An Islamic scholar recently considered bitcoin Sharia law compliant, which may potentially open the cryptocurrency market to the world’s Muslim population of over 1.6 billion.
Islam has strict definitions concerning money, and when a currency doesn’t meet those definitions it is considered Haram – forbidden. Commodities considered to have inherent value like gold are favored by Sharia law, and for a digital or paper currency to be recognized as a valid payment method, it needs to be backed by a commodity at a fixed exchange rate.
Of course, who’s to say what has inherent value? Sharia law also allows “customary money”, currency that has become accepted as a payment method through social or government mandate. This is the clause that allows Bitcoin to be considered as a permitted (Halal) method of payment.
According to Mufti Muhammad Abu Bakar, a Sharia adviser and compliance officer at Blossom Finance in Jakarta, Bitcoin can be Halal in certain cases.
Bakar’s paper reads:
“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.”
These fall under the government and social mandate definitions respectively. Of course, in nations where Bitcoin is neither adopted by merchants or supported by the government, this does not apply and Bitcoin is considered Haram.
Interestingly, blockchain is actually more Halal (permissible) than banking in many ways. “Loaning money into existence”, as Bakar puts it, is completely forbidden and falls under the definition of usury – loaning at high interest rates.
Fractional reserve banking is therefore non-compliant with Sharia law. Blockchain, on the other hand, does not work like this – the assets and their owners are at all times trackable in the ledger, making it amenable to Sharia law scholars.
A major conference of Islamic scholars was held on April 9 to discuss cryptocurrencies, a sign that the issue of crypto in the massive Islamic banking world is one that can no longer be ignored.
Being considered halal may have helped bitcoin rally, as it is currently up over 10 percent in the last 24-hour period, and as covered recently breached the $8,000 mark before falling back to $7,700.