Although this guide was designed to address the elephant in the room within the Muslim crypto community, anyone can benefit from the discourse.

Cryptocurrency has gained remarkable adoption over the last couple of years. Millions of individuals, regardless of their religious beliefs, now own cryptocurrencies and transact on the blockchain. However, since the inception of blockchain adoption, there have been speculations within the Muslim community as to whether cryptocurrency is haram or halal. Because blockchain is extremely new and didn’t come up during the Prophet’s (PBUH) time, the Sharia law governing it may be difficult.

This guide, which can benefit anyone regardless of their religion, explores the standpoint of cryptocurrency in Islam while demystifying the uncertainties regarding the acceptance of the currency. Sections to be covered in this guide include:

The meaning of halal and haram
Underlying principles of cryptocurrency
Why do some people consider cryptocurrency haram?
Is crypto halal or haram?
What scholars have said regarding crypto
Conclusion

Meaning of halal and haram

Simply put, halal refers to everything that is allowed in compliance with Islamic law, while haram refers to those things that are illegal or unacceptable under Islamic law. The concept of halal and haram cuts across all areas of Muslims’ lives and digital currencies are not an exception.

Underlying principles of cryptocurrency

As earlier hinted, the use of crypto is quite controversial in Islam. This is because Bitcoin and other crypto coins are not only used to pay for goods and services, but they are also products of financial engineering and speculation. Many crypto holders majorly hold their digital assets with the hope that they will increase in value. This is controversial because it can be likened to gambling, which is forbidden in the religion.

As digital currencies become more popular, more entities are accepting them for daily transactions. Businesses like Amazon, Expedia, Microsoft and others have started accepting crypto. It becomes obvious that using crypto to pay for Sharia-compliant goods and services may be halal. However, because cryptocurrency ownership and exchange are untraceable, many individuals use it for haram purchases. That is why it is important to understand the motive behind crypto ownership to determine its overall acceptability. A study reported in 2018 revealed that Bitcoin worth over $872 million was exchanged on the dark web. It would be haram to use cryptocurrency for shady purposes according to Islamic law or Shariah.

How about the consensus mechanisms?

The consensus mechanism of the digital asset will also determine the standpoint of its use in Islam. The most popular types of consensus mechanisms in blockchain are proof-of-work (PoW) and proof-of-stake (PoS). In PoW, participants, also called "miners," compete to validate transactions and add new blocks to the blockchain. They do this by solving tough mathematical puzzles. While in PoS, block validators are randomly selected based on the stake or ownership of cryptocurrency held by participants. Here, individuals who hold a higher amount of cryptocurrency have a higher probability of being chosen as validators. The more cryptocurrency you hold, the more likely you are to be selected.

There is an obvious peculiarity here. PoW seems like a work-to-earn mechanism, you earn a reward for your hard work while PoS seems like a staking mechanism where the biggest guys potentially win. Although PoS is more energy-efficient and sustainable, the staking feature raises concerns among Islamic scholars.

Why do some individuals consider cryptocurrency haram?

People consider the use of cryptocurrency as haram for 3 major reasons:

Some part of it resembles gambling
Crypto isn’t money
It is not regulated or accepted by some governments and financial bodies

Some part of it resembles gambling

Unlike standard currencies, the value of cryptocurrency depends on demand and supply. This inherently makes it very volatile and risky. At the beginning of 2024, the price of Bitcoin rose to $45,000 and dropped to $40,800 within minutes, getting 181,697 crypto traders liquidated and over $634.4 million lost. Because buying crypto for investment purposes is risky and very similar to gambling, many Islamic scholars are tilting against it.

Crypto isn’t money

Many professionals have described crypto as having limits to being called money. Some individuals have stopped using the term “cryptocurrency” because they believe it is better called “cryptoassets.” Most countries of the world have not adopted cryptocurrency as a legal tender because of the limitations it has in being called money.

In Islam, money should be based on physical assets and many cryptos don’t pass this criterion. Because of that, some Muslims have reservations regarding the subject matter. That is why one needs to determine whether to consider crypto as a true currency, digital asset or neither.

