I’ve recently been learning about financial infrastructure, and I was browsing the extra requirements in Islamic finance. This led me to the requirements an Islamic currency must satisfy. In answering this question, I saw an article discussing whether Bitcoin is Sharia compliant citing conservative philosopher Imran Hosein. And for good reason — Hosein is one of the clearest and most cited thinkers in Islamic finance, and his paper, The Gold Dinar and the Silver Dirham: Islam and the Future of Money (2007), gives six necessary properties for “money” within a fully Sharia-compliant economy. These are:
(1) Money functions as a medium of exchange.
(2) Money is durable and does not spoil or corrode.
(3) Money is either a precious metal or food.
Technically, this can also be any “regularly consumed commodity.” Additionally, this one seems flexible as long as (6) is well-satisfied. More liberal Islamic scholars opine that it is sufficient for your currency can be readily exchanged for gold/silver.
(4) Money exists in creation and is made valuable by Allah.
(5) Money is abundant and freely available.
(6) Money has intrinsic value.
There must be value “inside” the money, not just “outside”.
We examine these in turn and see how well Bitcoin (BTC) and Ether (ETH) satisfies every condition.
1. Money functions as a medium of exchange. ✅ ✅
As evidence from the many currency exchanges, both Bitcoin and Ether satisfy this easily.
2. Money is durable and does not spoil or corrode. ✅ ✅
Living on a digital ledger, both Bitcoin and Ether satisfy this with flying colors.
3. Money is either a precious metal or food. ✅ ✅
The liberal interpretation is that it is sufficient for there to merely be an exchange rate between the given currency and gold. And both Bitcoin and Ether satisfy this by there being a conversion between BTC ↔ USD ↔ Gold and ETH ↔ USD ↔ Gold. Both good here. The more conservative interpretation is that this is a restatement of the “intrinsic value” criterion. A useful comparison here is to tradable mobile phone minutes, which are 100% accepted even by the Saudis.
4. Money exists in creation and is made valuable by Allah. ✅ ✅
A Pakistani banking colleague of mine tells me that to “exist in creation”, is usually interpreted to mean that ownership of the asset is unambiguous. As the ownership of BTC/ETH is determined by the private key, there’s no problems here.
For “made valuable by Allah”, it’s been argued that it is sufficient for the commodity’s price to set by the market instead of by some external issuer. The value of BTC/ETH are both determined by numerous exchanges. So all good.
5. Money is abundant and freely available. ✅ ✅
BTC and ETH are both widely accessible via exchanges. As for being “abundant”, I suppose that even though Bitcoin has a fixed cap on the number of coins, people will always be able to own one Satoshi of BTC (1 BTC = 10⁸ Satoshi). Ether is always minting new coins, and likewise it will always be possible to own one Wei of ETH (1 ETH = 10¹⁸ Wei). No problems here.
6. Money has intrinsic value. ❌ ✅
This one is the differentiator. Bitcoin has no intrinsic value. Some have argued that Bitcoin’s “proof of work” gives it value, but it’s unclear to me how running on a treadmill increases the value of any excreted sweat. (Under this same reasoning, people would be able to successfully commodify proof of dumbbell lifts, but no society accepts this.) Bitcoin is merely a medium of exchange. On the other hand, Ether has the intrinsic value of powering diverse programs. Ether is closer to oil or cellphone minutes in that it is readily consumed for a purpose unrelated to its use as a currency. This analogy to cellphone minutes puts Ether on much higher ground when it comes to being halal-compliant.
To my pleasant surprise, many Bitcoiners agree with this assessment. In fact, a very pro-bitcoin source cites although Bitcoin is not explicitly haram, it “falls short of the strict and narrow definition of money in Islam”, under the justification:
“Historically, though, Islam has only recognized commodities of intrinsic value as money including things like gold (Dinar), silver (Dirham); rice, dates, wheat, barley and salt. In a strict interpretation of what qualifies as money, Bitcoin probably misses the mark.”
I couldn’t agree more. The Bitcoiners have Bitcoin Jesus, but Muhammad (pbuh) is an Etherian.
- I’ve seen it claimed that because Bitcoin executes short scripts, BTC has intrinsic value in computation unrelated to the currency (just like Ethereum). I am skeptical of this because Bitcoin’s Script code is simply to determine whether a given user is permitted to spend a certain transaction output. I’m skeptical that this constitutes intrinsic value unrelated to use as a currency.
- Another claim I’ve seen is that because groups like Factom use the Bitcoin ledger as a database, the Bitcoin system itself has intrinsic value unrelated to its use as a currency. On the face of it, this sounds reasonable. And I suppose this would be equivalent to my taking out all the bills in my wallet and carefully penning a JSON file stretching across all the bills. Okay… sure, those specific bills now have intrinsic value to those who care about my JSON file. And if the Bitcoin ledger was designed for scribbling JSON files onto it, or if JSON scribbling was incredibly common, I’d accept this argument.
But this isn’t the case. The Bitcoin Core team explicitly discourages using the Bitcoin ledger in these non-standard ways. And as far as frequency, >98% of transactions don’t use the fancy OP_RETURN magic used by Factom and others. Taken together, I stand by the claim that, BTC as a whole, lacks the “intrinsic value” property demanded by Hosein.
- One can argue that Ether is unlike cellphone minutes because when Ether is used to power a contract, the Ether is not “consumed” by the computation, but merely transferred to a miner/validator that performed the computation. This is true. I suppose I would argue that, given that pretty much anyone on earth can process your computation, it doesn’t really matter that there must to be someone on the other side to actually perform the computation. If there was a cabal attempting to prevent you from using your Ether, anyone else in the world (including yourself!) can come along and process your transaction. We can think of Ether as cellphone minutes that any carrier in the world can take.