The Problem of Ihtikar (Hoarding) in Cryptocurrency

Most fatwa against cryptocurrency center around the concept of gharar, which is sometimes translated as “uncertainty” or “speculation.” The concept of ihtikar, or hoarding, is actually closely related to gharar, but has received much less attention from scholars in discussions on cryptocurrency.

The issue of hoarding has been brought to my attention for a number of reasons; in particular, Proof of Stake consensus methods, but also the many game theoretical models for engineering cryptocurrency price growth.

Proof of Stake Revisited

Proof of Stake has obvious similarities to riba, which caused a post I wrote on that subject to get a lot of attention. One of the reasons that I and other Muslims concluded that Proof of Stake cannot be clearly defined as a riba transaction is because the money that is “staked” is more like a deposit, rather than a loan.

If the staker behaves dishonestly, he will lose his money, so the stake acts as a security. Furthermore, the money that the staker receives is a reward for performing a useful service for the network — validating transactions. This is in contrast to an interest-bearing loan, where the lender performs no useful service other than allowing the borrower to temporarily use his money.

However, a large part of the function of Proof of Stake has become to immobilize as much of the supply of a currency as possible, thus driving up the price and fueling speculative growth. This is actually a big part of emerging science of “tokenomics,” in which protocol designers attempt to structure token economies so as to balance incentives and pursue economic objectives.

This practice is very similar to something which is expressly prohibited in Islam — ihtikar, which is sometimes translates as “hoarding” or “monopolizing.”

Defining Ihtikar

A number of hadith establish the prohibition on Ihtikar.

Ma’mar b. Abdullah reported that the Messenger of Allah ﷺ said:

“No one hoards but the sinner.”

-Sahih Muslim, 1605

Some of the texts prohibiting hoarding describe the nature of cryptocurrency very closely.

Mu’ath said that he heard the Messenger of Allah ﷺ say:

“What an evil person is the one who withholds! If Allah causes the prices to drop, he would be saddened, and if He causes them to climb, he would be excited.”

-al Bayhaqi

Excitement with price increases and sadness with crashes is one of the most salient features of cryptocurrency markets. Ihtikar is translated here as withholding, or in cryptocurrency parlance, we might say “withhodling.”

These hadith clearly prohibit the practice of price manipulation through hoarding. Typically, this would take the form of hoarding some commodity in the market in order to deliberately drive up the price. For example, a trader could buy up all of the wheat in market until the price increases, and then sell at a profit.

This is actually precisely what many cryptocurrencies are designed to do. This dynamic emerged almost accidentally in the cases of Bitcoin, but later cryptocurrency designs emphasized features that deliberately encourage hoarding to drive up price.

Ikhtilaf on Ihtikar

Most scholars of fiqh would probably be hard pressed to use these hadith alone as evidence for a prohibition of cryptocurrency, because the majority of the ulema regarded this prohibition as relating to any goods that the Muslims need.

Imam Malik, rahimullah, said: “Monopoly occurs in everything, including food products, jute, woolen or safflower products and the like; whatever, if withheld, would harm people, the withholder should be prevented from so doing, but if he is not harming (consumers) or their commerce, there is nothing wrong with it.

Likewise, Imam an-Nawawi, rahimullah, said: “The wisdom behind prohibiting monopolistic practices is to prevent the harm that would befall people as a result. Scholars are in agreement that if a person possesses items that people are in dire need of, and they can not find anyone else to supply it, he is to be forced to sell it in order to lessen the harm and remove difficulty from people.”

However, some scholars, such as Abu Yusuf, the renowned student of Abu Hanifa, rahimahum Allah, held the view that any form of hoarding is haram if it causes harm to the people, regardless of the type of products being withheld.

Rulings on Means Follow the Rulings on Ends

There is a principle in fiqh which states that the rulings on the means are like the rulings on the ends. So, for example, obtaining water to perform wudhu is obligatory just as salah is obligatory, because water is a necessary means to an obligatory end.

In the same sense, what leads to haram is also haram. So, for example, non-mahram men and women being alone together is not allowed, because it can easily lead to haram relationships.

This would suggest that if we follow the view that hoarding cryptocurrency is of the unlawful type of hoarding, a cryptocurrency protocol which deliberately encourages hoarding would render the entire currency itself haram.

A cryptocurrency may be designed in such a way that it encourages hoarding on the protocol level, but it could still be possible for people to use it without actively engaging in hoarding. However, using such a currency would increase its circulation, visibility, and popularity, so if there was another option, this would be preferable.

