A note on Cryptrocurrencies and How Islamic Law Creates Rulings

On this page you’ll find the following:

  • Video from the Association of Muslim Accountants and Lawyers, Durban SA
  • My article: “A note on Bitcoin and the epistemological foundations of Islamic law”

AMAL workshop on Cryptocurrency , Bitcoin and Islamic Perspective -Bitcoin and How Islamic Law Creates Rulings | Shaykh Joe Bradford


The Article: 

There seems to be much ado these days about Bitcoin and cryptocurrencies as they gain traction in muslim-majority circles and developing nations. The ability of cryptocurrencies to expand markets, going over the heads of regulators due to its decentralized nature makes it an appealing asset to prospective investors. Some may be seeking to free capital from government control, others simply looking for an easy way to transfer money on the dark web.

One question people seem to be asking more these days is “Is Bitcoin permissible?” The motivation for this question however shows a fatal flaw in understanding the epistemological roots of Islamic law and how it comes about. People asking this question about Bitcoin are the flip side of those who ask whether gold and silver are obligatory to use as currency. Both of these approaches posit that there has to be some form of positive legal evidence obligating or permitting the use of anything in order for it to be legitimate under Islamic law. This could not be further from the truth.

 

Everything is Permitted unless evidence shows otherwise

A very well-known principle of Islamic law that “the base ruling for all things is permissibility and allowance” (الأصل في الأشياء الحل والإباحة).

Therefore the question that we should be asking is not “is Bitcoin permissible” but instead “what are the parameters that regulate the use of Bitcoin under Islamic law.” They seem like the same question but in fact they are not. The first assumes that the Sharia must speak to every individual incident directly in order for it to be licit and legitimate for Muslims to use. That type of thinking brings about a form of dogmatism which is very dangerous and which I have touched on and several other articles. The second question comes from the general principle we mentioned before that is based on numerous verses of the Quran and various traditions of the Sunna that state that all has been allowed for us except for those things which God has deemed unlawful.

وَقَدْ فَصَّلَ لَكُمْ مَا حَرَّمَ عَلَيْكُم

Surat Al-An’am 119

“God has delineated in detail for you what is unlawful for you.”

وَأُحِلَّ لَكُمْ مَا وَرَاءَ ذَٰلِكُمْ أَنْ تَبْتَغُوا بِأَمْوَالِكُم

Surat An-Nisa’ 24

“And permitted for you is everything beyond this which you seek with your wealth…”

These are just two of the verses imparting such an indication. You can find the detailed evidences for this principle drawn-out in the books of Usul and Qawā’id.

 

Bitcoin as an Intellectual Property Right?

During a recent conversation the question was posed to me as to whether it was appropriate to say that Bitcoin was permissible to use because it was an intellectual property right.

The claim that it is permissible to transact forward sales (عقد السلم) on bitcoin because it is intellectual property is one that has to be analyzed a little bit further.

Intellectual property does not confer any specific status on anything in its own right. I may own intellectual property of something but that something in and of itself is not sharia-compliant. Secondly we’d have to judge what is the inherent value of the thing which I’m claiming intellectual property over. If it is something which is ubiquitous to the point of not conferring any differentiating characteristics over things that are like it then in reality there is no intellectual property right. For example me claiming intellectual property rights over the phrase “The sky is blue” is invalid, because this phrase is not fixed in a permanent state, is not a unique expression, and is unoriginal.

Likewise me owning a individual unit of Bitcoin cannot be described as an intellectual property stake, as Bitcoin being in a fixed state is something which would seem to contradict its nature of being a distributed Ledger technology. It can also not be said to be a unique expression as there is no expression in the artistic sense through the owning of a commodity or an asset, and in the same vein it is not original as there are millions of Bitcoins.

I personally view this manner of substantiating the permissibility of Bitcoin to be weak and one which does not have much basis from our Islamic legal heritage. As I mentioned at the beginning of this article it is not necessary to substantiate the permissibility of something as long as there are no prohibited factors involved in it or surrounding it.

 

Drilling down on how to characterize Bitcoin under Islamic Law

The question then becomes how do we characterize Bitcoin for the purposes of using it and setting parameters for it’s permissible use.

Is it simply a digital asset? Is it simply a currency? If it is a currency what type of currency is it is it a commodity currency a representative currency or a fiat currency?

We have to differentiate between the substance, characteristics, and function of a given asset. Currency, any currency, at its heart has no substance. It may be an asset, it backed by an asset, and it may not.


