Cryptocurrency from Shari’ah perspective

Gapur Oziev1
Magomet Yandiev2

Abstract

For the past few years there has been a significant increase of people’s interest in crypto-
currencies. Seminars and conferences have been organized to discuss the nature and feasibility of
cryptocurrencies. Some argue that it is good to have an alternative to the current fiat money
system in which the predominant role is played by banks while the cryptocurrency does not
require any bank account, tax payment and auditing. Some others disagree with these arguments
and claim that any mode of payment in other than traditionally known instruments such as cash
payment, TT, cheques etc will open the door to avoid tax and auditing, which in turn will cause a
serious trouble to government budget and the overall decrease in GDP. This research uses
theoretical, descriptive and analytical methods of research and therefore focuses on the following
important points: a) defining the place of cryptocurrency in the financial system by determining
the extent of its influence; c) reviewing the literature on the topic, which will allow us to
determine the current understanding of the problem by modern science; d) unveiling the key
requirements of Shari’ah for money and money circulation to formulate a standard
understanding of money in Shari’ah; e) comparing the characteristics of paper money and
crypto-currencies (using the bitcoins as an example). The authors believe in permissibility of
using the cryptocurrencies but with strict reservations.

Key words: cryptocurrency, bitcoin, digital finance, Shari’ah view

1. Introduction

It is obvious that more and more people around the globe are embracing the new world of
currencies and financial transactions, the world of cryptocurrencies. Studies by consulting
agencies Infosys Finacle on the topic of cryptocurrencies found that about 69% of banks in the
world are experimenting with crypto-currencies, and the average amount of investment in
projects related to cryptocurrencies – blockchain technology - has reached 1 million USD3.
Another study conducted in 2017 by Cambridge Center For Alternative Finance shows that the

1
Associate Professor at faculty of economics and management sciences, at International Islamic University
Malaysia.
2
Associate Professor at faculty of economics at Moscow State University. M.V. Lomonosov.
3
Infosys Finacle: “Blockchain Technology: From Hype to Reality”.
https://www.infosys.com/newsroom/press-releases/Pages/accelerate-blockchain-investment-reveals.aspx retrieved
on 24/08/2017, at 15:31.

Electronic copy available at: https://ssrn.com/abstract=3101981

total cryptocurrency market capitalization (mainly because of bitcoin) has increased more than
3x since early 2016, reaching nearly $25 billion in March 2017.4 As the influence of
cryptocurrencies in our daily life grows, the question of their relevance, compliance with the
requirements of Shari’ah and the permissibility of their use by ordinary Muslims and Islamic
financial institutions is also becoming apparent.

2. Position of cryptocurrency in the financial system

The significance of cryptocurrencies is determined by the fact that they represent a fundamental
component of a complete new model of financial relations - Digital Finance.
Needless to say, it was only until recent in the financial structure that there were three
fundamentally different models of financial relations: the classical finance, corporate finance and
Islamic finance. The Digital Finance now constitutes the fourth structure. The differences
between these four fundamental models are illustrated in the table 1 below.

Table 1: Characteristics of the Four Fundamental Finance Models Compared

№ Parameters Existing Models of Finance The New

finance
model:

Classical Corporate Islamic Digital

Finance Finance Finance Finance

1. Era of The beginning Development of Economic 1. Independent

establishment of the financial growth of Internet access
currency markets Islamic
emission countries 2. Independent
currency
emission

2. Single emission Yes Yes Yes No

center

3. State regulation Yes Yes Yes No

of financial
activities

4. Interest based Yes Yes No Yes

loans

4
Dr Garrick Hileman & Michel Rauchs: “Global cryptocurrency benchmarking study”. P.16.
https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-global-
cryptocurrency-benchmarking-study.pdf retrieved on 24/10/2017, at 10:22.

Electronic copy available at: https://ssrn.com/abstract=3101981

5. The cost of Constant Future money is Constant * Future money
money over time cheaper is more
expensive***

6. The objective of Profit Maximizing the Achieving Maximizing

doing business maximization cost of capital prosperity in personal
both worlds ** freedom of
action ***

7. Criteria for Income profits Excess of Steady growth

business exceeding exceeding incomes over in clients ***
efficiency expenditure expenses for expenditures
servicing capital taking into
account
religious
restrictions

* From theoretical point of view, it is constant, but since Islamic finance does not have its own (Islamic) currency
and is based on conventional / traditional currency, the value of money over time can be unstable, for example,
"future money could be cheaper than the money at hand" as is the case in corporate finance.
**This unscientific formulation implies the desire of Muslim businessmen to maximize their family and social
wealth by observing strict religious rules and regulations.
***Presumption of the authors

Classical finance has its own way of counting from the moment of the emission of banknotes. In
this system, the value of money does not change with time, that is, one ruble today will have the
same value as one ruble in a year time. The model of corporate finance started conducting its
own counting since the beginning of the rapid growth of financial markets. This model sees the
value of money depreciating over time. Finally, the model of Islamic finance has adopted its
counting technique since the beginning of rapid economic development of Muslim countries.
One of the unique principles of this model of financial relations is the inadmissibility of lending
on interest. Nevertheless all three models adopt a single emission center represented by the
central bank and strict state control over the sphere of financial relations. Hence, all the three
models can be generally defined as "centralized finance".