Could Ihtikar Mean that Bitcoin is Haram?

Holding cryptocurrencies to support their long term price growth appears very much to be a type of collective price manipulation. Many thousands or millions of investors may knowingly or unknowingly band together to drive up the prices.

As with every attempt to call Bitcoin haram, we cannot say that the issue of ihtikar is a perfect fit, for some of the same reasons that gharar is not a perfect fit. An investment in a cryptocurrency protocol is not the same as hoarding wheat in the marketplace.

When a trader hoards wheat and drives up the price, he hurts the whole society while benefitting only himself. Cryptocurrencies, on the other hand, have an element of investment, rather than just pure speculation.

The value of a cryptocurrency is largely a function of the ecosystem of software and users surrounding that currency, and this ecosystem is generally sponsored by holders of the currency. Purchasing a cryptocurrency moves value into that ecosystem and supports its growth, and the expansion of functionality can provide real utility to society.

Expanded utility can also make the currency more attractive, bringing in more investors and further boosting the market value of the currency in a virtuous cycle.

Cryptocurrencies also do not lose utility as they become more scarce. Whether the price of Bitcoin is one dollar or one million dollars per Bitcoin, it’s still possible to use it to transfer money anywhere in the world, whereas if wheat becomes scarce in the market, people will go hungry and suffer.

Does Hoarding Bitcoin Harm Muslims?

However, as discussed above, the main criteria in determining a haram type of ihtikar is the harm that it causes to society, and to Muslims in particular. This makes the weighing of harms and benefits very difficult, because hoarding in the case of cryptocurrencies can actually benefit other holders very much, but at the same time, it can be very harmful to holders of other currencies.

One of the reasons I have always (reservedly) supported Bitcoin is because I understood the harm of the US dollar, and I understood the potential of Bitcoin to end the dollar system. This would weaken a number of political forces hostile to Islam and the Muslims, which would clearly be beneficial.

However, partly due to the justified reservations of many Islamic scholars surrounding cryptocurrencies, Muslims in general have been slow to adopt cryptocurrencies, and thus are in danger of getting stuck at the bottom of the pyramid, as it were.

As a side note, the comparison of Bitcoin to a pyramid scheme is again not a 100% match, because even if Muslims are the last ones to adopt it, it will still offer major advantages over the previous system. Muslims, on average, suffer from over double the inflation rate than the world average, so even if Bitcoin destroyed the value of their savings, one could argue these savings would have eventually lost their value anyway.

Still, the shift to a Bitcoin standard could end up worsening the situation of the Muslims, because of the fact that so many hold their wealth in national, fiat currencies. The first line of defense when facing this problem is spreading awareness about the fact that fiat currency is haram, and encouraging Muslims to store their wealth instead in trusted media such as gold, livestock, and social connections instead.

When weighing the harms and benefits of cryptocurrency, we have to also consider a criticism mainstream economists have invoked since the early days of Bitcoin. They argue that a deflationary currency cannot work as a currency, because of the tendency to hoarding.

In other words, they contend an economy can’t really be based on Bitcoin, because an innately deflationary currency would dampen economic activity. If people continue getting massive returns on Bitcoin, they have little incentive to invest and may even cut back their consumption to buy more Bitcoin.

Bitcoiners might argue that Bitcoin is more of a savings technology than a day-to-day currency, but none the less, the incentive is clear to hoard rather than invest or consume. This dynamic is perhaps even more pronounced when it comes to Proof of Stake currencies that deliberately incorporate mechanisms to encourage hoarding and drive up price.

So let’s summarize the arguments for and against Bitcoin being harmful to the Muslims.

Harms:

• Causing Muslims who don’t invest in it to lose wealth stored in fiat.
• Reducing economic activity by promoting hoarding.
• Causing late adopters to lose wealth to early adopters (ie. when forced to sell during market downswings).
• Possibly increasing demand for energy, which could drive up prices.

Benefits:

• Weakening the conventional world financial system which is used to strangle Muslim countries.
• Protecting the wealth of Muslims who do invest in Bitcoin.
• Capturing wealth from fiat held by individuals hostile to Islam.
• Improving the overall quality of Bitcoin infrastructure and ecosystem, yielding benefits to users, including Muslims.
• Possibly consuming energy that would otherwise be wasted, increasing profits for energy producers and possibly lowering costs for energy consumers.