The characteristics are those that distinguish between bitcoin the technology and Bitcoin the currency. The technology of storing value and verifying through distributed ledger technology is important, and protected by intellectual property laws. The function is that it is used as a currency in a limited sense meaning that it’s not accepted in all markets and by all vendors. In this sense it is very akin to “weak currency.”

We can see the difference between Bitcoin as a digital asset currency and other digital assets that actually have functional uses beyond the mere transfer & storage of value. Bitcoin is different than say a WordPress plugin that I may purchase digitally own digitally and transfer to another person digitally. The value of that plugin is in its function and its ability to provide me with a certain operation needed for the WordPress system.

 

Applying Islamic law to Crypto-Currency and digital assets.

That doesn’t mean that the rules of currency exchange do not apply, especially when we take the rationale for the prohibition of Riba to that of value (ثمنية). It’s important to note that those Scholars of the past would allow Salam in Fiat Currency (fulus) did so because the rationale for something being Ribawi for them was it’s weight and genus, i.e. the underlying asset value of the commodity which was being used as a fiat currency. Why did they consider the asset value as key because if you are buying previously circulated copper coins you can always melt them down for their asset value even though they have no currency value at the time.

That is markedly different than Bitcoin which has no inherent asset value. Bitcoins exist as a unit of account/measurement of their transactions, in the same way that meters exist as a unit of measure for distance. But a meter does not exist as a standalone object, likewise bitcoin doesn’t exist as a stand-alone either. If it were not for its function as a storage of value and a method for transferring that value it would not exist.

The only inherent value that Bitcoin has is its function. Regardless of all of the blockchain technology and other technological innovations behind the digital asset, it has no intrinsic value of its own.

This strengthens the idea that the rules of Riba apply to Fiat currencies as equally as they do to commodity and representative currencies.

 

Even if it were only a digital asset…

Even if we were to say that Fiat currencies are not dealt with with the same exact stipulations as commodity currencies (ie gold and silver) the rules of loans (قرض) still apply to all fungible items (مثليات). So it is impermissible for me to loan you one cup of sugar and to demand two cups of sugar back. When I do so I am stipulating the extra cup of sugar do to the time value or the imputed interest lost by my loan.

Let’s ask ourselves this question would it be acceptable for me to trade you one Bitcoin for two Bitcoins? If you say yes, you must show how each individual Bitcoin holds a specific value based upon its inherent characteristics beyond those acquired through transfer and trade. Now the common retort is going to be that there’s a difference between “clean” Bitcoins and those which have previously been used in transactions. But remember we are talking here about inherent characteristics, not those which were acquired later on. So if I mine 50 Bitcoins on Monday and I mine 50 Bitcoins on Tuesday and on Wednesday I transfer you 100 Bitcoins, there’s no way of differentiating between them. They’re divisible at the subatomic level, and coins flowing in and out of transactions are mixed.

If Bitcoins are permissible to trade like Commodities simply because there’s a difference between clean and tainted Bitcoins, then dollar bills are permissible to trade as a commodity because there are newly issued dollars as well as old dirty notes. That’s a ridiculous assertion and one that those making the claim about the difference between clean and tainted Bitcoins as not being fungible cannot uphold.

So back to our initial question can I trade one Bitcoin for two Bitcoins? Not only would it be irrational to do so, but it goes against the silent consensus that has been related by Ibn Qudamah in al-Mughni: “Everything in which Riba al-Fadl is forbidden, then Riba al-Nasī’ah is forbidden therein as well; without any difference that we know of.”
كل ما حرم فيه التفاضل حرم فيه النساء بغير خلاف نعلمه.

In conclusion

  • Bitcoin and other Cryptocurrencies are permissible because there is nothing found in them which necessitates they are impermissible.
  • Anything impermissible about cryptocurrencies comes from how they are used, whether that be through sale, purchase, trade, or mining. To mitigate any of the dangers and risks associated with this impermissibility the Islamic laws of currency exchange must be applied.
  • The claim that they are digital assets and are thus exempt from the rules of Riba is a weak claim in my opinion, based on the nature and function of these assets.
  • If one is going to use cryptocurrencies they must follow the rules for currency exchange under Islamic law.
  • As a business decision I personally would not recommend anyone unfamiliar with trading to go into cryptocurrencies. The market can be extremely volatile. Some coins are most likely a bubble that’s going to burst. If you don’t know what you’re doing, play it safe. 
  • These are simply my thoughts on the use of Bitcoin and not a comment on POW (proof of work) or POS (proof of stake) concept which I’m still researching.
  • I will update this article and release others as my research on the topic continues.


Joe Bradford

 

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