Bitcoin in Islamic Finance: Evaluating Compliance with Sharia Principles in Decentralized Finance

Change has always been a constant in human history, influencing economies and societies. Bitcoin, a decentralized form of currency introduced in 2009 by the pseudonymous figure Satoshi Nakamoto, has significantly disrupted traditional financial systems. Its structure, being neither centralized nor governed by any financial authority, has drawn both intrigue and skepticism, particularly from the Islamic finance sector. 

Islam advocates for ethical conduct in all areas of life, including business and finance. As such, any new economic development—such as Bitcoin—demands rigorous scrutiny to determine its alignment with Islamic principles. Islamic scholars are now tasked with determining whether Bitcoin is permissible (Halal) or forbidden (Haram) in Islam. 

This article seeks to answer the question: Is Bitcoin compliant with Islamic law? We will explore the history of Bitcoin, its method of operation, and scholarly perspectives on its permissibility, especially in light of modern fatwas. 

Evolution of Money Systems

Before diving into the specifics of Bitcoin, it is essential to understand the evolution of money. The earliest economic exchanges were based on the barter system, where goods were traded for other goods. Over time, people realized the inefficiencies in bartering, and commodity money emerged, with grains, salt, or leather serving as currency. 

The introduction of precious metals, specifically gold and silver, as currency was a turning point. These metals had intrinsic value and were easier to store and transport. However, as economies grew, even gold and silver proved cumbersome, leading to the development of paper money. Banks would issue receipts in exchange for gold deposits, which later evolved into banknotes—effectively the first forms of paper currency. 

By the early 18th century, banks had begun issuing these banknotes in a formalized manner, with the promise that they could be redeemed for gold. Over time, paper money became detached from gold, leading to the creation of fiat currency, which holds value by government decree rather than intrinsic worth. 

Today, currency has evolved further with the advent of digital payments, debit cards, and credit cards. Bitcoin, however, represents a new era of currency, one that is entirely digital and decentralized, without any government backing or physical form. 

What is Bitcoin?

Bitcoin is a form of digital currency created with the idea of decentralization, meaning no central authority, such as a bank or government, controls it. Introduced in 2009, Bitcoin operates on blockchain technology, a public ledger that records all transactions made with the currency. 

One of Bitcoin’s most unique aspects is its limited supply. There can only ever be 21 million bitcoins in existence, making it immune to inflation caused by excess currency production. However, its value is highly volatile, often fluctuating based on market demand and speculation. 

Bitcoin and Blockchain Technology

Bitcoin transactions are verified and recorded through blockchain technology. A blockchain is a public ledger where each transaction is documented and encrypted to ensure security and transparency.

This decentralized system eliminates the need for intermediaries like banks, providing users with anonymity. However, the anonymous nature of Bitcoin transactions has raised concerns about its use in illegal activities, such as money laundering and purchasing illicit goods on the dark web. 

Means to Acquire Bitcoin

There are two primary ways to obtain Bitcoin. The first is through mining, where individuals or entities use computing power to solve complex mathematical problems. As a reward, they receive newly created bitcoins.

The second method is through purchasing Bitcoin via exchanges using traditional currencies. Bitcoin mining is capped, with the total number of bitcoins limited to 21 million. Once this cap is reached, no new bitcoins will be generated, which is anticipated to happen around 2140. 

Bitcoin’s Price Fluctuations

Bitcoin’s value is not tied to the economic stability of any one country, unlike traditional currencies like the U.S. Dollar or Indian Rupee. Instead, Bitcoin’s price fluctuates based on market supply and demand. When more people invest in Bitcoin, its price rises; when people withdraw from the market, the price decreases.

This unpredictability has led to comparisons between Bitcoin and gambling, as its value can change drastically in short periods. 

Bitcoin: Advantages and Disadvantages

Advantages

Bitcoin offers several advantages, particularly in terms of privacy and security. Bitcoin transactions are anonymous, allowing users to transfer funds without revealing their identities.

Furthermore, transaction fees are generally lower compared to traditional banking systems, and there is no need for the paperwork required to open a bank account. 

Disadvantages

Despite these benefits, Bitcoin has significant drawbacks. Its high volatility makes it a risky investment. Prices can rise or fall dramatically within short periods, causing significant financial losses for investors.

Additionally, Bitcoin is stored in an “E-Wallet,” which is susceptible to hacking. If an E-Wallet is compromised, the owner may lose their bitcoins permanently. Unlike traditional bank accounts, there is no authority to approach for redress in the case of theft or loss. 

Bitcoin and Illegal Activities

Due to its decentralized and pseudonymous nature, Bitcoin has been associated with illegal activities, including drug trafficking and ransom payments.

While the majority of Bitcoin transactions are legitimate, the lack of oversight makes it attractive for those seeking to avoid regulatory scrutiny.

Is Bitcoin Comparable to Gambling?

Bitcoin’s value fluctuations have led many to question whether investing in it is akin to gambling. Much like in gambling, Bitcoin investors speculate on whether its price will rise or fall.

As the market is highly unpredictable, this speculation often results in either significant financial gain or loss, creating a scenario similar to gambling. 

Sharia Compliance of Bitcoin

The question of Bitcoin’s permissibility under Sharia law revolves around several factors:

Volatility and Gharar (Uncertainty)

Bitcoin’s unpredictable price aligns with the concept of Gharar, or excessive uncertainty, which is prohibited in Islamic finance.

Since the future value of Bitcoin is speculative and highly volatile, it introduces a high degree of risk, making it questionable under Islamic principles.

Lack of Intrinsic Value

Traditional currencies derive their value from either physical assets (such as gold) or government backing.

Bitcoin, on the other hand, has no intrinsic value—it is not backed by any physical commodity or state authority. This characteristic makes it difficult to classify Bitcoin as lawful (Halal) in Islamic finance.

Scholarly Opinions

Islamic scholars are divided on Bitcoin’s permissibility.

Some, like Mufti Taqi Usmani and the Darul Ifta Deoband, have deemed Bitcoin haram (prohibited), citing its volatility, lack of regulation, and potential for misuse. Others, such as Mufti Muhammad Abu-Bakar, argue that Bitcoin can be considered Halal if it is used responsibly and regulated appropriately. 

Bitcoin in the Global Muslim Community

One important consideration is the impact of prohibiting Bitcoin on the economic development of the Muslim community.

As Bitcoin and other cryptocurrencies become more integrated into global financial systems, excluding Muslims from these markets could lead to economic stagnation. Therefore, some scholars advocate for finding a permissible way to engage with Bitcoin while upholding Islamic principles. 

Conclusion

The question of whether Bitcoin is permissible in Islamic finance remains unresolved. Its decentralized nature, volatility, and lack of intrinsic value raise significant concerns under Sharia law.

While some scholars have deemed it haram, others see potential for responsible use with proper regulation. Moving forward, Islamic scholars and financial experts must continue examining Bitcoin’s implications within the framework of Islamic finance. By doing so, the Muslim community can engage with new financial technologies in a way that is both ethically sound and economically beneficial.