CRYPTOCURRENCY: AN ISLAMIC

LAW PERSPECTIVE

PROF. ABDULRAZZAQ ABDULMAJEED ALARO FIFP, MCIARB, CIAE

HEAD OF DEPARTMENT OF ISLAMIC LAW, UNIVERSITY OF ILORIN, ILORIN, NIGERIA;
MEMBER, FINANCIAL REGULATION ADVISORY COUNCIL OF EXPERTS, CENTRAL BANK OF
NIGERIA &
MEMBER, TAKAFUL ADVISORY COUNCIL, NATIONAL INSURANCE COMMISSION
27/03/2021 1
 MONEY EVOLUTION/REVOLUTION

1. Commodity money

2- Fiat Money

3- Mathematics-based Money (Virtual Currencies)

27/03/2021 2
 WHAT IS A CRYPTOCURRENCY?

• Cryptocurrencies are in the class of what has come to be known as

“virtual currencies”. An offshoot of Fintech, and manifestation of smart
contracts

• In 2014, The European Banking Authority (EBA) defined virtual currency

as:

• ‘a digital representation of value that is neither issued by a

central bank or a public authority, nor necessarily attached to a
fiat currency, but is accepted by natural or legal persons as a
means of payment and can be transferred, stored or traded
electronically”.
27/03/2021 3
• In October 2016, the European Central Bank (ECB) while presenting its
opinion on a proposal for an EU directive on prevention of the use of the
financial system for money laundering or terrorist financing (Directive
2009/101/EC), declared that:
• “ … given that virtual currencies are not in fact currencies, it
would be more accurate to regard them as a means of exchange,
rather than as a means of payment” (https://eur-
lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52016AB0049)

27/03/2021 4
• The ECB further asserts that
• “ virtual currencies’ do not qualify as currencies from a Union perspective. Relying on
the Treaties and the provisions of Council Regulation (EC) No 974/98, it emphatically
stated that “the euro is the single currency of the Union's economic and
monetary union”
• In other words, unlike fiat money, virtual currencies are not legal tenders, but are
nevertheless accepted by members within a virtual community as a medium of
exchange and as a unit of account.

• Simply put, Cryptocurrencies are digital or virtual currencies that are encrypted
(secured) using cryptography. They are created and stored electronically.
• Bitcoin represents the first decentralized cryptocurrency, and in fact the king of
cryptocurrencies. It is powered by a distributed ledger that records and validates all
transactions chronologically, called the Blockchain.
• This presentation shall focus principally on Bitcoin as the first, the most valued, and
the most traded cryptocurrency in the world. (Other cryptos are not significantly
different from Bitcoin in protocols and operations) 27/03/2021 5
 FEATURES OF CRYPTOCURRENCIES
• From the forgoing we can deduce the following pieces of information
• Cryptocurrencies are:
• Digital: fully electronic
• Private: Not issued by any govt or constituted authority
• Decentralized: No centralized issuing or regulating authority.
Units issued to decentralized groups of users.
• No intrinsic Value
• No physical existence

• Anonymous: It’s possible to send and receive cryptocurrencies

without giving any personally identifying information.

27/03/2021 6
 TYPES OF CRYPTOCURRENCIES

• The most common categorization of cryptocurrencies are:

• Alternative Cryptocurrency Coins (Altcoins)

• Tokens

27/03/2021 7
• Altcoins simply refers to coins that are an alternative to Bitcoin.
• Some examples of altcoins that are variants of Bitcoin's codes are
Namecoin, Peercoin, Litecoin, Dogecoin and Auroracoin

• There are other altcoins that aren't derived from Bitcoin’s open-source
protocol. Rather, they have created their own Blockchain and protocol
that supports their native currency.
• Examples of these coins include Ethereum, Ripple, Omni, Bitshares, NEO,
Waves and Counterparty.

27/03/2021 8
2- Tokens

• Tokens are a representation of a particular asset or utility, that usually

resides on top of another blockchain.

• Tokens can represent basically any assets that are fungible and tradable,
from commodities to loyalty points to even other cryptocurrencies or fiat
currencies!
• Tokens are created and distributed to the public through an Initial Coin
Offering (ICO)

• The majority of coins in existence (close to 80%) are tokens, since

they're much more easier to create.

27/03/2021 9
 HISTORICAL DEVELOPMENT

• The creation of Bitcoin ushered in the birth of new currency known as

Cryptocurrency

• Bitcoin (₿) was invented in 2008 by an unknown person or group of

people using the name Satoshi Nakamoto.

• Its implementation was released as an open-source software in 2009

• The first Bitcoin was successfully transferred from Nakamoto to Hal

Finney in 2009

• In 2010, the first known commercial transaction using bitcoin occurred

when a programmer Laszlo Hanyecz bought two Papa John's pizzas for
₿10,000.

• Nakamoto’s identity, real name and nationality remain unknown up till 10

27/03/2021
today (Although he claimed to be a Japanese) and has disappeared since
December 2010
 KEY CONCEPTS:

1-Blockchain: A digital ledger of transactions, distributed and duplicated

across the entire network of computer systems.