Each of these four models are associated at one point in time with the rapid development
one of the spheres of economic or political life of the society. The corporate finance model is
associated with the rapid development of financial markets. This created opportunities for
alternative investments that evolved into new ways of doing business especially where the
increasing cost of capital is maximized. Meanwhile the rapid economic development of certain
Muslim countries led to the birth of the Islamic finance model. This allowed the citizens of these
Muslim states to invest their savings in Shari’ah compliant projects. Similarly, there has rapid
development of the Internet in the finance sector, notably the Big Data, Blockchain, Smart
Contract, P2P, air / space distribution of the Internet and many others. This development has

3
created incredibly huge opportunities for doing business on the network. This has also allowed
the evolution of a modern financial system – the digital finance, completely different from the
existing systems. One of these forms of digital finance is the cryptocurrencies, which primarily
decentralize their emission process make it difficult for money circulation to be controlled and
managed by a central authority. Cryptocurrencies are available everywhere and for everyone
including Islamic financial institutions and ordinary users as long as there is an access to the
Internet. Despite this rapid development, the question of the compliance of cryptocurrencies with
Shari’ah requirements remain unresolved.

3. Literature review

In the Russian electronic library of REL (elibrary.ru) 366 articles are displayed on request with
the keyword "cryptocurrency", but when adding one more keyword "Shari’ah" to the search
query, the result becomes zero. Searching in the international library of the Social Science
Research Network (ssrn.com) led to a similar result - 143 and 0 articles, respectively. In addition
to that we found one article whose author peremptorily attempts to label bitcoins as 100%
Shari’ah compliant. In fact, this opinion is not a result of an accurate academic research but
rather a mere author’s opinion published in a popular daily newspaper called Gulf Times.5
However, we found few articles whose authors somehow tried to address the issue of using
bitcoins in Islamic Banking and Finance (IBF). For example Charles W. Evans6, makes
comparison between fiat money and bitcoins and draws conclusion that bitcoins are free from
Riba and believes that bitcoins incorporate the principles of maslahah and risk sharing. However,
Jan A Bergstra7, on the other hand, who also discusses certain issues of using bitcoins in IBF,
describes bitcoins as currency-like informational commodity and concludes by saying that there
is a significant probability (higher than 99%) that bitcoins will disappear and the investors will
get disappointed.

Thus, it can be stated here that while academicians dispute whether cryptocurrency is a
reliable currency or not, Muslim scholars view it from a different perspective, i.e. the extent to
which cryptocurrencies comply with Shari’ah principles. Various opinions of famous experts of
Islamic finance, both proponents and opponents of cryptocurrencies, are available on the
internet. The following experts express their support for cryptocurrencies and that they believe in
compliance of cryptocurrency with the Shari’ah law.

5
Islamic finance and digital currencies: The halal aspect. http://www.gulf-times.com/story/532032/Islamic-finance-
and-digital-currencies-The-halal-
a?utm_source=Eloqua&utm_medium=email&utm_campaign=Newsletter_IslamicFinanceWeekly&utm_content=Ne
wsletter_IslamicFinanceWeekly_12Feb17 retrieved on 23/08/2017, at 11:08.
6
Charles W. Evans. Bitcoin in Islamic Banking and Finance. Journal of Islamic Banking and Finance, (2015), Vol.
3, No: 1. p. 4.
7
Jan A Bergstra, Bitcoin and Islamic Finance, p.19.
https://pdfs.semanticscholar.org/3a7d/7f35440191f1217d7b4f49f50079c4e9708e.pdf retrieved on 1/10/20017, at
18:17.

4
Sheikh Dr. Adnan Al-Zahrani, ex-chairman of the Shari’ah Supervisory Board of Al-Jazeera
Bank says: "Crypto currency is one of the types of currencies / money that emerged as a result of
the process of creating and developing money. In other words, at first it was an ordinary barter,
then gold and silver coins, and then paper money and now virtual money, which are crypto-
currencies. And this is normal".8 Dr. Monzer Kahf, an expert on Islamic economics and finance,
Professor at the Qatar Faculty of Islamic Studies believes that bitcoin like any other currency is
money within its community and exchanging it with other currencies is definitely subject to the
same conditions of exchanging currencies which are: 1) exchange should be on the spot without
leverages and futures; 2) no speculations on currencies, i.e. exchange must have a real cause to
buy or to sell other than the idea of currency for currency. Even though he accepts bitcoin as
money his confidence in it is minimal not until it is traded in the open market – like other
currencies – the chances of manipulation are high. 9 Mufti Abdul Qadir Barakatullah, a member
of the Shari’ah Committee in Al-Ryan Bank, formerly the Islamic Bank of Great Britain says: "I
am convinced that cryptocurrencies can be an effective tool for the further development of
Islamic finance."10 In addition, he recalls the rule among Muslim scholars that any commodity
that is perceived by society as a means that can play the role of means of payment must be
perceived as money.

