Marhaban bikum...

18 April 2016

Sharia Law and Bitcoin


Certain areas of Islamic law deal specifically with money. The rules of charity and lending are stated clearly which is why “sharia compliant” banks and Zakat (charity) eligible charities exist. The bank activities are structured in such a way that they are consistent with the principles of Sharia. Islamic banking is therefore more correctly known as Sharia Compliant Finance.

It prohibits fees for loans as well as specific interest, known as Riba or usury. O.5% of the world’s assets are held in sharia compliant financial institutions.

Usury in Islam and the fundamentals of banking

The original word for Usury is Riba, meaning addition or excess. In Islam this refers directly to interest rates on loans. Therefore, sharia compliant banks do not charge interest rates.

Islam also prohibits investments in businesses that are haram or unlawful: liquor stores, gossip columns and pork shops are classified in this category.

Subsequently, conventional banking is not possible in Islam as excessive risk, uncertainty of the future and possible fraudulent behavior are all characteristics that go against their beliefs.

What is money according to Islam?
“The Gold Dinar and Silver Dirham” written by Imran Hosein answer this question by identifying six commodities which were used by the Prophet Muhammad.

  • Gold
  • Silver
  • Dates
  • Wheat
  • Barley
  • Salt

These goods had rules associated with money, but not so for other commodities such as livestock or even apples for that matter. The generations that followed Muhammad accepted some foreign coins, but rejected others and also used commodities such as sugar or Rice.

The question remains, what is money according to Islam and why are some goods acceptable as a means of exchange while others are not?

According to Islam, money has 6 traits

  • It is either a precious metal or food
  • It is freely available and abundant
  • It does not corrode or spoil
  • It has value
  • It is made valuable by God and exists in Creation
  • It functions as a medium of exchange

Creating wealth out of paper is therefore assuming divine prerogative and assigning value to it is therefore Shirk or idolatry. Paper has no intrinsic value by nature and neither is it a precious metal or food. Intrinsic value here means that the value is determined by factors such as demand and supply, rather than artificially assigned by people.

So, is it safe to assume that if a commodity satisfies 5 traits but is not a precious metal or food it can be used as money?

What is Bitcoin?
Bitcoin is a virtual currency circulated worldwide on a peer to peer network. A public ledger of all transactions called the block chain is what drives Bitcoin.

Bitcoin mining is the process of creating new coins.

Sharia Law and Bitcoin

Bitcoins can be freely exchanged by anyone without the need of a government or central bank, all that’s needed is access to the internet.

Does Bitcoin measure up to the Islamic definition of money?
Sunnah money as note above has six traits,

It is a precious metal or food.
No. but it can be argued that Bitcoins are mined just like gold or silver

Freely available and abundant
Yes. Anyone can mine Bitcoins if they invest in the necessary software, or acquire them by exchanging some other currency for them

It does not spoil
Compared to wheat and Barley, Bitcoins can be saved for decades.

It has value
A commodity is only worth what someone is willing to pay for it. Is Bitcoin valuable? There is no central planner when it comes to Bitcoin. It is backed by itself, which technically is what intrinsic value means. It’s design characteristics are what make it valuable; The potential to be transferred anywhere at the click of a button, its anonymity; these are the reasons why people find Bitcoin to be of value.

It exists in nature and is made valuable by Allah
According to Islam, Price is determined by supply and demand, as opposed to being dictated by a central planner. Early Muslims accepted copper as a means of exchange though it is not listed among the six used by Prophet Muhammad. However, they did not use the face value of copper coins, but traded it at the market price.

Bitcoins are mined from numbers. Numbers are independent from any individual imagination and are not objective. Bitcoin mining is the search through these naturally existing numbers to find some that satisfy a particular algorithm.

In the same way, mining of gold is done through naturally occurring rock in order to find the precious metal which satisfies a particular algorithm. Until it is mined and made useful, gold has no utility.

It is a medium of exchange
Bitcoin is used every day to trade, buy and sell and is divisible down to eight decimal places.

According to the rules of Islam, Bitcoin satisfies four rules undisputedly.

Comparison to paper money
Paper is not a precious metal or food. Its value deflates due to inflation and is not intrinsic, but comes from legal tender laws. Its price is set by central planners and is not determined by supply and demand.

This means that paper money only satisfies two of the 6 requirements.

Bitcoin should therefore be acceptable in the Muslim world and is definitely an alternative for Muslims looking for an alternative to paper money.

Copy from Posted on August 16, 2014 by Patrick van Ek
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