Haram or Halal?
Cryptocurrency, digital assets and Shariah law. Full Disclosure — none of the members of NotCentralised are Islamic scholars.
Crypto Is Forbidden(?)
There is a widespread belief that all cryptocurrencies (e.g. bitcoin) and digital assets (such as NFTs) are deemed Haram (forbidden) under Shariah (Islamic) law. According to Islamic law, a transaction should satisfy certain requirements, such as having a physical form and definite value. While there has generally been suspicion and caution around the status of cryptocurrencies from Shariah scholars, it is overly simplistic to declare “crypto is banned for Muslim nations”.
Bitcoin for example is almost certainly Haram as a currency, and has been declared such by Nahdlatul Ulama (NU) in Indonesia, for example. NU has around 90 million followers and members, from the most populous Muslim nation on the planet. An Ulama is a Muslim scholar who is recognised as having a special knowledge. Indonesia has a quasi-government Council of Ulama, of which the NU is the biggest component.
“Cryptocurrency as currency is forbidden because it has elements of uncertainty, harm and doesn’t meet the Islamic requirement according to Shariah [law]”. These words came from KH Asrorun Niam Sholeh, the council’s head of religious decrees, and was declared during an online forum of cryptocurrency and Sharia law experts. You can read more here.
However, Mr Sholeh added that although using cryptocurrencies as a currency is forbidden, they could be traded as a commodity or as digital assets, if they meet certain requirements. Indeed, if we think about the above-mentioned requirements of (i) definite value and (ii) physical form — how on earth do many fiat currencies qualify? How do equities qualify?
During the online forum referred to above, equities were deemed Halal (permitted) because of this “definite” value and because their price reflected the performance of the business, which could be valued. Anybody who has invested in tech stocks would justifiably question these conclusions. Firstly, no equities these days are represented by paper certificates or physical securities. Indeed, as the globe digitises further, this requirement seems to eliminate all manner of investments. Fiat currencies are almost entirely digital, for example. Secondly, equity prices move for all sorts of reasons and there is no single agreement on a business’s value. Rather, that value is implied and subject to the views of any potential buyers, if any M&A activity occurs.
Has Atlassian’s performance and product set changed in the last 6 months, such that it would warrant a 75% drop in the stock price? How about Netflix, or Roku, or Zoom? Markets oscillate with the whims of sentiment, supply and demand, macro headwinds and tailwinds, momentum. Idiosyncratic risk is a small component of value and statistically, a small determinant of observed returns.
Another reason offered by Gus Fahrur, when speaking to Australia’s ABC news, was that “cryptocurrencies was [sic] also similar to gambling because people speculate about the value without knowing the cause.”. Again, to anybody who has worked in financial markets, this approach is eerily familiar to managing stocks and currencies and bonds etc. Funds management is akin to somewhat-informed gambling, with a set of risk controls.
So, what about NFTs?
Let’s consider NFTs (non-fungible tokens). Being digital does not prevent an NFT from being an asset under Shariah law, as the driving factor in being Māl (property) — and therefore a valid asset — is the ability to benefit from the asset in a reasonable manner. Can NFT owners benefit from them? Absolutely, and in concluding this we do not consider price appreciation as the relevant benefit. Rather we are speaking about real world utility. Utility is usefulness, and if something is useful, the owner benefits. NotCentralised is a big believer in utility tokens as having more long term value prospects than meme tokens.
If we dig further into Islamic jurisprudence, to consider the nature of what can be deemed “property”, the Hanafi jurists (the Hanafi is one of the four major traditional Sunni schools) defined Māl in several ways such as:
- Māl is what human instinct inclines towards and it is capable of being stored and accessible at the time of necessity (Ibn Abidin).
- Māl is that which has been created for the benefit of humans. Māl brings with it scarcity and stinginess (al-Haskafi).
- Māl is that which is normally desired and can be stored up to the time of need (Majallah).
Let’s consider the highlighted text as it pertains to NFTs. Scarce (limited supply); can be stored (such as on AWS or Arweave) and accessible at the time of need (through storage in a wallet, for example). It seems prima facie that NFTs do have characteristics of Māl. Modern Shariah scholars have concluded that as long as what the NFT represents is Halal and lawful (e.g. artwork represents Halal subjects), then the sale of an NFT which incorporates all rights to the underlying including proprietary rights, will be a sale of an asset, albeit a digital asset. It will be deemed a sale of property (Māl) as the buyer receives all rights connected to the digital asset. It is thus Halal.
Wrapping Up
In conclusion, it is far too simplistic to declare that “crypto is forbidden”. Firstly, not all tokens are the same and secondly, even if a token is forbidden to be used as a currency (e.g. bitcoin), it is perfectly fine to trade it as a commodity. Secondly, NFTs would seem to satisfy Halal requirements under Shariah law, if we assume there is a utility benefit to the NFT. Junk can never be Halal, as it would not satisfy the criteria of being Māl (property).
There is a great exploration of these topics in a piece by Amanah Advisors which you can find here.
