Buying and selling virtual currencies is not compatible with religion at this time on the fact that their valuation is open to speculation, says Diyanet

by HABHAJAN SINGH / pic by BLOOMBERG

The Turkish religious authorities have ruled that bitcoin, the cryptocurrency that is gaining strength on the global plane, is not in accordance with Islam at this point of time.

This makes the Turkish government one of the first countries to rule out the digital currency from the Islamic perspective, as most nations, Malaysia included, take a wait-andsee attitude as they pursue more detailed study on the emerging phenomenon that has certainly captured the imaginations of the investing community, as it keeps breaking new grounds in terms of price.

It is not clear if the pronouncement by Turkey’s Directorate of Religious Affairs, known as Diyanet, will immediately impact the trading of the cryptocurrency in the nation.

“Buying and selling virtual currencies is not compatible with religion at this time. Because of the fact that their valuation is open to speculation, they can be easily used in illegal activities like money laundering and they are not under the state’s audit and surveillance,” according to Diyanet, as quoted by local newspapers.

In its response to a question on purchasing digital currencies such as bitcoin and ethereum for investment purposes, Diyanet noted that digital currencies are not under a central authority or under the guarantee of any state or financial institution, according to a report at Hurriyet Daily News.

Diyanet is now led by Prof Dr Ali Erbas as its president.

In an earlier development, Turkish central bank chief Murat Cetinkaya was quoted by local Turkish media as saying that cryptocurrencies like bitcoin could “contribute to financial stability”, though he had earlier cautioned that the nation’s current financial law does not apply to bitcoin.

Earlier this month, according to another media portal, Turkish police had captured a gang who had extorted 450 bitcoins, worth around US$3.3 million (RM13.5 million) at the time, from a wealthy businessman, forcing him to transfer them from his laptop and hand over his online banking passwords. The gang targeted him because he showed off his flashy lifestyle on social media, it said.

Since its inception in 2009, central banks around the world are still trying to grapple with the advent of bitcoin and other such digital currencies.

In one recent Bloomberg report, it noted that the guardians of the global economy have two sets of issues to address. First is what to do, if anything, about the emergence and growth of the private crypto

currencies that are grabbing more and more attention — with bitcoin climbing above US$10,000. The second question is whether to issue official versions.

How It Works

The above predicament for central bankers is simply to get a handle on the currency, which exists only in the digital form and tries to bypass the financial network.

In a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”, attributed to Satoshi Nakamoto who is the supposed founder of bitcoin, it said a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another, without going through a financial institution.

It added: “Digital signatures provide part of the solution, but the main benefits are lost, if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem, using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that can not be changed without redoing the proof-of-work.”

The document noted that the longest chain not only serves as a proof of the sequence of events witnessed, but as a proof that it came from the largest pool of central processing unit (CPU) power.

“As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best-effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as a proof of what happened while they were gone,” it said.

Shariah Debate

That explains the technology. But how is it deployed and on what purpose? On the Islamic finance front, the debate is raging as to whether cryptocurrency and peer-to-peer payment systems like bitcoin are Shariah-compliant.

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 Darul Fiqh fatwa portal. He also served as a lecturer of Islamic studies at the UK’s Darul Uloom Leicester for a couple of years.

The topic is far from concluded. One Shariah consultant felt that bitcoin 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 conducting any other businesses, 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 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.

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