Information on transactional records on the blockchain are recorded in a

way that makes it difficult or impossible to alter, reverse, or hack.

2-Peer-to- Peer (P2P) : No central server, every client can be a server, no

intermediary, direct transactions .

3- Mining :

• Bitcoins are created as a reward for a process known as mining, on first

performed first rewarded basis.

• The currency is created in cyberspace when so-called "miners" use the

power of their computers (nodes) to solve complex algorithms27/03/2021
that serve11
as verification for Bitcoin transactions.
• 4- Proof of Work (PoW): rewards the miner for solving complex equations
and creating new block

• 5-Proof of Stake (PoS): the next block is created based on how much the
miner has staked.

• Both are consensus mechanism, but while miner gets rewarded with a
new coin in PoW, what contributors to the PoS system get is simply the
transaction fee. Hence they are not called miners but “forgers”.

• PoS is faster, and consumes less electricity

• 6- Double Spending

27/03/2021 12
 SHARIAH ISSUES IN CRYPTOCURRENCIES

In three major areas:

1- Trading and investment

2- Mining

3- Means of payment (Payment System)

27/03/2021 13
 TRADING AND INVESTMENT IN CRYPTOCURRENCIES

• Two juristic opinions:

• Haram: mainly by official iftaa bodies, such as Egypt, Turkey and Palestine,
and some notable individuals

• Halal: mainly from individual respected jurists, Prof. Ali El Gari (Saudi Arabia),
Dr. Daud Bakar (Malaysia), Dr. AbdulBari Mishal, IEF (USA) and Mufti Abu Bakr
(South Africa).

• IIFA has postponed issuance of resolution on this so far, but organized

seminars

27/03/2021 14
 TRADING IN CRYPTOS IS HALAL, WHY?

This view is actually based on two different approaches

1. Cryptos are Currencies/Means of Exchange, unless authorized by a govt.

2. Cryptos are digital assets, not currencies

We shall discuss these two in the following slides

27/03/2021 15
 CRYPTOS ARE CURRENCIES

-Because they fulfil all the features of currency (Medium of Exchange, Unit
of Account and Store of Value)
- In this case the rule of Sarf (Exchange) shall apply:
- (1211 /3) ‫صحيح مسلم‬
ُ ‫ضة‬ ‫ َو ْال ِف ﱠ‬،‫ب‬
ِ ‫َب بِالذﱠ َه‬ ُ ‫ »الذﱠه‬:‫سلﱠ َم‬ َ ‫صلﱠى ﷲُ َعلَ ْي ِه َو‬ َ ِ‫سو ُل ﷲ‬ ُ ‫ قَا َل َر‬:‫ قَا َل‬،ِ‫امت‬ ِ ‫ص‬‫عبَا َدة َ ب ِْن ال ﱠ‬ ُ ‫ع ْن‬ َ -
َ ،‫ ِمثْ ًﻼ بِ ِمثْ ٍل‬،‫ح‬ ْ ْ ْ ْ ‫ َوال ﱠ‬،‫ َو ْالبُ ﱡر بِ ْالبُ ِ ّر‬،‫ض ِة‬‫بِ ْال ِف ﱠ‬
‫س َوا ًء‬ ِ ‫ َوال ِمل ُح بِال ِمل‬،‫ َوالت ﱠ ْم ُر ِبالت ﱠ ْم ِر‬،‫ش ِعي ِر‬
‫ير بِال ﱠ‬ُ ‫ش ِع‬
«‫ ِإذَا َكانَ يَدًا بِيَ ٍد‬،‫ْف ِشئْت ُ ْم‬ َ ‫ فَبِيعُوا َكي‬،‫َاف‬ُ ‫صن‬ ْ َ ‫ت َه ِذ ِه ْاﻷ‬ْ َ‫اختَلَف‬
ْ ‫ فَإِذَا‬،ٍ‫ يَدًا بِيَد‬، ٍ‫بِ َس َواء‬
- No Riba al Fadl (Riba in exchange contract)
- No Riba Anasiiah (Riba in loan/debt contract)

27/03/2021 16
 CRYPTOS ARE ASSETS

In this case no rule of Sarf, but rule of Commodity shall apply

1- Don’t sell what you don’t have

2- No excessive jahala/gharar (uncertainty): The quantity, the

quality and the consideration must be clearly spelt out

27/03/2021 17
 My Opinion
A) Currency Status of Cryptos, not as simple as projected

We shall use the following parameters:

1. Rawaj (wide acceptance), not necessarily as a legal tender

2. High Volatility (From just USD0.06 in September 2010 to USD 55,000 in March 2021)
38 million % surge in ten years as compared to gold’s 55.67%

3. Limitation in quantity: 21 million coins (Year 2140)

B) Crypto as Asset . This is also not without issues

1- Asset with no intrinsic value ?

2- Asset but being widely used as a currency. (Unlike assets, we are only allowed to
trade with, not in, currency )

27/03/2021 18
 TRADING IN CRYPTOS IS HARAM, WHY?