On the other hand, there are experts who oppose cryptocurrencies. For example, Sheikh
Imran Hussain, one of the modern and famous Muslim scholars, believes that any currency that
does not have intrinsic value cannot be considered as valid money. Consequently - in his opinion
- only gold or silver money can meet the criteria of the Shari’ah.11 Professor Ahmed Kamel
Midin Meera, the former dean of the Institute of Islamic Banking and Finance at the International
Islamic University of Malaysia, and the author of the book Islamic Golden Dinar, believes that in
order for the digital currency to be accepted in the Islamic financial industry, it must have a
measure of value, which has to be a monetary commodity. According to him there must be a
standard weight on paper notes or electronic currencies to be accepted, and it has to be
redeemable with a standard weight like gold. Otherwise, it is not fair and it is fiat money.12

Queries, in the format of Q&A about permissibility of cryptocurrencies from Shari’ah

perspective can also be found online in the "question-answer" format at the following link
http://www.islamweb.net/.13 We reproduce below two pertinent questions with their
corresponding answers.

8
https://www.youtube.com/watch?v=OyG5YYY-4D4 retrieved on 25/08/2017, at 22:11.
9
http://lightuponlight.com/blog/fatwa-on-bitcoin-by-monzer-kahf/ retrieved on 22/08/2017, at 16:40.
10
http://fin-future.com/category/financial-services/crypto-currencies/. FinFuture Forum. Inc. Publications. p.35.
11
https://www.youtube.com/watch?v=9czV1bronto retrieved on 26/08/2017, at 8:34.
12
Rabbit, G. (2017, March). A Cryptocurrency for the Islamic Financial Markets. Retrieved on 27/07/ 2017,
https://cryptoinsider.com/cryptocurrency-islamic-financial-markets/
13
One of the most popular and reliable Islamic websites in the world (70 million visitors in 2011). Administered by
the Ministry of Waqfs and Religious Affairs of Qatar.

5
- Question: What is the Shari’ah's view on buying bitcoins? Answer: despite the fact that there
are a lot of unintended actions around electronic money, such as volatility and speculation, we
cannot unequivocally prohibit the use of this money, as the aforementioned negative indicators in
most cases are already present in the markets.14

- Question: What is the opinion of the Shari’ah on the purchase and sale of electronic money
(bitcoins) and also mining? Answer: "Anyone who has acquired electronic money in a legitimate
way can use it, this is permissible. We already said in one of the previous fatwas that the digital
or electronic currency is different from paper money or ordinary coins. Consequently, the
purchase of these electronic moneys is regarded as an ordinary currency exchange".15
However, despite the importance of fatwas and expert opinions, they cannot be considered as
reliable as scientific research.

4. Shari’ah requirements for money and money circulation

There is no clear Shari’ah text with a special set of requirements for the characteristics of money
and the way it should circulate. And in order to examine how cryptocurrencies comply with the
Shari’ah, we have to analyze: a) opinions of some classical as well as modern Muslim scholars
with regards to the efficient cause (illah) of money; b) the modern mechanism of money
circulation from the Shari’ah point.

a) opinions of Muslim scholars regarding the efficient cause (illah) of money

Islamic heritage has quite a rich number of references in which scholars expressed their views
regarding the essence and role of money. However, we will provide only few of them which in
our opinion reflect the view of the majority.

Imam Al-Ghazali says:

“Allah created dinar and dirham for circulation and to be an equitable and just standard
between different assets and for another wisdom which is make them as means to all other
assets. That’s because they are precious in themselves (intrinsic value) but not desired for
themselves...”16

14
http://fatwa.islamweb.net/fatwa/index.php?page=showfatwa&Option=FatwaId&Id=320230&wheretosearch=0&
order=&RecID=5&srchwords=%20251170&R1=1&R2=0&hIndex= retrieved on 26/08/2017, at 10:33.
15
http://fatwa.islamweb.net/fatwa/index.php?page=showfatwa&Option=FatwaId&Id=251170. Retrieved on
26/08/2017, at 10:54.
.91 ‫ ص‬،4 ‫ ج‬.‫ دار املعرفة – بريوت‬،‫ إحياء علوم الدين‬:‫ أبو حامد‬،‫ الغزايل‬16

6
Imam Ibn Taymiyah states:

“Whenever currencies are sold one for another on differed basis, it opposes the purpose of
Thamaniyyah (measure of value) of money”.17

Sheikh Saleh Al-Fauzan believes that any “measure of value” commonly accepted by people
should be considered as currency upon which the rules of Riba are applicable.18

The commonality between the above two opinions is that money should be considered as
measure of value or unit of account but not as ordinary commodity which can be traded on
differed basis.

Generally, opinions of Muslim scholars from various Fiqhi schools regarding the efficient cause
(illah) of money can be summarized in the following way:

1) Efficient cause is in “measurement”. Historically, dinars and dirhams were not only
counted but also were weighed on scale. For example a man selling his certain
commodity could ask for bag (with a known size) full of dinars. The could have
contained let’s say 95-100 dinars. Therefore, scholars from Hanafi and Hanbali schools
said that if money is made of ordinary minerals such as iron, copper and they can be
weighed then the rules of Riba will be applicable to them.

2) Efficient cause is in “intrinsic value” from which it is made such as gold dinars and silver
dirhams. In other words, the presence of precious metals such as gold and silver in those
moneys made them possible to value other commodities.

