Incorporating Virtual Currencies In Islamic Finance

Cryptocurrencies represent a value that can be transacted or traded digitally. Although they have not attained a legal tender status anywhere, they operate as a medium of exchange and also as a store of value. The market capitalization of the virtual currencies has grown to about $400 billion. Over 1500 coins have been developed with Bitcoin being the most popular with a market capitalization of about $150 billion. It is, therefore, important to explore whether the new currencies can create another medium of exchange that can be reconciled in Islamic finance.

Different Interpretations Of Islamic Law

There have been different views on how Cryptocurrencies can be used according to the Islamic faith, especially among the unbanked and to facilitate cross-border trade. Various advocates and observers disagree when it comes to categorizing what is required (Halal) and what is not (Haram) depending on their interpretation of Islamic Law (Shari’ah). However, there is a general consensus among Islamic finance scholars that transactions should include movement of real products and services.

Different Islamic Finance Scholars View Cryptocurrencies Differently

When it comes to Cryptocurrencies, there are different schools of thought in the Islamic world. There are some who view the digital assets as speculative tools, hence non-Shari’ah compliant. To them, the currencies should not be treated as Mâl (wealth). Others don’t see the virtual currencies as money while others say they are.

For anything to be considered as Mâl, it must have two feature namely desirability and storability. Since their introduction a few years ago, the demand of Cryptocurrencies has increased tremendously leading to an increase in their prices. This indicates their desirability. The virtual currencies are also stored on the shared ledgers hence they fulfill the storability feature of Mâl.

For Cryptocurrency to be considered as Mâl, it should have a retrievable economic value. Technological development has led to the creation of digital assets that have an economic value that is retrievable differently from the classical assets. Consequently, Cryptocurrencies have a value that is both transferable and usable. Hence, Cryptocurrencies can be seen as a digital asset and not money. They are a currency.

However, there are some scholars who argue Cryptocurrencies are not Mâl and lack both the function and utility. They are of the opinion that the virtual currencies are just numbers that keep fluctuating because of speculation. They, therefore, conclude that they are Shari’ah non-compliant as they are used for maysir (speculation).

To have a better understanding of Cryptocurrencies, it is advisable to consider their benefits and uses and compare them with those of derivatives and other financial assets. Cryptocurrencies are used to trade. They are also assets, unlike the financial assets that are only representations of price fluctuation of the assets they represent.

Why Some Scholars Consider Cryptocurrencies As Both Money And Currency

According to Shari’ah, anything that is both money and currency must have Thamaniyyah. This is a unit account and an independent standard of value. The value of Cryptocurrencies depends on that of fiat currencies hence they don’t have an independent value. Money should also be a stabilizer and Cryptocurrencies keep changing thereby failing this test. Cryptocurrencies cannot be used to bring stability.

Regardless of the different opinions, Cryptocurrencies and fiat currencies are similar in certain ways. Whereas the fiat currencies rely on government backing to get value, Cryptocurrencies rely on the demand and supply of the concept and the trust of people. Electronic money is controlled by a centralized system hence Cryptocurrencies cannot be considered as one.

Given the diverse views about Cryptocurrencies, it is challenging to identify their right place in Islamic law. However, they can be used to create another medium of exchange to compete with the Riba-backed central bank.