An Islamic Perspective on Bitcoin


In Islam money must have an intrinsic value and should function as a store of value in addition to medium of exchange and unit of account. During the blessed life of Prophet Mohammad (PBUH) Dinar (Gold coin) and Dirham (Silver coin) were mainly used as money. When these precious metals were in short supply wheat, barley, dates, and salt have been occasionally used to serve the functions of money. All these commodities have an intrinsic value that is the value of money is in the money so they have successfully functioned as a store of value. The modern fiat currency loses value when more and more of it is issued by central banks and other financial institution which is referred to as inflation. Inflation is a kind of legal theft which steals wealth from masses to the pockets of bankers. Fiat currency does not have any intrinsic value so it has failed to function as a store of value. Thus it cannot be considered as legal money according to Quran and hadith. In USA the real GDP from 1978 to 2011 has increased by 73% but during the same time period, the median income just grows by 5%. This is sufficient to explain the wealth transfer from pockets of masses to the vaults of bankers. So an anonymous developer by the name of “Satoshi Nakamoto” has developed the Bitcoin to counter this legal theft through inflation and central banking hegemony as it is a completely decentralized blockchain based cryptocurrency.
Whether Bitcoin is Sharia complaint or not is a serious concern for Muslim scholars around the world. Islam has got perfect solution to every problem; so of course, it will solve the puzzle of Bitcoin, provided we should have a sufficient understanding of cryptocurrencies and the monetary system of Islam. Bitcoin can be used for real-world transactions as it has the ability to serve as a medium of exchange and unit of account. Bitcoin must fulfil the two remaining functions that consists the store of value and intrinsic value to qualify as a form of legal money in Islam. Bitcoin can function as a store of value only when it is inflation proof. Inflation occurs when more and more money is pumped into the system as in the case of fiat currency. There is no upper limit to the amount of fiat currency that can be issued by banks on the behalf of the government. European central bank is printing about 60 billion Euros per month and the Federal Reserve which is the central bank of USA has printed trillions of dollars during last few years. The situation is not different in other countries of the world.
Any commodity like gold and silver derives value from scarcity and usefulness. The mining process of Bitcoin can generate only 21 million units of it, so it is a scarce entity. Bitcoins can be used in real-world transactions that indicate its usefulness. The current market capitalization of bitcoin is about $300 billion which is 40% the value of apple and 72% the value of Amazon. Bitcoin is less than 0.1% of value invested in all other major assets. This technically means that there is a lot of room for its growth. Moreover, the value for the upper limit to the cryptocurrencies is the value of all the fiat currencies of the world combined. All these factors, when combined with a limited quantity of 21 million Bitcoins, indicates that it is inflation proof and can effectively function as a store of value
As for as the intrinsic value of commodities like gold and silver is concerned, it comes from the intensive labour employed during the mining process. They are also malleable, fungible and non-perishable commodities. 14,000 KWH of electricity is required for mining a single bitcoin and currently, the mining computers across the globe are using more electricity than consumed by Pakistan and Ireland. So if we considered the value of the electricity it can be said that Bitcoin is actually an electronic unit of work stored somewhere on the hard drive of a computer. So, in my opinion, the condition for intrinsic value is also satisfied by the Bitcoin.
Another qualifying condition for money is Islam is its non-perishability. The blessed prophet Mohammad (PBUH) has prohibited the use of animals for money as they have a limited lifespan. So perishable goods are prohibited to be used as money in Islam. Bitcoin is a block chain based cryptocurrency that cannot be hacked or perished as the transactions are recorded on millions of computers simultaneously. The block chain network cannot be hacked with the available technology, but things can change with the development of working quantum computers. Governments cannot destroy Bitcoin even if they use every regulator, bureaucrat, politician and central bank around the world. If they smash copy after copy and destroy trillions of copies of Bitcoins as long as there is a single copy left on the block chain network and surely there will be, all the copies will be regenerated instantly and will come into existence billions and trillions of times again. It simply means that block chain is more powerful than all the governments of the world combined. Human history has never witnessed such a powerful tool as the block chain technology. So the criteria for non-perishability have been full filled by bitcoin.
Critiques of bitcoin have put forth some illogical claims to defame the cryptocurrency. They stated that bitcoin has been used for drug trafficking, murder, and other criminal activities. But there is not a single currency in the world that has not been used for criminal activities. So a criminal act cannot be blamed on any currency. They consider that anonymous transactions over a block chain network are untraceable, but it is not true as the transactions over a block chain network are completely traceable. Another point put forth by critiques is regarding the technical difficulty faced by old folks. Aged and illiterate people have always faced a difficulty while adopting a new technology. So it cannot be wholly blamed on Bitcoin. It is always the younger and qualified people who have to take the front whole adopting a new technology like bitcoin.
People purchase bitcoins for the same reasons as they buy gold and silver. They want to free themselves from the hegemony of central banks and governments. Gold and silver have served the needs of humanity from the last 5,000 years, but bitcoin is not going to last for a longer time period in the future as it may be replaced by a more advanced technology like a hashgraph. Bitcoin is also not going to replace the predatory international monetary and financial system because a very little number of people are using the bitcoin for actual transactions and rest are just using it for the speculative purposes. If bitcoin replaces the international monetary and financial system it will consume more electricity than the entire world produces which is practically impossible to sustain. So it has not lived up to the expectations of its developers and adopters, but the emerging technologies like hashgraph are about to fulfil the promises made by the Bitcoin. The central bankers, stock exchange thugs and other financiers are just like dinosaurs looking at an asteroid and are not realizing the upcoming disaster.
Now it is easy to derive a conclusion regarding the Islamic perspective of Bitcoin. It has successfully functioned as a medium of exchange, unit of account and most important the store of value. But there is some doubt regarding the speculative aspects, hoarding, and future of it. So Bitcoin is very close to being considered as a halal money in Islam. The emergence of block chain technology has shaken the pillars of the predatory international monetary system. Technologies like block chain are either going to make free humankind or it can enforce a complete slavery. There is no middle ground in-between these two extremes but we have a golden opportunity to choose the right side between completely decentralized cryptocurrencies or centrally controlled debt based international monetary system controlled by the same block chain or some other emerging technology like a hashgraph.
(The author, a researcher, can be reached at: [email protected])