Are Cryptocurrencies Legal? How Do They Align with Islamic Banking and Finance Principles?

By Hata Team

11/6/20234 min read

Are cryptocurrencies legal?

Cryptocurrencies operate in a complex legal landscape, with regulations varying from one region to another. Some countries enthusiastically embrace cryptocurrencies as the future of finance, while others impose restrictions or outright bans.

In a nutshell, the legality of cryptocurrencies depends on your location. It's vital to understand the rules and regulations in your area before venturing into the world of digital currencies. To put it simply, before delving into cryptocurrencies, ensure you're well-versed in the laws in your region. This ensures a smooth and trouble-free journey in the exciting realm of digital finance.

How does cryptocurrency align with Islamic banking and finance principles?

Cryptocurrencies and Islamic finance have gained attention, and some questions arise about their compatibility with Islamic principles. Let's break it down:

  • Prohibition of interest (Riba): Islamic finance prohibits interest-based transactions. Cryptocurrencies, being decentralised and free from traditional banking, don't involve interest. So, they align with this Islamic finance principle.

  • Prohibition of uncertainty (Gharar): Islamic finance forbids uncertainty in transactions. While cryptocurrencies can be volatile, it's not inherent to the transactions themselves. If used openly and transparently, they may not contradict this Islamic finance principle.

  • Prohibition of gambling (Maysir): Islamic finance prohibits gambling. Cryptocurrencies' speculative nature is debated, with some seeing them as legitimate investments. The alignment with this principle is still a topic of debate.

  • Social and ethical responsibility: Islamic finance encourages investments in projects benefiting society and the environment. Cryptocurrencies themselves may not promote this, but they can be used for such purposes. Projects using cryptocurrencies for social and environmental initiatives can align with this principle.

  • Asset-backed financing: Islamic finance requires transactions to be asset-backed. While cryptocurrencies aren't inherently asset-backed, they can be used in such arrangements. For example, some entities issue cryptocurrencies backed by tangible assets like gold.

The compatibility of cryptocurrencies with Islamic finance principles is subject to interpretation and debate. While they don't inherently violate key principles, concerns exist about their speculative nature and lack of regulation. However, when used transparently and responsibly, cryptocurrencies can align with the core principles of Islamic finance.

Cryptocurrencies and Sharia Law

Sharia-compliant cryptocurrencies are digital currencies specifically designed to adhere to Islamic financial principles, particularly those prohibiting usury (riba) and uncertainty (gharar).

There are blockchain networks being developed in accordance with sharia compliance. For instance, the Haqq blockchain utilises Islamic Coin (ISLM) to address key principles in Islamic Finance. One of these principles is Zakat, requiring people to donate a portion of their wealth to those in need.

To implement this, 10% of newly minted coins on the network are sent to a decentralised autonomous organisation (DAO) named Evergreen DAO, which donates the funds to Islamic charities.

The Haqq blockchain also avoids promoting interest, gambling, casinos, or projects conflicting with Sharia ethics and values. The protocol received a Fatwa in 2022 for its efforts in constructing a sharia-compliant blockchain network.

Developing sharia-compliant cryptocurrencies entails creating a digital currency backed by tangible assets, such as gold or real estate, deemed permissible in Islamic law. The currency should operate on a transparent and secure blockchain, with transactions verified by a network of nodes.

Besides technical requirements, sharia-compliant cryptocurrencies must adhere to ethical and moral principles, encompassing fairness, transparency, and social responsibility. This means ensuring tokens are not used for illegal or unethical activities, like money laundering.

To ensure compliance with Islamic law standards, specialists in both Islamic finance and blockchain technology frequently collaborate. This collaboration may involve consulting with Islamic experts to ensure Sharia compliance and working alongside regulatory authorities to verify the legitimacy of the currency and its alignment with applicable regulations.

Sharia-compliant cryptocurrencies can introduce decentralisation to financial products in the Muslim world, especially in countries like Malaysia and Indonesia, where there is a significant demand for financial products aligning with Islamic law. Additionally, these cryptocurrencies can be used for everyday purposes, such as the payment of goods or services.

Expanding access to crypto

Cryptocurrencies that adhere to Sharia principles hold the potential to attract a broader user base, particularly in nations where Islam is the predominant religion. By conforming to Sharia guidelines, these cryptocurrencies can address apprehensions that religiously inclined investors might have regarding the compatibility of cryptocurrencies with their beliefs.

Mohammed AlKaff AlHashmi, co-founder of Islamic Coin, had stated that one of the possible advantages of Sharia-compliant cryptocurrencies is to enhance Muslims' access to financial services. Furthermore, cryptocurrency could serve as a means for Muslims who have been denied access to traditional banking to conduct financial transactions in accordance with their religious beliefs.

AlHashmi further stated: “Increased capital investment in Islamic banking could be a positive result. If cryptocurrencies can be made Sharia-compliant, they may attract Muslim investors seeking investments aligned with their religious principles. This could lead to further growth and expansion in the Islamic finance sector, benefiting the overall economy.”

As the financial landscape evolves and new technologies emerge, Muslim investors must be cautious in assessing the compatibility of these developments with the principles of Islamic finance and ensuring they align with the system's ethical and social objectives.


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