Bitcoin ‘not ideal’ as long-term investment, says research paper

Islamic finance industry should not consider its use in exchange, unless there is a specific need until a regulated and transparent framework is established


The debate is raging in the Islamic finance fraternity on whether cryptocurrency and peer-to-peer payment systems like bitcoin are Shariah-compliant. Which way will the industry eventually turn on this question?

In a recently released 55-page research paper on the topic, it was concluded that bitcoin is “not ideal as a long-term investment, and neither should the Islamic finance industry consider its use in exchange, unless there is a specific need, until a regulated and transparent framework is established”.

“This paper is just based on opinion and expression on bitcoin. It is by no way a final statement or fatwa on this issue. This paper was written to engage Shariah scholars and Muslim economists to try and collectively reach clarity on this matter,” said Faraz Adam who authored the paper “Bitcoin: Shariah Compliant?”

Faraz, the director of Shariah advisory services provider Amanah Finance Consultancy Ltd, is also the founder of the fatwa portal. He had also served as a lecturer of Islamic studies at Darul Uloom Leicester in the UK for a couple of years.

The topic is far from concluded. One Shariah consultant felt that bitcoin, or cryptocurrency, is a reward for blockchain transactions validation and ledger update.

“Therefore, it is fully Shariah-compliant on the basis of ownership of an intellectual property right, as well as selling such a right in the market. However, just like the norms of con- ducting any other business, excessive risk which is gharar (uncertain) should not be taken. The Shariah rule concerning trading money is applicable to prevent riba (debt usury) and gharar,” he said in an entry in an Islamic finance discussion group.

The query is only natural as Islamic finance, with Shariah as its underpinning rule, prohibits certain activities such as acceptance of specific interest, which is considered riba, or investments in businesses which are contrary to Islamic acceptance such as alcohol.

Fierce Debate

Commenting in the same discussion group, another participant said: “Bitcoin is speculation because there are no asset under it that is performing any beneficial service for the people.”

The rise of cryptocurrencies like bitcoin and seemingly fast-paced developments in the area of blockchain have spilled over to the Islamic finance sector, with practitioners asking whether bitcoin and similar platforms are Shariah-compliant.

Among others, the Malaysian-based International Shariah Research Academy for Islamic Finance has also undertaken a research project on cryptocurrency, led by its researcher Dr Farrukh Habib.

Defining Money

In his paper, Faraz said he had used an inductive process by interpreting classical legal texts to identify the principles of defining money in Islamic law.

Three elements were identified for anything to be considered as money: Mal (wealth), taqawwum (legal value) and thamaniyyah (monetary usage), according to the paper.

The concept of mal was analysed; different definitions and understandings were presented. A famous definition for mal — “what is normally desired and can be stored up for the time of need”.

Two key criteria for mal were highlighted from this definition: “Desirability” and “storability”. Storability simply refers to something retrievable for use at a future date. Mean- while, desirability refers to something beneficial and lawful for use which people had an inclination to.

The second condition was taqawwum, which meant that the asset must be lawful. The final condition was thamaniyyah. Thamaniyyah refers to the potential of something to be a measure of value and be commonly used as a medium of exchange.

Upon analysing bitcoin to see if these criteria were met, the paper “arguably” noted that bitcoin was mal and has taqawwum.

However, it noted that bitcoin fails to fulfil the role of money, which has been described by Shariah, and thus cannot be considered to possess thamaniyyah, adding that this is ascertained, considering the associated risks of bitcoin with the maqasid al-Shariah (Islamic faith).

Other Fronts

Bitcoin was further assessed in terms of the principles of Islamic moral economy.

“A key theme and objective of Islamic moral economy is embedded financing and investments linked to the real economy. Bitcoin and cryptocurrency investments do not serve the real economy and do not promote real growth of an economy,” the paper noted.

Thus, based on the number of arguments presented, the paper concluded that bitcoin is “not ideal” as a long-term investment.

It also noted that investors are speculating on it, which in turn is creating its own endogenous risks.

“Speculation has led to bitcoin to behave more like popular stocks and less like currencies. All this activity and investment has left the reality of bitcoin vague and obscure in the conventional system, let alone in the Islamic finance industry. As a result, the question of what is money and whether bitcoin can be money is beginning to take centre stage in discussions,” it said.

The paper, however, also concluded that any return on bitcoin investments would be lawful and Shariah-compliant.