JAKARTA, Indonesia. - April 10, 2018 - As fluctuations and volatility continue to rock the cryptocurrency world, Blossom Finance has commissioned and released a working paper exploring the Islamic permissibility of bitcoin, cryptocurrency, and blockchain. The paper concludes that Bitcoin fully meets the definition of Islamic money under certain conditions and is generally permissible under Shariah. Blossom’s research also includes analysis of various legal opinions (fatawah) issued by prominent Islamic scholars on the topic. The research and development of the working paper was led by Mufti Muhammad Abu Bakar - Blossom’s internal Shariah advisor and Shariah compliance officer.
The working paper is publicly available at:
Clarity Needed: Is Bitcoin halal or haram?
Although interest, investment, and speculation in Bitcoin and cryptocurrency have continued to rocket upward, there remains growing confusion amongst Muslims - which make up nearly a quarter of the world’s population - as to whether Bitcoin and cryptocurrencies comply with Shariah law. Shariah law is a set of rules followed by Muslims in accordance with the guidelines of the Quran and teachings of the Prophet Muhammad, peace be upon him.
The Islamic finance sector, which offers financial products to Muslim individuals and Islamic institutions, adheres to Shariah law - clear understanding of cryptocurrency and blockchain continue to grow in importance as practitioners increasingly recognize that blockchain will transform every area of the global financial system in much the same way the internet transformed media and publishing.
“Contrary to popular myth, Shariah law is not single set of rules; it’s is a scholarly field subject to differing interpretations and opinions on various matters. Several recent fatawah issued by prominent Muslim scholars offered incomplete or contradictory opinions on the topic. With all the confusion out there, we wanted to offer clear guidance supported by solid research that benefits both laypeople and practitioners of Islamic finance” said Matthew J. Martin, CEO of Blossom Finance.
A fatwah (plural: fatawah) is a legal opinion issued by a Muslim scholar that expresses opinions, advice, and/or rulings on a certain topic.
“I’ve had so many people ask me ‘Is Bitcoin halal or haram?’, and the honest answer is ‘it depends’. Bitcoin is not just a currency, but it’s also a transaction and payment network. And blockchain itself is a whole category of technology with wide ranging applications” said Blossom CEO Matthew J. Martin.
Bitcoin Qualifies As Money
Bitcoin and similar cryptocurrencies fulfill the economic roles of money - acting as medium of exchange, unit of account, and store of value - and also gain status as Islamic money by being “customary money”. Shariah recognizes customary money as being anything that gains monetary status through wide acceptance in society or by government mandate.
In Germany, Bitcoin is recognized as a legal currency and therefore qualifies as Islamic money in Germany. In countries such as the US, Bitcoin lacks official legal monetary status but is accepted for payment at a variety of merchants, and therefore qualifies as Islamic customary money.
Rulings by Islamic scholars that claim Bitcoin is not permissible because it is subject to fluctuation and/or has the potential for use in illegal activities are not valid reasons under Shariah, since these factors are external to Bitcoin: the price of bitcoin is subject to supply and demand, just like commodities and fiat currencies, and the use of any lawful thing for an unlawful purpose cannot not make the thing itself unlawful.
National Law Supersedes Shariah Permissibility
Although Bitcoin’s properties and increasingly wide acceptance qualify it as Islamically permissible “customary money”, Bitcoin is not permissible as money in jurisdictions where government law or mandate forbids Bitcoin or prohibits Bitcoin’s use in payments.
The Republic of Indonesia issued clarification in January 2018 that all payments within Indonesia must be in Indonesian Rupiah, and therefore Bitcoin is not allowed to be used for payments. However, this clarification should not be seen as an anti-bitcoin stance - the same legal tender laws in Indonesia also forbid gold, silver, US Dollars, and Euros. It remains legal to buy and sell Bitcoin in Indonesia.
Volatility and Unclear “ICO”s Highly Uncertain, Not Advised
One of the key goals of Shariah is preservation and protection of wealth. Cryptocurrency markets also remain highly volatile. All investors should exercise extreme caution and never invest more money than they are willing and able to lose.
ICOs, or initial coin offerings, often lack clarity on: a) what are investors actually buying, and b) what are the investors’ rights. Many such offerings likely fall afoul of having gharar, meaning, excessive uncertainty, and therefore do not qualify as permissible Islamic investments.
Bitcoin/Blockchain Shares Core Principles With Shariah
Despite price volatility, Bitcoin’s underlying blockchain technology is highly aligned with the Shariah goal of reducing excessive uncertainty as well as the Shariah prohibition against fractional reserve banking. Its immediate primary application remains in payments and for exchange.
“Blockchain proves ownership of the asset - it proves you actually have the money you’re sending in a transaction. Conventional banking literally loans money into existence, and that is completely incompatible with the Shariah principles of money” said Blossom CEO Matthew J. Martin, referring to the Shariah rules of money that require all money to be exchanged “hand to hand” and never on a fractional reserve basis, as is the norm in the conventional (non-Islamic) global banking system.
“Blockchain gives you mathematical proof of ownership and that’s overall much more in line with the spirit of Islamic finance than any digital fiat money.”
Blossom’s working paper on the shariah considerations regarding bitcoin, cryptocurrency, and blockchain is available and open for comment at: blossomfinance.com/bitcoin
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