Since the invention of Bitcoin in 2009, the cryptocurrency market has grown to a $2.87 trillion market composed of thousands of cryptocurrencies. The number of people adopting cryptocurrencies has reached above 300 million1, and is rapidly rising with a global adoption growth of 881% from June 2020 to June 2021 or 2300% since Q3 20192. In Indonesia, cryptocurrency investors reached 7 million, it’s more than double the stock investors, which is 2,7 million as of 20203, highlighting its influence and growth.
This emerging trend has garnered global attention, including from sharia scholars on whether cryptocurrencies are sharia-compliant. There have been differing opinions from scholars, not only on its sharia compliance, but also on its status as a currency. And beyond it, is cryptocurrencies in its current form in line with the ethical goals of Islam? As the sector grows larger and influential, verifying these issues would become more essential.
In order to understand this issue, this paper attempts to present the discussion on the status of cryptocurrencies. This article looks at this from both from its legal perspective and from a Islamic Moral perspective.
1.1. What Is Cryptocurrency ?
According to the Commodity Futures Trading Regulatory Agency (BAPPEBTI), cryptocurrency, or Crypto Assets are intangible commodities in the form of digital asset, which uses cryptography, peer-to-peer network, and distributed ledgers to control the creation of new units, verifying transactions, and secure transactions without the help of external parties4.
According to FATF (Financial Action Task Force), a virtual currency, which includes cryptocurrency, is a Digital representation of value that can be digitally traded and functions as medium of exchange, unit of account, and/or store of value, but does not have legal tender status5. It is not issued or guaranteed by any jurisdiction, but fulfills the above function by agreement within the community of users of the virtual currency.
Furthermore in FATF’s definition, Cryptocurrency itself is categorized as a math-based, decentralized convertible virtual currency5. Decentralized means distributed, open-source, and math based peer-to peer virtual currencies which have no central administrating authority, monitoring, or oversight. While convertible means that it has a equivalent real currency value and is exchangeable with real currency.
One example of cryptocurrency is Bitcoin, which is the first cryptocurrency launched in 2009. As of November 2021, it is valued at over US$67 thousand per bitcoin, which is a substantial increase from its valuation of around US$1 thousand in the start of 2017, showing the extreme fluctuations of cryptocurrencies. Currently, Bitcoin (US$1,25 trillion) comprises of 40% of the total cryptocurrency market (US$2.87 trillion) according to coinmarketcap. Other cryptocurrencies include Ethereum, which has around 20% market share, Solana, Binance Coin, and Tether.
Proponents of cryptocurrencies argue that this would create a decentralised currency and payment system valued solely on market demand and supply, removing the intermediation of banks and influence of countries6. This would also lowers cost and create a faster digital economy, through eliminating intermediation from banks. The anonymity and privacy of cryptocurrency transactions also has an appeal in comparison to more traditional payment methods such as debit cards. Even though it is anonymous, the system would also be more transparent, as all transactions are recorded on the network through the mining process.
However, there are risks as well, especially volatility and security risks, as cryptocurrency rates has been extremely volatile compared to fiat currencies, and there had been several scams and hacks involving cryptocurrencies. For example, as of 9th of November 2021 Bitcoin has appreciated 442% YoY compared to rupiah, while dollar depreciated less than 1% to rupiah during the same timeframe. There are also financial integrity issues like AML/CFT as cryptocurrencies allow more anonymity and has a global reach5. As crypto assets grow rapidly, it also has an increasing financial stability risks through increases in banking exposure, market capitalization, usage in payments and settlements, and spillover from loss of confidence7.
1.2. Features And Usage Of Cryptocurrency
Cryptocurrency uses cryptography principles to create a distributed, decentralised, and secure information economy5. Each transaction must be validated both publicly and privately. Security of cryptocurrency ledgers are assured by miners (for bitcoin), who protects the network by validating transactions with the payment of a certain number of new cryptocurrencies and transaction fees. A large number of cryptocurrencies run on a technology called blockchain, a type of distributed ledger technology (DLT)8. DLT is a method to record and share data accross multiple ledgers with the same data records, maintained and controlled by a distributed computer server network. Blockchain itself uses the aforementioned cryptoghraphy and algorithms to create a distributed ledger where new data can only be added and previous data cannot be removed, creating a transparent decentralized economy.
In terms of usage, there has not been a lot of companies that accept cryptocurrencies directly. However, the number is increasing, and currently has included major companies such as Microsoft, Overstock, and Paypal. However, cryptocurrency owners can use third-party crypto debit or credit card to pay using cryptocurrency in any store that accept debit/credit card. This can also be used for ATM withdrawals. There is also further support in innovations such as the Lightning Network, which helps to facilitate and accelerate crypto-based micropayments.
