Is it permissible to invest in cryptocurrencies?
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Contemporary issues require some level of Ijtihād and scholarly reasoning, thus, there is usually a difference of opinion in such contemporary issues. Our current position on cryptocurrencies is that it is permissible to invest in cryptocurrencies which have been issued. Cryptocurrencies which have not been issued and are merely in crowdfunding phase will have a different ruling based on the scheme involved.
At present, we do not regard cryptocurrencies as a currency like sterling and dollars nor is it like gold and silver, rather, it is a digital asset with value. However, they have the potential to be currency in future.
The Fiqh (jurisprudence of the answer):
Cryptocurrencies are merely verified entries on a blockchain which are tradeable and usable. Cryptocurrencies are strands of numbers and entries stored in a digital wallet. On the other hand, the fiat-money in bank accounts are created by debt, and the numbers, seen on the ledger, represent nothing but debts. It is a system of IOU. Cryptocurrencies do not represent debts. They just represent themselves. The numbers in themselves hold value and do not represent a debt.
Thus, the visible cryptocurrency digits represent a value. The actual digits are what possess material value. The notion of value is embedded into these digits and is represented by these digits. Thus, these digits themselves become Māl and assets which are being purchased, held and exchanged. Financial engineering and technological advance has resulted in a paradigm shift of how value is stored and represented. Thus, in cryptocurrencies, the notion of value has evolved into being represented by cryptic entries. It is this notion embedded into cryptic entries which people are investing in and trading.
There are currently three opinions regarding cryptocurrencies among Shariah scholars:
Opinion 1: Cryptocurrencies are not Māl and are purely speculation
Opinion 2: Cryptocurrencies are a digital asset and not currency
Opinion 3: Cryptocurrencies are money and a currency
Scholars of opinions 2 & 3 suggest that cryptocurrencies pass the criterion of storability in respect to being Māl as they are stored on the shared ledger. In respect to Taqawwum, the Aṣl and foundational premise is ‘Ibāḥah (lawfulness) in respect to items and transactions. Considering that cryptocurrencies are merely digits, there is no evidence or matter which indicates to them being unlawful. Hence, Cryptocurrencies have Taqawwum. Thus, Cryptocurrencies are deemed to be a digital asset to the scholars advocating opinions 2 & 3.
However, scholars who advocate for opinion 1 – Cryptocurrencies are not Māl – argue that Cryptocurrencies are just numbers with digital entries on a cryptic blockchain. They have no intrinsic function, utility at all. On the other hand, other digital assets and real assets (‘Urūḍ) serve a purpose and function. They have some intrinsic utility and benefit. Cryptocurrencies are just numbers which are fluctuating in value due to pure speculation. There is no real substance or underlying asset; it is just speculation on the fluctuation of numbers. This can result in cryptocurrencies being non-compliant and a form of maysir and prohibited speculation. This group of scholars liken cryptocurrencies to settling price differences, where the objective is purely the fluctuation of price; interestingly, those are digits also.
For those who consider Cryptocurrencies as Māl, they do so considering it is as something of economic value and being storable, retrievable. According to this opinion, cryptocurrencies will be a digital asset. They argue that with the technological developments and advancement, it is not necessary for something to be like a classical asset; the very nature of cryptocurrencies and cryptocurrencies is that it is innovative. To find an example of this classically is almost impossible. They rebut those who say it is not Māl and is merely settling of prices and speculation by arguing that cryptocurrencies are a digital representation of a value which can be transferred and used. The entire digital world can be summarised as algorithms. However, to understand the reality of cryptocurrencies, one needs to observe the benefits (thamarāt) and uses to see how different it is from other financial assets; Cryptocurrencies can be used and are used to trade. The cryptocurrencies in themselves are the assets, whereas, derivatives and financial instruments are nothing in themselves but representations of the price fluctuations of underlying assets they represent. Thus, the difference between the two is: The value of cryptocurrencies is in themselves and not in an underlying asset, whereas, derivatives do not hold any value, instead, the value represents an underlying asset and the derivative contract and instrument is purely a price reflecting the price of the underlying asset.
For cryptocurrencies to be a currency, it must have Thamaniyyah. If an asset has Thamaniyyah, the rules of currency exchange apply. For an asset to have Thamaniyyah, t must be:
1) An independent standard of value
2) A unit of account
The following observations must be considered before suggesting cryptocurrencies to be a currency: The current state of cryptocurrencies is that they are not an independent measure of value. Rather, the value of fiat currencies is used to determine the value of cryptocurrencies. Thamaniyyah demands that the currency itself gives a clear reference of value. Cryptocurrencies falls short of being an independent reference of value. Furthermore, the extreme volatility and instability in cryptocurrencies opposes the entire purpose of currency being a stabaliser (Qiyam) and balance for our worldly life. Therefore, with the uncertainty and volatility, cryptocurrencies lose their primary role and function. Something unstable cannot bring stability to others.
According to opinions 2 & 3, cryptocurrencies can still serve as a medium of exchange in isolated transactions; something which does not have Thamaniyyah can still be traded and used as a medium of exchange in a transaction. Cryptocurrencies will then be regarded as Thaman (price) in that particular transaction.
However, according to opinion 1- Cryptocurrencies not being a real asset or Māl – it cannot be used as a medium of exchange whatsoever let alone as an investment.
Do cryptocurrencies qualify as currency in Islam?
Considering all of the above, it is difficult to argue at the current stage that cryptocurrencies as currency in Islamic law due to the following reasons:
- Cryptocurrencies fall short of possessing Thamaniyyah.
- There is doubt in cryptocurrencies being currency. The legal maxim states that the Aṣl and foundational premise in temporary attributes and changeable state (ṣifāt ‘āriḍa) is that of non-existence (al-‘adm). Thus, for other than gold and silver, currency is a changeable state; it is not a permanent attribute. Considering the legal maxim, currency cannot be attributed to cryptocurrencies unless there is sufficient evidence to suggest otherwise.
- The number of risks associated with cryptocurrencies undermine the very reasons and objectives money was created to serve.
- Cryptocurrencies fail to uphold the Maqāṣid al-Shariah in respect to wealth.
- The tendency among people to invest in cryptocurrencies as opposed to using it as a medium of exchange shows that there is no overriding and encompassing ‘Urf (custom) to consider cryptocurrencies as currency.
For the detailed reasoning why cryptocurrencies are not considered as a currency yet, you may view the paper released on our Islamic finance platform – Amanah Finance Consultancy (www.afinance.org):
And Allah Ta’ālā Alone Knows Best
Mufti Faraz Adam,
The views and opinions expressed in this answer belong only to the author and do not in any way represent or reflect the views of any institutions to which he may be affiliated.
Arguments and ideas propounded in this answer are based on the juristic interpretations and reasoning of the author. Given that contemporary issues and interpretations of contemporary issues are subjective in nature, another Mufti may reach different conclusions to the one expressed by the author. Whilst every effort has been taken to ensure total accuracy and soundness from a Shari’ah perspective, the author is open to any correction or juristic guidance. On the event of any juristic shortcomings, the author will retract any or all of the conclusions expressed within this answer.
The Shari’ah ruling given herein is based specifically on the scenario in question. The author bears no responsibility towards any party that acts or does not act on this answer and is exempted from any and all forms of loss or damage. This answer may not be used as evidence in any court of law without prior written consent from the author. Consideration is only given and is restricted to the specific links provided, the author does not endorse nor approve of any other content the website may contain.