3) Efficient cause is about “measure of value” or “unit of account”. So, money can be made
of absolutely anything (gold, silver, iron, paper, plastic etc) as long as they serve as
measure of value or unit of account.

b) the modern mechanism of money circulation from the Shari’ah point.

Our analysis on the mechanism of money circulation from Shari’ah point of view will be carried
out with a reference to the key prohibitions of the Shari’ah - interest (Riba), uncertainty (Gharar)
and excessive risk and speculation (Maysir) by focusing on the following seven aspects: a) The
commodity feature of money; b) Volume of emission and the money supply; c) Procedure for
money emission: d) Liquidity management of the banking sector; e) Inflation; f) Issues on Zakat
payment; g) Avoidance of Shari’ah prohibitions.

،‫ اململكة العربية السعودية‬،‫ املدينة النبوية‬،‫ جممع امللك فهد لطباعة املصحف الشريف‬،‫ جمموع الفتاوى‬:‫ أمحد بن عبد احلليم‬،‫ ابن تيمية‬17
.472 ‫ ص‬،29 ‫ ج‬.1995
.40 ‫ ص‬،2‫ ج‬.‫ اململكة العربية السعودية‬،‫ الرايض‬،‫هـ‬1423 ،‫ دار العاصمة‬،‫ امللخص الفقهي‬:‫ صاحل بن فوزان‬،‫ الفوزان‬18

7
The commodity feature of money: There are varying opinions on the commodity feature of
money. The most comprehensive definition that is extracted from scattered definitions of the
early scholars is that of one of our contemporary scholars Ibn Uthaimin where he defined maal
as follows:

.‫المال كل عين مباحة النفع بال حاجة‬

“Any object that has halal benefit, and that benefit is meant to be halal in of itself and not
because of a need or necessity”. This means that the legality of the benefit extracted from that
object should not be based on necessity such as the permissibility of eating pig to save life, or
using a dog for the sake of protection. This does not make the said objects (pig and dog) maal,
because if people are not in a state of need or necessity the object will remain impermissible.19

There are views that money should only be gold and silver, others opine that money is any
material backed by gold. On the other hand, there are opinions that any money should have
intrinsic value. Majority views recognize fiat money, yet Shari’ah views on cryptocurrencies
remain contentious. We shall make use of the following two narrations to analyse these divergent
views on the commodity feature of money. These narrations have also implications for the other
subsequent two aspects under discussion.

1) Ahmad bin Yahya Albalazuri (d. 892) narrated the following:

‫من الناس فجودوه‬

َ ‫ال كان الناس وهم أهل كفر قَ ْد عرفوا موضع َه َذا الدرهم‬ َ َ‫"… َح َّدثَـنَا يونس بْن ُعبَـ ْيد َع ِن ا ْحل‬
َ َ‫ ق‬،‫سن‬
‫ مهمت أن أجعل الدراهم من جلود اإلبل‬:‫ال‬َ َ‫ ولقد كان ُع َمر بْن اخلطاب ق‬.‫ فلما صار إليكم غششتموه وأفسدمتوه‬،‫وأخلصوه‬
20
."‫فقيل له إذا ال بعري فأمسك‬

“Yunus bin Ubaid narrated from Al-Hasan: previously when people were disbelievers they
realized the position of this Dirham towards people so they improved its quality and purified it,
but when it came to your turn you cheated and spoiled it. Indeed Umar bin Al-Khattab once said:
I wanted to make dirhams from camel hide, but then he was told by companions: then there will
be no camels left. And Umar refused (from this idea)"

There could be two possible reasons behind Umar’s suggestion of making dirhams from camel
hide: 1) to create a new type of money which could not be faked or forged; 2) there was
insufficient money supply in the economy. The possibility of the second reason is not less than
the first. The centuries-old practice of using money of other states, in particular the Roman Dinar
and the Persian Dirham, suggests that the absence of the Islamic Caliphate’s own currency does
not undermine its sovereignty and it was not a priority that required immediate solution.
Otherwise Prophet (saw) would have had taken some actions towards this issue [of a new

)‫ه‬1428 - 1422 :‫ (دار ابن اجلوزي‬،‫ الشرح املمتع على زاد املستقنع‬،‫حممد بن صاحل بن حممد العثيمني‬
19

.452 :‫ ص‬،1988 ،‫ بريوت‬-‫ دار ومكتبة اهلَلل‬،‫ فتوح البلدان‬،‫ أمحد بن حيىي بن جابر بن داود البَ ََلذُري‬20

8
currency] or at least he would have had left a will (wasiyah) asking his companions to pursue
this matter after his demise.

2) Imam Malik said in his famous Al-Mudawwanah:

21
‫ب َوال َْوِر ِق نَ ِظ َرة‬ َّ ‫اع ِِب‬
ِ ‫لذ َه‬ ٌْ ‫ود َح ََّّت تَ ُكو َن ََلَا ِس َّكةٌ َو َع‬
َ َ‫ني لَ َك ِرْهتُـ َها أَ ْن تُـب‬ َ ُ‫ازوا بَـ ْيـنَـ ُه ْم ا ْجلُل‬
ُ ‫َج‬
َ ‫َّاس أ‬ َّ ‫َول َْو أ‬
َ ‫َن الن‬
“And if people had permitted leather coins I would dislike them (coins) to be exchanged with
gold and silver on deferred basis”.

