The reality of cryptocurrencies such as Bitcoin and the shari’ah rule regarding them

The following is the translation of an Ijtihad by Ustadh Abu Khaled al-Hejazi, please refer to the Arabic original for exact meanings.

Today, Bitcoin and other cryptocurrencies are proposed as alternate currency models compared to the traditional currencies such as the Dollar, Riyal and euro, albeit there are some fundamental differences between the two and the most important being that cryptocurrencies are a digital currency that exist only on the Internet without having a physical or tangible existence to it.

In addition to this there is no centralized organization that issues the currency and there is no real world asset that backs these currencies.

The users of these currencies can purchase the currencies through Cryptocurrency exchange websites on the internet and they can also convert these currencies back into traditional currencies.

Who issues cryptocurrencies?

Contrary to traditional currencies which are generally backed by assets such as gold or by other stronger currencies, cryptocurrencies are supported and generated by the users of the currency themselves. Anyone interested in creating a cryptocurrency requires an Internet connection attached to a computer where he can install the currency ‘mining’ software and he can then use the mining software to generate the currency. The ‘mining’ software utilizes the computational power of the computer to run an algorithm which upon successful completion creates a certain amount of the cryptocurrency. As the total amount of currency issued by the system increases, the algorithm becomes difficult hence leading to longer computation periods to generate the same amount of cryptocurrency.

Cryptocurrencies also have a limit to the total amount of currency that can be generated and this is to be able to maintain a controlled supply over the currency. For instance, the total number of bitcoins that can be mined is 21 Million BTC.

Where can Cryptocurrencies be used?

Cryptocurrencies can be used to trade on some ecommerce websites, in addition to this, they can be exchanged for physical currencies with people who are interested in purchasing them. Today cryptocurrencies have become a speculative trade with people investing millions in them because of their continuously increasing price. For instance, the cost of one of the more popular cryptocurrencies, Bitcoin was 14 USD in 2011 and it has increased manifold to reach 2800 USDin 2017.

The reality of Issuing Currencies & its shari Hukm

Each State adopts a specific unit of something, making it the basis to which goods and labour are related and by which they are measured. It coins the unit in a specific form and fashion which is specific to it along with a fixed weight and value. Societies have, from the earliest times, made this measuring unit from things with intrinsic value. They adopted gold and silver as a measure to which all goods and labour are related, because gold and silver have intrinsic value in the world at large. They have issued currency with a specific form and modeas well as a specific fixed weight and value.

The state which adopts gold or silver units as the basis for its currency follows the metallic system. If it makes the gold unit the basis for its currency which it issues as currency for itself, then it follows the gold standard. If it makes the silver unit the basis of its currency which it issues, then it follows the silver standard. If it makes both the gold and silver unit together as the basis for its currency, then it follows the gold and silver standard or the bimetallic standard.

As for the state which adopts paper currency such that goods and labour are exchanged with it, it follows the paper standard. If the paper it prints, as money and currency is representative of gold or silver, the state follows the representative paper currency standard. If the paper it prints and makes as its currency has gold or silver backing equal to a specific proportion of its value, it follows the paper currency standard of the secured type.

If the currency it prints, issues and makes as its money and currency is substitutable for gold or silver, nor backed by them, the country is considered to be following the compulsory paper currency or fiat standard.

The currency which was accepted and implemented by the Prophet (saw) was the Gold and silver currency i.e. Dirhams and Dinars. This Islamic currency fulfilled three important conditions.