1. No Intrinsic Value
2. High volatility culminating in excessive uncertainty and
high risk that is akin to gambling
3- No link to real economy (just like a bubble waiting to
burst )
4- Cryptos are used for illicit activities
5- Ambiguity and anonymity even in the identity of the
inventor
6- Not issued or regulated by any constituted authority
27/03/2021 19
 MY OPINION ON ALL THESE
• 1- Fiat money also has no intrinsic value
• 2- The high volatility in crypto is really a major concern, but that may not be peculiar to it.
That alone may not be enough for its invalidity
• 3- The problem with the link to economy may be solved through non-permissibility of
derivatives and speculation in cryptos
• 4- Other currencies are also used for illicit activities. But if that becomes the major use then it
can trigger a shariah issue ( ‫)سد الذريعة‬
• 5- Disclosure of identity in buying and selling –in principle- is not a Shariah requirement
• While the nature of blockchain technology (which records all transactions ) provides enough
confidence of traceability if necessary
• 6- Scholars have argued that non constituted authority can issue currencies if the same
maslaha will be guaranteed and the currency is widely accepted in the community.
27/03/2021 20
 SHARIAH ISSUES IN MINING OF CRYPTOS

• PoW is halal based on the rule of Jaaalah

• PoS is also halal since the reward is not from the
competing miners/forgers themselves. Unless if it is certain
that interest is being paid on what the investors have
staked for validation of transaction

27/03/2021 21
 SHARIAH ISSUES IN CRYPTOS AS MEANS OF
PAYMENT
• 1- How it is procured – Hacking and other forms of cybercrimes are haram
• 2- For what is the payment being made, for halal transaction or for haram
transactions
َ ‫ َو‬،ُ‫س ِد ِه فِي َما أَب َْﻼه‬
ُ ‫ع ْن‬
‫ع ُم ِر ِه فِي َما‬ َ ‫ع ْن َج‬ َ ‫ْال ِقيَا َم ِة َحتﱠى يُ ْسأ َ َل َع ْن أ َ ْربَعِ ِخ‬
َ :‫صا ٍل‬ ‫يَ ْو َم‬ ‫" َﻻ ت َ ُزو ُل قَ َد َما ْال َع ْب ِد‬ •
‫ْف َع ِم َل فِيه" أخرجه الترمذي بإسناد‬ َ ‫ع ْن ِع ْل ِم ِه َكي‬
َ ‫ َو‬،ُ‫سبَهُ َوفِي َما أ َ ْنفَقَه‬
َ َ ‫ا ْكت‬ َ‫أَيْن‬ ‫ع ْن َما ِل ِه ِم ْن‬ َ ‫ َو‬،ُ‫أ َ ْفنَاه‬
‫صحيح‬
• And of course such a cryptocurrency much enjoy wide acceptance (rawaaj)
27/03/2021 22
 CONCLUSION & RECOMMENDATIONS
• The original/default rule in commercial transactions is that of permissibility
• Most of the concerns raised about cryptos do not affect the technology itself, neither do they affect the
crypto protocols, but essentially they revolve around HOW and WHAT crypto are used for
• As per rule of sadd Adhariah, a legitimate means may be blocked if it is established that it will either
“certainly” or “mainly” lead to an illegal end..
• Equally, weighing the quantity of benefits and harms embedded in any practice in a society is a
Shariah mechanism, with emphasis always or giving priority to prevention of harms over and above
realization of benefits
• Govts and monetary authorities are therefore advised to critically look into the pros and cons of
cryptocurrencies and take a decision as to:
• Whether to allow or disallow it
• A third option is to introduce some levels of regulation to crypto related activities ( in Malaysia for
instance, Platforms and Exchange for cryptocurrencies trading must be
27/03/2021 23
registered)
 CONTINUED
• Excessive trading in crypto without creating any real economic activity is not healthy for a
nation’s economy
• “Money is never sought for itself, rather it is used as a means to gain commodities. When
money begins to be treated as a commodity and becomes the objective of transactions,
the entire (economic) system gets corrupted and will be in crisis” Ibn Al-Qayyim Aljawzi
(105 /2) ‫إعﻼم الموقعين عن رب العالمين‬ •
‫س َد أ َ ْم ُر‬ َ ‫ت ِفي أَ ْنفُ ِس َها ِسلَعًا ت ُ ْق‬
َ َ‫ص ُد ِﻷ َ ْع َيا ِن َها ف‬ ْ ‫ار‬
َ ‫ص‬َ ‫ فَإِذَا‬،‫س َل ِع‬
ّ ِ ‫ص ُل ِب َها إلَى ال‬ َ ‫ َب ْل يُ ْق‬،‫ص ُد ِﻷ َ ْع َيا ِن َها‬
‫ص ُد التﱠ َو ﱡ‬ ُ ‫فَ ْاﻷَثْ َم‬
َ ‫ان َﻻ ت ُ ْق‬ •
‫اس‬ ِ ‫النﱠ‬
• As for individual citizens, exercise caution while trading in cryptos, it may plunge you into
sudden and devastating level of poverty (loosing one single bitcoin means loosing USD
55,000 which is equivalent to more than 26 million naira today!) SO BE WARNED

27/03/2021 24
…

•Thanks for Listening

•And don’t forget that your
Bitcoin is zakatable, anyway
27/03/2021 25