Further analysis of the above narrations leads to the following conclusion: money
emission does not necessarily have to be from gold or silver, as it is commonly believed, but
rather from any material. In addition, it can be argued that, in Shari’ah law, the money emitter
(in the hadith it is Caliph Umar) and the monetary regulator (companions) - can be different
bodies. In fact, this narration shows that people, on their own, used to mint dirhams. They could
polish and improve the quality of dirhams or to fake, cheat and spoil them by reducing the
quality. And yet, as it is clear from the text, there was no objection on minting the dirhams but
rather it was a quality issue. However, we can also argue here that based on the logical inference
of the hadith, it is the central authority that is responsible for ensuring that there is no counterfeit
money. In other words, Caliph Umar declined to implement the idea of the proposed currency
precisely because it could create room for fake money (because every camel owner would make
money) and not because it would lead to the extermination of the camels as such.
It is a commonly accepted concept that all financial liabilities such as Sukuk, should be backed
with real assets. AAOIFI (Organization of Accounting and Audit of Islamic Financial
Institutions) was the first to officially announce that standard. 22 By applying this approach to the
concept of money, we can get an erroneous conclusion that the whole money supply should also
be backed with real assets. However, this is not the case. It should be noted that money is not a
financial asset, they are just a means for exchanging goods and services and therefore they do not
have to be asset backed.
b) Volume of emission and the money supply: As we mentioned earlier, one of the possible
reasons that Caliph Umar had proposed to emit money from the camel hide is because at that
time the state economy did not have enough money in circulation. Therefore, another important
point that can be deduced from the hadith is that Shari’ah does not specify and has remained
silent on the quantity of money that should be emitted. The decision to emit money falls within
the purview of the money emitter. Nevertheless, money can be emitted as much as it is necessary
for the needs of the economy.

c) Procedure for money emission: There are mainly two approaches for money emission: 1)
Money emitted by a central authority such as the state treasury (in some countries it is the
Ministry of Finance). Money is emitted to finance government budget deficit. The money is

.5‫ ص‬،3‫ ج‬،1994 ،‫ دار الكتب العلمية‬،‫ املدونة‬:‫ مالك بن أنس‬21

22
http://www.kantakji.com/media/7760/f173.pdf retrieved on 29/08/2017, at 15:23.

9
credited to the budget and spent to cover the state's expenses. Such an emission is normally
considered as one of the causes of inflation. From a Shari’ah perspective, this approach does not
contain prohibited elements, contrary to the following second approach 2) in this second
approach, the money emission is carried out by the Central Bank, which then distributes money
among commercial banks on a competitive basis, in which the selection criterion is the highest
interest rate offered. Since money emission approach in this conventional financial system is
based on Riba it cannot be applied to the Islamic financial system.

d) Liquidity management of the banking sector: One of the functions of the Central Bank is to
manage liquidity of the banking system. To do this, the Central Bank either attracts loans from
the market or deposits money by itself. In both cases it is carried out on a competitive basis,
where the criterion is the highest interest rate offered. Needless to say that the conventional
instruments of monetary regulation - loans and deposits - do not meet the Shari’ah requirements.
Furthermore, the Central Bank is considered an absolutely risk-free institution, which goes
against the basic legal maxim of Shari’ah "Liability justifies gain". Based on this maxim, unlike
in the conventional banking system, there is no legitimate justification for Islamic banks to
“gain” a profit simply by depositing money in Islamic central bank. On the other hand, Islamic
central bank is also not entitled to “gain” any profit from other banks for the financing it has
provided. Therefore, since central banks (in general) are risk free institutions they have no right
to take upon themselves any commercial risks for with no risk/liability there can be no
reward/gain.

e) Inflation: Inflation is normally understood as a sustained increase in the general level of prices
for goods and services in a particular county. The concept and some factors that lead to inflation
are recognized by the Shari’ah. For example, demand pull inflation due to the expectations of the
population, and genuine cost push inflation due to global factors are the kinds of inflation that do
not conflict with the Shari’ah. However, inflation that causes a change in the purchasing power
of money due to excessive emissions goes against the tenet of the Shari’ah. The harm from
inflation caused by excessive money emission into circulation can almost be similar to the harm
of Riba. The modern system of monetary circulation is based - in theory - on strict control of
volume of money emission, which is consistent with the principles of Islam. In fact the ban on
Gharar (uncertainty) and Maysir (speculation/gambling) on the whole correspond to such an
important characteristic of money as liquidity. However, the existence of a variety of
prohibitions and restrictions on trade operations (what can and cannot be sold based on rules of
pricing) imposed by the state authorities contributes to the speculation black market and, as a
result, reduce the liquidity.

f) Issues on Zakat payment: Zakat is compulsory on every Muslim who fulfills its conditions. If a
person has savings that reach Nisab23 and does not invest them they will decrease by 2.5% every

23
Nisab (85 grams of gold or cash equivalent) is the minimum amount of Zakatable wealth obligatory on Muslim.
Upon completion of one lunar year the owner is obliged to pay Zakat (alms) amounting to 2.5%.

