, priests and scientists. The Islamic heritage contains a rather rich number of references in which scholars have expressed their views on the essence and role of money. Here are just a few of them.

Imam Al-Ghazali says: “Allah created the dinar and the dirham for circulation and for them to be a fair and just standard between various assets, as well as for another wisdom, which is to make them a means for all other assets. This is because they are valuable in themselves, but not desirable for themselves...”

Imam Ibn Taymiyyah states: “Whenever currencies are sold one for another on a different basis, this contradicts the purpose of the Tamaniyah (measure of value) of money.” Sheikh Saleh Al-Fauzan believes that any "measure of value" generally accepted by people should be considered as a currency."

There are opinions that money should be only gold and silver, others believe that money is any material backed by gold. On the other hand, there are opinions that any money should have an intrinsic value. The views of most theorists recognize fiat money, but the views of Sharia on cryptocurrencies remain controversial. The generally accepted concept is that all financial obligations, such as Sukuk, should be backed by real assets. AAOIFI (Accounting and Auditing Organization of Islamic Financial Institutions) was the first to officially announce this standard.

Applying this approach to the concept of money, we can get the erroneous conclusion that the entire money supply should also be provided with real assets. However, this is not the case. It should be noted that money is not a financial asset, it is just a means of exchanging goods and services, and therefore it does not necessarily have to be secured by assets. One of the functions of the Central Bank of any country is to manage the liquidity of the banking system. To do this, the Central Bank either attracts loans from the market, or places money on deposits itself. In both cases, it is carried out on a competitive basis, where the criterion is the highest interest rate offered.

Needless to say, the traditional instruments of monetary regulation - loans and deposits - do not meet the requirements of Sharia. In addition, the Central Bank is considered an absolutely risk-free institution, which contradicts the basic legal maxim of Sharia - "Responsibility justifies profit." Based on this principle, unlike the traditional banking system, Islamic banks have no legitimate justification for “making” profits simply by depositing money into the Islamic central bank. On the other hand, the Islamic central bank also has no right to “receive” any profit from other banks for the financing provided to them. Therefore, since central banks are (in general) risk-free institutions, they have no right to take on any commercial risks, since there can be no reward/benefit without risk/liability.

An important aspect of sharia is that nothing should contribute to prohibitions, including unfair monetary treatment. One of the key issues actively discussed in Islam is social injustice caused by the unfair (uncompetitive) distribution of national wealth. Consequently, money circulation should not be in the hands of a few rich people, which leads to the concentration of wealth among the few due to the marginalization of the majority of people within the society.

Here are the basic requirements of Sharia concerning money and money circulation.

1. The process of issuing money, offering it and withdrawing it from the market should be free of Fish;
2. Money can be made of any material (metal, wood, plastic, etc.);
3. The money issuer and the monetary regulator can be two different entities/organizations;
4. The issuer of funds should not enter into transactions with financial institutions aimed at generating income;
5. It is not prohibited to use the currency/money of other countries;
6. Money does not have to be backed by real assets;
7. Money should be issued in sufficient quantity to meet the needs of the economy;
8. Money and money circulation should make people's lives easier;
9. A person's ownership of money should be transparent.

The main characteristics of cryptocurrencies

Cryptocurrency is a computer file that cannot be copied or applied twice. Since cryptocurrencies can be used for trading, savings and exchange for other currencies, they are considered similar to any existing undocumented money circulating only on the Internet. Cryptocurrencies are not backed by real assets. From time to time we hear that there have been some attempts to support cryptocurrencies with certain assets, especially gold. But in this case, the asset-backed cryptocurrency will actually turn into a regular investment attraction mechanism guaranteed by real collateral, and can no longer be considered a cryptocurrency.

Cryptocurrency, after it is legalized by the state, can freely circulate in the economy and can be bought and sold as, for example, an investment product with high liquidity. But cryptocurrency – at least in the current situation - should not have a similar status with the existing national currency as a means of payment, otherwise it will lead to negative consequences, creating unnecessary competition between the two currencies. In accordance with the norms of Sharia, the following points can be distinguished, according to which the compliance of cryptocurrencies with the rules of circulation in Islamic finance systems is determined.

1. The acquisition of cryptocurrencies for the purpose of saving (investing, accumulating) is not allowed, since their high volatility in the exchange rate entails excessive risk (garar) and participation in speculation (maysir). If the volatility of the exchange rate decreases to the level of the world's leading currencies, the above ban may be lifted.

2. The purchase of cryptocurrencies for payment settlements (for example, payment for goods or services, exchange) is permissible, but it is recommended to purchase cryptocurrencies immediately before the transaction in order to minimize the risk of volatility.

3. The permissibility of mining depends on the goals pursued by the miner. If the miner's goal is to acquire the necessary amount of cryptocurrencies for immediate payment for goods and services, then this is allowed. In this case, the commission received for the approval of the transaction by third parties during mining should also be considered acceptable. However, mining becomes unacceptable if the purpose of the miner is to receive and save in the hope of further growth of its exchange value, then this is nothing but excessive risk (garar) and speculation (maysir).