If Bitcoin were to be introduced to a genuine Islamic economy, it might actually be reasonable for a ruler to prohibit it because of the tendency toward hoarding and its harmful effect on overall economic activity. Since it is being introduced to an interest-based, oppressive financial system, however, I tend to view it as a net positive, because rather than undermining an Islamic system, it could very well help to make space in which an Islamic system can grow and thrive.

And Allah knows best.

What to do with Profits from Ihtikar?

For the reasons mentioned above, it’s difficult to say that these profits are haram, but because of the various doubts surrounding ihtikar, it’s also difficult to say they are absolutely halal. Some cryptocurrencies have far more blatant hoarding schemes than Bitcoin.

Many Muslims have realized substantial gains from cryptocurrency investments, so what should a Muslim do if they realize they have been participating in a hoarding/price manipulation scheme?

If a person were to hold the view that Bitcoin or another currency is haram due to ihtikar, how would one determine how much of the profits they can benefit from? If you wanted to follow the absolute safest opinion, it would likely be to give profits earned from investments as sadaqa.

Measuring profits in fiat currency would also be unjust, because in many cases we hold these assets for years, and inflation would erode the value of the original sums invested.

So if a person felt that the most correct course of actions was to sell their cryptocurrency, the most logical course would probably be to look at when they purchased their cryptocurrency and for how much, and to calculate the amount of gold bullion the purchase would have cost at that time.

This amount could then be translated to the present equivalent in cryptocurrency, and all profit additional to this amount could be given to charitable causes that do not directly benefit the one giving. For someone who is afraid of consuming haram wealth, this is probably the safest course of action which still prevents theft by way of inflation.

To give away all of these profits, however, would be giving a wide margin of safety in trying to avoid any haram earnings. Particularly with Bitcoin, the investment helps to develop useful services, and it’s very difficult to imagine profiting from supporting the successful development of the Bitcoin ecosystem (which investors help to fund) as something clearly haram.

Still, the hoarding behavior also helps to fuel all of the negative aspects of cryptocurrency that have led many Muslim scholars to label it as haram — most notably maysir and gharar. This is what makes this issue so contentious.

There is no doubt that cryptocurrency falls in the grey area between matters that are clearly halal and clearly haram, but the fact that it is an alternative to fiat currency (which is clearly haram, but generally allowed due to necessity) makes it much more attractive than it would if it were an alternative to an established Islamic economy based upon the Quran and Sunnah. For this reason, it’s useful to distinguish between using cryptocurrency and engaging in ihtikar type behavior.

The Critical Importance of Differentiating Between Ihtikar and Using Cryptocurrencies

It’s important to distinguish here the difference between using a cryptocurrency, and trying to turn a profit by hoarding, driving up the price, and attracting other investors into a speculative frenzy. Great care should be taken with this distinction, because if we simply label cryptocurrencies as haram, we can end up driving Muslims away from a tremendous source of potential benefit.

Sending money by way of cryptocurrency, using them to protect wealth from oppressive governments, to finance activities where anonymity is required, or to establish trust in certain kinds of transactions must be considered as allowed due to necessity at the very least —especially if we are willing to extend that same understanding to fiat currency. All of these activities, as well as many others, are completely possible without engaging in the issues that scholars have objected to, such as gharar and maysir.

Weaponizing Currency Networks

A question which requires deep contemplation and discussion, however, is when it might be permissible to use the kind of game theoretical, engineered hoarding that currently characterizes so many cryptocurrencies. Can we consider this as a permissible means of conducting “raids” on hostile economic networks? Speculative attacks on fiat currencies are certainly deliberately used as a weapon of war in the modern era. Would it be permissible to try to align incentives in such a way as to capture value from other networks?

In a normal cryptocurrency scheme, price rises are engineered by incentivizing hoarding purely on the basis of expectation of future profits. There is still an element of belief here, however. Many people invest in Bitcoin due to ideological as well as economic motivations.

This is why the cryptocurrency ecosystem is a site of continuous ideological warfare. Bitcoin’s claim to continued dominance depends on the belief that it is the most secure, most decentralized, and most censorship-resistant network with the critical momentum to maintain dominance into the future.

This is a topic I’m hoping to discuss in my next post, which in sha Allah will be on the subject of what cryptocurrencies can teach us about iman (faith) and nifaq (hypocrisy).

Walhamdulillahi Rabbil ‘alamin.