10
year due to Zakat deduction. For proper and smooth functioning of Zakat collection, as well
implementation of law of inheritance, the person must completely own the property, whether
such properties are visible such as buildings or hidden such as cash in safe custody. In the
extreme case, virtual or digital money remain much hidden that the calculation of Zakat or
allocation of shares for heirs will be overlooked.

g) Avoidance of Shari’ah prohibitions: An important aspect of the Shari’ah is that nothing

should promote prohibitions including inequitable monetary circulation. One of the key issues
actively discussed in Islam is the social injustice caused by the unfair (non-competitive)
distribution of national wealth. Hence the circulation of money should not be among few rich
hands resulting in wealth concentration among the few at the expense of marginalizing the
majority of the people in the society.

In summary, the following are the salient requirements of Shari’ah related to money and money
circulation:

 the process of money emission, its supply and withdrawal from the market should be free
from Riba;
 money can be made of any material (metal, wood, plastic etc);
 the money emitter and the monetary regulator may be two different
entities/organizations;
 the money emitter is a risk-free institution;
 the money emitter should not enter into transactions with financial institutions aimed at
obtaining income;
 it is not forbidden to use the currency/money of other countries;
 money does not necessarily have to be backed by real assets;
 money must be emitted in a sufficient quantity to serve the needs of the economy;
 no prohibitions and or restrictions on monetary transactions, as well as exchange and
transfer of money; [not clear]
 money and monetary circulation should facilitate the life of the people;
 ownership right of a person over money should be transparent.
5. Salient characteristics of cryptocurrency

Cryptocurrency is a computer file that cannot be copied or used twice. Since cryptocurrency can
be used for trading transactions and savings and exchange for other currencies, they are
considered similar to any existing undocumented money circulating only in the Internet.

There are three distinct levels of working with cryptocurrency (taking bitcoins as example).

Firstly: any legal or real physical person can own bitcoins and use them for transactions. The
client will need to download on his computer a special software program which will enable him
to open a wallet for storing his bitcoins. The client, using ordinary fiat money (USD, EURO etc),

11
can buy bitcoins on the special cryptocurrency market and place the acquired bitcoins in his
wallet.

Secondly: bitcoins can be generated or emitted: To do this, the user needs to download on his
computer a special software program that solves sophisticated mathematical equations/puzzles
generated by the bitcoin system. The user whose computer first solves the equation/puzzle
(known as hash) gets a bitcoin as a reward. Figuratively, the process of generating or emitting
bitcoins is called mining (as if it is a work in a mine where something valuable, for example,
gold is mined). The process takes time and considerable amount of electricity. For a long time,
especially at the initial stage, the market value of bitcoins was lower than the cost of electricity.

However, the truth is that in the current situation only those with specialized, high-powered
machinery will have a greater chance to profitably extract bitcoins compared with the home
miners. That’s because they actually have no chance to compete in such a challenging
environment, unless they have access to free or extremely low-cost electricity.

Thirdly: the user, having solved a sophisticated mathematical equation/puzzle faster than other
players gets the right to execute transactions performed by bitcoins’ holders at that particular
time. Owners of bitcoins can perform transactions either way: with or without payment of
commission. The user proposes a commission to prioritize his deal, in about 10 minutes time,
while regular transaction - without commission - can take longer, up to few hours. High security
of bitcoins is provided in addition to encryption by the use of blockchain technology
(decentralized maintenance of registries). In other words, each owner of bitcoins has a complete
database of all transactions made with all the bitcoins from the first time of their appearance. The
complete database is about the transaction time of all bitcoins, the transferred amount and the
approximate location of the payer (however, the database is anonymous and therefore to find the
exact location of the bitcoin holders in most cases is impossible.

The transaction mechanism works as follows. A person, for example, sold something and
received bitcoins in his wallet. The record of this transaction is automatically sent to all
computers connected to the bitcoin system, and all bitcoin owners learn that a certain owner of
an electronic wallet with a certain number has acquired a certain amount of bitcoins from such a
wallet under certain number. After some time this person decides to buy something using his
bitcoins. In this case he instructs his wallet to transfer a certain sum of bitcoins to such and such
an address/wallet. At this point, his computer sends a request to all computers connected to the
bitcoin system to confirm the validity of such a transaction. The computers of other participants
check their records and send confirmation when they see that, indeed, this buyer (they see only
the electronic name/code of his wallet) possesses the necessary amount of bitcoins. When a
certain number of confirmations are received, the participants of the second level form a special
record. Next, the claimed amount is transferred and all the computers of the system receive a
message to add a new record to the database: deduct bitcoins from this person’s wallet and add to
his partner's wallet.