Cryptocurrency and blockchain technology has also been applied to provide financial services, which is called Decentralized Finance (DeFi). DeFi uses smart contracts, blockchain codes that perform automatically, in place of traditional financial institution9. Currently, DeFi has replicated many existing financial service including lending, payment, and insurance. Even though it is still in the early adoption stage, it has grown significantly over the last few years.
Countries has been vastly different in regulating cryptocurrencies, ranging from adopting it as legal tender to outright bans. El Salvador is the only jurisdiction which adopts a cryptocurrency, specifically Bitcoin, as legal tender, and several countries are advocating cryptocurrencies10. On the other hand, countries such as Turkey, Bangladesh, Iran, and Bolivia bans cryptocurrencies2. In Indonesia, Bank Indonesia has not given permission for using cryptocurrencies as medium of exchange. But the Indonesian Government allows buying and selling cryptocurrencies as commodities under Commodity Futures Trading Regulatory Agency (BAPPEBTI).
1.3. Comparison Between Cryptocurrencies And Fiat Money
Cryptocurrencies are fully digital, in the forms of pieces of code, while fiat money can be either digital, like electronic money, or physical, like coins and paper money. Cryptocurrencies are not part of a centralized system like fiat money, which is centralized and regulated by the central bank. Fiat money can only be issued by governments, while cryptocurrencies can be mined by any individual. Fiat money, as a whole, has more usage and acceptance compared to cryptocurrencies, which is only a legal tender in El Salvador and is banned in several countries. However, they have a similarity in the fact that both does not have intrinsic value. The value of fiat money came from government order, while the value of cryptocurrencies stems from its community.
Table 1. Differences between Cryptocurrencies and Fiat Money
|Form||Fully Digital||Digital and Physical|
|Issuance||Anyone can Participate||Only by Governments|
|Usage and Acceptance||Limited||Unlimited|
|Source of Value||Community Trust||Government Order|
2. Wealth And Money In Islam
Before discussing rulings and the opinions of the scholars on cryptocurrency, we will discuss what constitutes wealth that is tradeable in sharia law. And also what can be called as money in sharia, as the basis on whether cryptocurrencies can be called as money.
2.1. Wealth/Maal In Islam
Wealth, or maal in arabic literally means something which can be possessed11. This means that anything that is not possessed and/or unavailable, such as fishes in the sea or a runaway horse, cannot be categorized as Maal. The significance of the status of Maal is that only things that are Maal can be a counter value in a transaction11. Therefore, the status of Maal is essential for something to be acknowledged as money.
Scholars differs in the definition of maal, mainly on whether intangible items, such as usufruct, can be called as Maal. Hanafi scholars tends to limit maal to physical entities, although there are differing opinions within11. However, the majority of scholars includes intangible items which has value and compensation if is destroyed, and as intangible items are valuable in the customs of modern business, this opinion IS more widely accepted6.
An essential requirement of maal is that it has to possess legal value(mutaqawwim), meaning that it is permissible in sharia12. It is not permissible to sell what a Muslim is prohibited to use, such as intoxicants and flesh of swine.
2.2. Money In Islam
Money is not a term that originates from sharia, therefore its definition and what can be called money is based on the custom which prevails in a society. Therefore, there is no fixed designation of what is categorized as money in Islam. Imam Malik stated that if even skin became accepted by the masses as money, it would be categorized as money just like gold and silver13. Muhammad Abu-Bakar, adding from Muhammad Taqi Usmani, defines the following attribute for money6:
- Medium of exchange
- Widely accepted as means of payment
- Measure of value
- Unit of account
This means that money must be a common reference of value and an accepted means of payment. To become a standard of value, something must have a stable enough value to create price stability, as instability cannot bring stability to others11. Furthermore, something cannot be accepted as money if it is only accepted in certain areas or communities, such as bonus coupon that has to be traded in certain stores13.
In Sharia, there is a difference between money and commodity. Money is treated only for its purpose, which are medium of exchange and measure of value, and not for its intrinsic value. While commodities must have an intrinsic use and purpose6. When a currency has other utilities, these utilities are not considered when exchanging it for another currency. If money is treated as a commodity, then the financial system would be disrupted.
3. Scholarly Opinions Regarding Cryptocurrency
Most of the opinion of the scholars focuses on Bitcoin, but as many Cryptocurrency share the same principles, we can apply it to a larger context6. Generally, we can divide the opinions of the scholars on cryptocurrency into 3 main opinions, which are:
- Cryptocurrency is haram
- Cryptocurrency is halal as transactable wealth, but is not categorized as money
- Cryptocurrency is halal as transactable wealth, and is categorized as money
3.1. Cryptocurrency Is Haram
This view is supported by a number of scholars. Some scholars argue that cryptocurrencies are not maal, it has no intrinsic function or utility, and only fluctuates in value due to speculation11, therefore it is not sharia-compliant. This view states that cryptocurrencies has no real existence, for example, The Indonesia Ulema Council declared cryptocurrency as haram, because they state that it has gharar and cannot be categorized as a commodity, which they argue has to have an underlying asset and a clear value14.
