What does Islam say about Bitcoin?

We have always encouraged financial innovation, but innovation that is useful and relevant.

Following the warnings issued by the AMF, we thought it useful to shed light on the view of Islam on this new virtual “currency”.

Let us first define the types of money:

Fiat money (from the Latin fides, trust) is money (or more generally a financial instrument) whose physical form has no intrinsic value and which cannot be converted into gold. This is the case of the currency we use every day. Each currency is defined, under the name of a currency unit, for a monetary zone. There it takes the form mainly of credits which make up deposits, and secondarily of banknotes and coins, also called fiduciary money.

Scriptural money, literally written money, consists of bank deposits in current accounts at commercial banks. These entries, long kept in ledgers, are now managed by computer. They make up the bulk of the money supply, far ahead of notes and coins.

We have recently witnessed the creation of a new “currency”, bitcoin. How should it be defined and situated?

“Bitcoin is one of the speculative assets, sometimes wrongly described as virtual “currencies” or “cryptocurrencies”, that currently exist in the world. It is traded online and is not embodied in any coin or note.

Bitcoin, like other assets of this type, relies on a computer protocol of encrypted and decentralised transactions, commonly known as the “blockchain”. It operates on a network without intermediaries and does not have legal tender status, unlike currencies issued by central banks.

Bitcoin is a decentralised virtual currency. This means that it has no central authority, and that nobody trusts anybody. Payments are nevertheless secure. The blockchain contributes to their security.

Miners is the term used for the people who collect cryptocurrency. Currency miners mine their cryptocurrency in their farms, specially secured computers dedicated to this task.“

Is Bitcoin really money? The answer may seem obvious to many. However, in Islamic countries there are specific guidelines on Islamic financial principles that people use to define what is or is not money. The question must therefore be asked whether Bitcoin is compatible with Islamic commercial law (fiqh al-mu’amalat).

Does Bitcoin have intrinsic value?

The Shari’ah says that a currency must have intrinsic value, backed by a tangible asset such as gold or silver. This means that money must have some use before it can be considered admissible. A currency cannot be halal simply because people consider it valuable. In some cases, financial institutions create currencies with no intrinsic value. A currency must be backed by a commodity of real value. Bitcoin is not.

Nor has our everyday currency been backed by a tangible asset since the abolition of the gold standard in the 1970s! However, this does not prevent it from being counted as money.

The four main factors that give Bitcoin intrinsic value are:

Its value is dictated by supply and demand.

It can be used as a currency on its own.

It is “mined”, as we explained above

and it is scarce (principle of scarcity).

The Shari’ah does not permit the use of money based on riba (riba al-qurud: interest on negotiated debts). Islamic law also prohibits the charging of interest and profiting from interest paid on loans. Islam does not regard money as a commodity but rather as a medium of exchange. A currency is considered halal (admissible) if it is deflationary in nature. This means that a currency should resist inflation and should command a stable market price. Islamic law further prohibits the use of a currency in haram (unlawful) activities.

A currency based on interest and debt is called “fiat“. The best definition of fiat money is that of a currency whose monetary value bears no relation to its value as a commodity, which most of the time is negligible by comparison. (Money, Banking and Finance, Jeffrey Rogers Hummel & Warren C). Such a currency is haram. A transaction becomes fiat if one party to the transaction is bound to gain unfairly more than the other. It is therefore inadmissible to trade currencies for speculative purposes. For Islam, a currency can only be exchanged at the spot price (to avoid riba).

Since Bitcoin is the result of a computerised “mining” process, it can be compared with the ancient currencies that were physically “mined”. Its future circulation is predetermined. Miners obtain a proportional value of the currency when they mine it. This serves to authenticate the process of extracting the currency. Some might invoke the “virtual” nature of Bitcoin to describe it as haram, but it cannot be denied that it can be verified using the Blockchain Management System (BMS). By extension, this makes it halal for some scholars.

What do the critics of Bitcoin say?

There are Islamic financial experts and Islamic bodies who maintain that Bitcoin is not really a currency like the others. According to the Malaysian Fatwa Council, Bitcoin is not eligible to resemble money or gold in cyberspace on the basis of a mere limitation or a deflationary nature. They further argue that Bitcoin should not be used as a currency because of its extremely speculative nature and the absence of an authoritative body to control it (absence of a regulator). Some experts have issued fatwas citing a high likelihood of market manipulation and low confidence in the currency.

Risk of crisis:

A crisis is specifically monetary when savings held in money lose all or part of their value, either because deposits or money-market investments disappear, or because the nominal value of the monetary unit loses a large part of its purchasing power.

When money was metallic, this kind of crisis was possible in the event of a massive inflow of precious metal without any economic counterpart, following a particularly successful military expedition (the case of Spain after the conquest of America) or, more rarely, following a mining boom. Conversely, the metal could become scarce for the symmetrical reason (payment of a huge tribute, plunder) or following a crisis of confidence leading to massive precautionary hoarding.

Today, crises are no longer physical. However, the excessive use of the printing press by one or more states, and the corresponding increase in the money supply in circulation, can lead to a similar result. In any event, crises essentially take the form of a massive loss of confidence. In the case of bitcoin, there is also the risk of fraud and abuse owing to the absence of a central regulator, as well as the volatility of its value.

In conclusion

When one looks at Bitcoin’s Blockchain Management System (BMS), it is easy to see how it complies with the prohibition of riba (usury). The BMS also incorporates the principles of maslaha (public interest, utility). Owing to the growing demand for cryptocurrency, many financial institutions in Islamic countries are adopting the BMS. Companies in Indonesia, Malaysia and several other countries use cryptocurrency to channel participatory investments to small and medium-sized enterprises in need of capital.

According to many academic papers, reviews and expert opinions, Bitcoin is not incompatible with Islam. It is free of riba and incorporates the principles of maslaha.

Nevertheless, some scholars are very reluctant about this “new currency”, and the regulators’ report also points in their direction. We quote here a recent extract from the AMF’s report (published on 4 December 2017):

“For several weeks, Bitcoin has seen its valuation rise sharply. This valuation may just as well collapse in the same way. The purchase, sale and investment in Bitcoins currently take place outside any regulated market.

Investors are therefore exposed to very high risks of loss in the event of a downward correction and enjoy no guarantee or protection of the capital invested.

The AMF and the ACPR are receiving more and more enquiries on this subject from savers through their call centres.

Because they are not considered financial instruments under current law, Bitcoin and other “crypto” assets do not fall within the AMF’s direct supervisory remit. Nor can they be classified as currencies or considered means of payment in the legal sense of the term. Consequently, they are not subject to the regulatory framework for means of payment either.

More generally, the two authorities wish to make clear that the blockchain technological environment is likely to offer many possibilities in terms of uses by companies. These technologies therefore contribute, like others, to the development of innovation.

Nevertheless, in the particular case of blockchain-based “crypto” assets, and given their technical characteristics, their high volatility and the absence of specific regulation, the AMF and the ACPR advise savers to exercise the utmost caution before considering investing part of their savings in them.”