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 Suppose that someone decided to cheat by duplicating his bitcoins before selling the
original ones. Next, he tries to sell the duplicate/copy. However, the computers of other
participants will not confirm the fact of his possession of those bitcoins because at the time of the
sale of the original bitcoins all participants recorded the deduction of a certain sum from person
A and added it to wallet of the person B. Therefore, the hacker would not be able to conduct this
type of fraud or fake transaction. Thus, to make a double payment by using the same bitcoins a
person will have to hack all the computers of the system and change the whole database of the
system to indicate that there was no payment from his account. And that is very unlikely if not
impossible because as of the beginning of 2017, the number of participants was estimated at
about 3 million people. According to various estimates, it is believed that for such a fraud, it is
necessary to mobilize the computing power equivalent to half of the world's existing computers.
Some experts say that even if you use more than 400 billion computers to hack the system it will
not cause any serious disruption except delaying certain transactions for maximum of ten
minutes.

Cryptocurrencies are not backed by real assets. However, since no one – at least so far –
has been able to hack the system we can say that cryptocurrencies are quite unique and therefore,
can be of interest to those users who are looking for an alternative to fiat money. From time to
time we hear that there have been some attempts to back cryptocurrencies with certain assets,
especially gold. But in this case the asset backed cryptocurrency will actually turn into an
ordinary mechanism of attracting investments guaranteed by real collateral and will no longer be
a cryptocurrency anymore.

The maximum volume of bitcoins’ emission is limited to the sum of 21 million. There are
also temporary and quantitative restrictions on "generating/mining". Therefore, participants of
the system always know how many new bitcoins will appear in the market in a certain period of
time. At present, bitcoins are mostly exchanged for the US dollars only. At the same time, their
exchange rate shows extremely high volatility (for example, the biggest drop in the rate of
bitcoins in 24 hours - 80% - occurred in April 2013, and on the night of August 13th 2017, its
value increased by 11.8%). This shows that bitcoins are used more for speculation and less for
real transaction. In the future, when bitcoins will get a stable rate and the speculative hype
around bitcoins cease, the above rules will help to minimize inflationary expectations.

It should be noted here that the operation of the cryptocurrency system is fully automated
and is carried out without human intervention. The inventors of the system launched it in 2008
(the first transaction was conducted in January 2009), and since then they have not interfered
with the system except for few adjustments to the program code. The fact that the system is free
from interference guarantees a high degree of transparency for independent programmers.
However, one of the shortcomings of this approach is the fundamental insolvability of some
problems. For example, if a person has lost the password of his wallet, then neither he nor
anyone else will ever get access to his money. If someone has stolen (somehow) your bitcoins
then you will never get them back. There is a well-known story when the owner of bitcoins
13
inadvertently showed the password (QR code) of his wallet, on TV during a news program and
immediately lost money.

Some other cases of losing bitcoins are also documented. For example it was reported
that a person confused the fields while making a payment (field for sending amount was
confused with the field of commission for payment). In the traditional banking system, the
Central Bank can cancel any transfer and return the money to the victim. However, there is no
regulator in the cryptocurrency system. Cryptocurrencies also carry risks to the heirs, for
example, if a person died without informing his family members the password to his bitcoin
wallet.

Despite the declared social justice in the bitcoin system it has shown insensitivity to social
inequality. According to various estimates, bitcoins, in terms of their volume, are distributed
unevenly among their owners. For example, it is claimed that just 927 people out of several
millions of biticon owners own 50% of the total bitcoins.24 This view is also supported by other
studies.25 Perhaps, the reason behind it is that the complexity of solving mathematical
equations/puzzles by the "miners" will become even more sophisticated over time. And it is not
surprising that creators of the system and the first "miners" found themselves in the most
profitable situation in terms of speed and volume of earning bitcoins. As more and more users
become attached to the system, the time for "mining" of one bitcoin becomes longer, and the
"reward" is reduced. Undoubtedly, the creators of the bitcoins have the right for remuneration.
But they should not receive it due to their exclusive position being the first "miners". It should be
stated here that bitcoins have nothing to do with the financial pyramid, where some participants
receive income from attracting new ones.

One of the main drawbacks of the cryptocurrencies is that they can be used to evade tax.
Indeed, a high degree of anonymity allows the owners of bitcoins to carry out operations, which
make them fearlessly, avoid tax payment or even reporting to the tax authorities. At present,
since bitcoin has not yet become a full-fledged means of payment (mainly due to the high
volatility of the exchange rate) this problem is not so noticeable. However, in future, the state
faces the risk of losing some of its tax revenues. This situation is deadlocked, in a sense that
there are no technical measures to counteract the tax evasion. Obviously, the state authorities will
have to develop completely new approaches to revenue collection for the maintenance of
budgetary institutions, law enforcement agencies and other government needs. Perhaps they may
create their own electronic money as a counterpart to the national currency.

24
50 любопытных фактов о криптовалюте Bitcoin. http://promtechrs.ru/bitcoin/50-interesting-facts-about-
bitcoin.html retrieved on 24/08/2017, at 21:09.
25
Сколько людей на самом деле владеют биткойнами? https://bitnovosti.com/2015/02/14/kak-mnogo-ljudej-
vladejut-bitcoinami/ retrieved on 24/08/2017, at 23:16.