Some scholars who acknowledge cryptocurrencies as a digital asset bans trading in it because of its highly volatile nature, making the transaction gharar or uncertain, and speculative making the transaction forbidden13. This volatility is considered to be more severe than the volatility of other currencies and commodities as cryptocurrencies has no underlying asset. Other reasons include lack of legal tender, lack of central issuer, and potentially can be used for illegal purposes6.
3.2. Cryptocurrency Is Halal As Transactable Wealth, But Is Not Categorized As Money
According to this view, cryptocurrencies is categorized as a sharia-compliant digital asset, with economic value and able to be stored and retrieved11. As cryptocurrencies are only digits on a public ledger, there is no reason to make them haram. They hold that cryptocurrencies is a digital representation of value which can be exchanged. And even though cryptocurrencies has no underlying asset, the cryptocurrency itself is the valuable asset11.
This view does not consider cryptocurrencies as money, based it on its lack of social concurrence and its high volatility15,11. As mentioned before, the usage of cryptocurrencies are still limited, both from a legal tender and market acceptance perspective. Moreover, the high volatility of cryptocurrencies makes them unable to be used as a stable measure of value. Furthermore, risks of cyberattacks and heists that plague cryptocurrencies also makes them difficult to use as money.
3.3. Cryptocurrency Is Halal As Transactable Wealth, And Is Categorized As Money
This view argues that cryptocurrencies has no utility or purpose other than monetary15. Its values are driven from its features of medium of exchange and speculation, and not from utility, so therefore it is categorized as a currency. Even though people are using them as investments, it is still categorized as currency because they are created as a peer to peer payment system. Regarding lack of social concurrence, it is argued that it is difficult to quantify usage and acceptance in a decentralized system. While concerns speculation and illegal use of cryptocurrencies are considered irrelevant as they are external factors which does not determine the legality of money, but instead requires regulation and control. Mufti Faraz Adam, for example, rules bitcoin as currency as long as people use and exchange them15.
It should be noted that the importance of whether cryptocurrency is a currency or not, is on its application on currency trading and zakat rules16. A currency has to be traded at with a spot transaction with the same or different currency, and no addition is allowed when traded with the same currency. While zakat is permanently obligatory on currencies, but on assets, it is only obligatory if the intention is to re-sell.
4. Cryptocurrency In Islamic Moral Economy Framework
For something to be called halal, it has to follow the letter of the sharia law, this is the legal aspect. Beyond it, however, it should also take into account the moral values of Islam which aims for prosperity in this world and the hereafter17. Asutay (2014) defines the key themes of Islamic Finance as follows18:
- Tenet-based, and its tenets are derived from the ontological source of Islam
- Based on principles, grounded in ethics, values, and norms, from Islamic ontology
- Financing embedded in real economy through asset-backed transactions
- Society-oriented financing
Between these themes, the third aspect is the most relevant regarding cryptocurrencies. Embedded financing means that financing should be designated towards real economy and real assets, with the orientation of adding value18. This would create stability as financial service is linked directly to the real economy. Examples of these includes real business ventures, financing SMEs, micro-financing, asset-backed credit sales, and other financing which directly corresponds to the real sector.
This theme goes directly against investing in cryptocurrencies, which has no relation to the real economy and adds no value to it. The large amount of transaction in the cryptocurrency market would not support the real economy, or leads to economic growth11. Instead, as the extremely volatile crypto market grows, it may create instability that damages the real sector as the financial stability risks of cryptocurrencies would have a global impact and most jurisdiction have inadequate framework7.
Therefore, regardless of whether cryptocurrencies is allowed in a legal sense, it might be argued that transacting in cryptocurrencies not aligned with the moral and ethical goals of Islam. Especially values regarding the connection of Islamic finance with the real sector.
In conclusion, scholars differs on the sharia compliance of cryptocurrencies, as well as its status as wealth or currency. Scholars who does not allow it are basing it on the lack of intrinsic value or a large degree of volatility which causes gharar. Scholars who categorizes is as maal acknowledges the value of cryptocurrencies as an asset, but does not think it can be treated as money because of the volatility and lack of social concurrence. While scholars who accepts cryptocurrencies as money argues that it is created only for monetary purposes and lack other utilities. Beyond the legal aspect, as currently cryptocurrencies adds little value towards the real sector, it has not yet aligned with the moral and ethical goals of Islam within this particular perspective.
So far, the cryptocurrency sector and blockchain technology has not been only growing in quantity, but evolving to create many new features and services. If it gains global usage and has a more stable value, or conversely, became a burst speculative bubble, it is possible that scholars changes their opinion towards a larger consensus one way or the other. Furthermore, if the crypto and blockchain sector can find innovative ways to create value in the real sector, such as Blossom Finance who uses ethereum blockchain to create smart sukuk for investing in local small businesses19, it make its alignment to Islamic morals much more viable.