It is not regulated or accepted by some governments and financial bodies

Although a few governments are getting more receptive to the use of crypto in their regions, most have not adopted it as legal tender. If crypto was accepted and regulated by recognized financial bodies, many Muslims would be open to the idea of its acceptability. Because many countries, including Nigeria, have started implementing policies that are crypto-friendly, Islamic scholars are increasingly re-considering their orientation towards crypto. But so far, no Muslim-dominant countries allow crypto for legal transactions.

With all this information, is cryptocurrency halal or haram?

As earlier outlined, there are several reasons crypto might be considered haram, but not all Muslims agree with that. Muslim scholars all over the world meet at the Supreme Council of the Muslim World League on the legality of cryptocurrency. Still, they have not made any official conclusion that it is haram. Therefore, Muslims need better guidance on the issue.

The Islamic Finance Guru believes that cryptocurrency is Sharia-compliant, in principle. They view crypto as a true currency or as a digital asset and they recommend that Muslim crypto traders check each crypto project individually to decide whether it’s halal or haram. Furthermore, many scholars have viewed crypto as being similar to buying stocks or shares, making people view crypto as halal. The only difference is the risk and high uncertainty level.

An Islamic scholar states that as a general rule, crypto is permissible because it is allowed to own different currencies from different nationalities. What makes it impermissible is when you use it in a similar way as gambling. If you own crypto with the mindset of getting rich quickly based on luck, it starts looking like gambling, thus unacceptable. Day trading and leveraging of various assets often fit this category.

Ultimately, how you use crypto will determine if it is halal or haram. If you’re using it to buy legal goods, it is surely permissible. Furthermore, if you’ve researched the project you’re investing in as legit and high-risk-free, you can go ahead with your purchase.

What scholars have said regarding cryptocurrency?

To date, national Shariah authorities have not ruled on whether cryptocurrencies are permissible. Although various international bodies have recommended standards for Islamic finance, none has the authority to impose them. Furthermore, because they don’t want to lose the chance to benefit from the revolutionary technology, many governments seem ambivalent and only worry about crypto’s potential for instability. The global consensus that has already been reached among scholars is the agreement that cryptocurrencies are a real form of wealth or maal.

Due to the speculative nature of the topic, Muslims are left to choose between sometimes conflicting judgments on cryptocurrencies by scholars at advisory firms, financial companies and academic institutions. A California-based Islamic finance author, Monzar Kahf, in 2014 gave the earliest ruling on Bitcoin as a legitimate medium of exchange, though vulnerable to manipulation. After that, Islamic jurists in South Africa ruled in favour of crypto, arguing that digital assets have become socially acceptable and commonly used. The Durban-based Darul Ihsan Centre refrained from endorsing them though, citing concerns over potential pyramid schemes. Some scholars in Egypt, Turkey, India and Britain have labelled them impermissible in Islam.

Farrukh Habib, a Malaysia-based research officer at the International Shariah Research Academy for Islamic Finance opined that cryptocurrencies are too diverse to give a general Shariah ruling for all. He said, “They are very different in terms of varieties, their underlying commodities, projects or businesses, so it’s not appropriate to have a blanket sharia ruling for all.”

Some scholars expressed concerns about understanding the complexities surrounding digital currencies. Harris Irfan, chairman of the UK Islamic Fintech Panel, said: “I would caution against accepting any fatwas from community scholars on the subject of fiqh al-mu’amalat, the jurisprudence of transactions, which is a highly complex area of Sharia.”

Connecting the dots

Bitcoin and other cryptocurrencies are increasingly gaining popularity globally because of the financial freedom they have granted to several individuals and businesses. Muslims have also jumped on the trend and they need assurances that their engagement with cryptocurrency is permissible with their faith. The truth is there are lots of conflicting opinions about the permissibility of cryptocurrency and there is no globally conclusive ruling against it. However, Muslims should be careful not to use crypto in a way that resembles gambling, an act that is forbidden in Islam. The overall idea is for everyone to ensure that they do their due diligence before hopping on any digital asset to ensure that the project is safe and legal.