14
 Another serious aspect is the geography. The fact is that cyberspace does not belong to
the jurisdiction of any of the countries of the world. Yes, many companies from different
countries use internet but still work within the legislation of their respective countries. However,
the cyberspace per se is not subordinated to anyone. Therefore, for any country, the
cryptocurrencies emitted in the Internet in a decentralized way will be perceived as a product
performed outside its jurisdiction, namely, as an imported commodity, with all the obvious
consequences such as customs clearance and taxation but taking into account the specifics of the
cryptocurrencies. Cryptocurrency, after it is legalized by the state can be freely circulated in the
economy and can be bought and sold as, for example, an investment product with high liquidity.
But cryptocurrency – at least in current situation - should not have similar status with the existing
national currency as a means of payment otherwise it will lead to negative consequences by
creating unnecessary competition between the two currencies.

In summary we can deduce the following key characteristics of cryptocurrencies (using

bitcoin as example)

 decentralized emission;
 absence of the regulator;
 the primary distribution of bitcoins among users is carried out based on competition
whose criterion is a successful solution for sophisticated mathematical
equations/puzzles;
 They are not backed by any asset;
 the maximum amount of emission is limited (21million), the terms and volumes of
current emission are known to all participants of the system;
 It is impossible to recover lost or stolen funds;
 It has high degree of anonymity of the users;
 They operate with full and transparent information for all users;
 They have relatively high transaction speed;
 There is no mandatory commission for money transfer;
 Their transactions currently are speculative in nature in most cases;
 They are unable to eliminate the social stratification.

Conformity
of bitcoins with the requirements of Shari’ah

Table 2
The key requirements of Shari’ah to money: Compliance (+),
non-compliance (-),
neutral (ок)
Emission process, including provision of liquidity to and its withdrawal from
money market should be free from Riba +
Nature of currency/money can be tangible or intangible (eg: digital) ок
Money emitter and monetary regulator can two different bodies ок

15
Money emitter is a risk-free organization NA
(no official emitter)
Money emitter should not enter into financial relations with financial NA
institutions aimed at obtaining income; (no official emitter)
Using foreign currency/money as the state currency is permissible +
Money does not necessarily have to be backed by real assets +
Money must be emitted in a sufficient volume to serve the needs of the ok
economy
No prohibitions and no restrictions on monetary transactions, as well as +
exchange and transfer of money
Money and monetary circulation should help to smooth out the social -
stratification of society
People’s ownership right over money/wealth should be transparent -

Source: by authors

6. Conclusion

Based on the analysis above we found that in the current situation bitcoin is a novel idea to the
society with many question marks around it. It is a highly demanded, well-protected and fast
growing currency which is totally independent from any central regulatory body. In Table 2, the
authors provided the key requirements of the Sharia for money as well as the main characteristics
of bitcoins. The analysis of this table allows us to state that there is no evidence that the bitcoins
clearly contradict the Shariah norms. At the same time, the rapid growth of the bitcoin’s price in
recent months, by hitting new heights almost every day (on 17th December 2017: 20k USD for
one bitcoin) does not necessarily indicate illegality of the bitcoins from the point of view of the
Sharia. It is just an evidence of the excessive growth in demand for bitcoins. Never the less, the
authors consider it necessary to focus on the following aspects with regards to the issue of
conformity of bitcoins with Shariah norms:

6.1. Acquisition of bitcoins for saving purposes (investment, accumulation) is not permissible,
because their high volatility in exchange rate entails excessive risk (garar) and partaking in
speculation (maysir). Therefore, in case if the volatility of the exchange rate of bitcoins gets
reduced to the level of the world's leading currencies the above prohibition can be lifted.

6.2. The acquisition of bitcoins for immediate settlement of payments (for example, payment for
goods or services, currency exchange) is permissible. Taking into account the above clause (6.1)
the authors recommend acquiring bitcoins right before the deal to minimize the volatility risk.

6.3. It should be noted here that bitcoin mining has two indivisible functions: a) solving
mathematical puzzle to obtain bitcoin; b) and commission-based confirmation for approval of
transactions performed by third parties. Therefore, the permissibility for mining of bitcoins will
depend on the goals pursued by the miner (see 6.1 and 6.2). If the purpose of the miner is to
acquire the necessary amount of bitcoins for the immediate payment for goods and services then

16
it is allowed. In this case, commission received for approval of the third parties transaction dring
his mining should also be considered permissible. However, mining becomes impermissible if
the miner’s goal is to obtain and save hoping for the further growth of its exchange value then it
is nothing but excessive risk (garar) and speculation (maysir) as stated above.

6.4. Bitcoins do not in any way constructively impede the growth of financial inequality among
their owners. At the same time bitcoins reliably protect the anonymity of the participants which
makes them evade taxes with impunity. Hence, the authors believe that permissibility of using
bitcoins even as stated in clauses 6.1 and 6.2 should be limited until the emergence of a new
crypto-currency free from the above stated shortcomings.

6.5. It is still unclear whether bitcoin is indeed an innocent digital currency - as claimed - or it is
an instrument in the hands of "certain smart people" who may have a "certain destructive plan"
to achieve. That’s why, it is recommended to use bitcoins where transactions are limited only by
using bitcoins.

Considering the fast spread of high technologies and the enormous interest of Internet users in
crypto-currencies, the authors consider it expedient to create a specialized Islamic crypto-
currency under the auspices of the Islamic Development Bank (IDB) which would play a
significant role in contribution to the growth of Islamic finance industry in the world.

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