Can I Invest in Bitcoin or Cryptocurrency?

One of the most common economic questions Muslim scholars get asked is whether bitcoin is halal. Although bitcoin was introduced in January 2009, most people had never heard of it until 2017. That year, the price of one bitcoin went from $1,000 in January to $11,000 in December. It clearly caught the attention of both investors and gamblers.

Despite its recent popularity, most people don’t understand what cryptocurrency really is or why it exists. Some are skeptical thinking it is a fad that will go away soon. Others think it is the future currency of the world that will displace all other currencies. Leaving the lovers and haters aside, cryptocurrency must be properly understood before deciding whether it is haram or halal to use.

The idea of a digital currency is not new. Paypal was launched in 1998 and is an extremely popular way to pay for things. However, it requires a third party like Visa, Mastercard, or Western Union to process transactions. Buying Microsoft or Apple points in their online store is a type of digital currency as well, but it is backed by only one company. Cryptocurrency is different because it is decentralized. That means there is no third party. No one entity controls it or can shut it down.

The idea of a decentralized currency has been around for a long time, but it became much more popular after the 2008 financial meltdown. The biggest problem in establishing it was coming up with a solution to the ‘double spending problem’. For example, Paypal is a giant company that keeps financial records in the form of a ledger. When I send you money, they deduct it from my account, credit it to your account, and verify the transaction. If there is no company like Paypal and no national bank, then who will keep a record of the transactions?

This problem was solved by Satoshi Nakamoto (which may be a fake name) in a paper he wrote in 2008. He came up with the idea of a blockchain ledger. Rather than keeping the transaction records with one person or entity, he figured out a way to use encryption to regulate the generation of a digital currency and verify the transfer of funds without the need for any central bank. Without getting into the technical details about how it works, the first bitcoin was created on Jan 3, 2009. As of January 2021 there were 8,257 different cryptocurrencies that work in a similar, but not identical, way.

There are many benefits to cryptocurrency. First, there are reduced transaction fees since the middleman is cut out of the transaction and there is no need for a bank. This has the potential to help poor people transfer money. Approximately $400 billion is transferred annually from migrants to friends and families in other countries. The average transaction cost is a hefty nine percent. By being able to skip companies like Western Union and MoneyGram, much more money can end up in the hands of those who need every penny they can get. Also, the transfer is instant so there is no delay, and no conversion of currency is required. Since there is already a lack of traditional branch banking in poverty stricken areas, and half the world’s population do not have bank accounts, digital currency has the ability to provide much good in the world.

Another major benefit of cryptocurrency is to protect people from government manipulation and mismanagement of currency. The hyperinflation which occurred in Zimbabwe in 2008 is a perfect example. At its peak, the inflation was estimated at 79.6 billion percent month-on-month. At the beginning of a year, Zimbabwe had printed a 10-dollar bill, and within 12 months, it had printed a 100-billion-dollar bill. The currency became worthless. Cryptocurrency would have been an alternative for people to not lose the value of their money when there was no trust in the government currency.

This brings us to the question of whether cryptocurrency is halal or not. There is a general principle in Islamic Law that the default for economic transactions is permissibility. That means everything is halal unless there is some clear evidence that indicates it is haram. Despite that, several scholars such as the Turkish Religious Ministry (Diyanet) in 2017, the Grand Mufti of Egypt in 2018, and Mufi Faraz Adam in 2017 of Amana Finance Consultancy declared it haram. Among their arguments were that it has a high risk of fraud since there is no centralized surveillance for the currency, it can be used to fund terrorism, it makes money laundering easier, and is highly volatile. None of these reasons intrinsically cause it to be forbidden in Islam. One of the stronger arguments is that people primarily use cryptocurrency for speculation and not as a currency. Nonetheless, speculation occurs on many other currencies. According to fundera.com in 2021 about 15,174 businesses worldwide accept bitcoin. This means that even though it is mostly bought for speculation, it is used as a currency.

So, in a nutshell, cryptocurrency such as bitcoin is halal to use as a currency. The last, and perhaps most important, point is whether speculating on a currency is halal or haram. Currency exchange is permissible if the exchanger has a good reason to think the currency will increase in value based on some analysis that does not resemble the psychology of gambling. So, for example, people in Venezuela are using US dollars through the service Zelle in order to avoid the worthless Venezuelan bolivar currency. If they used cryptocurrency instead, it would not resemble the psychology of gambling in any way whatsoever. Another example is a twenty year old American college student who sees that cryptocurrency fluctuates massively and tries to cash in on the upward momentum. He purchases one-tenth of a bitcoin hoping to sell it once the value goes up by 10%. This is clear speculation on currency and is akin to gambling, so it is haram. So whether or not it is halal for an investor to purchase cryptocurrency depends on their intention and some legitimate analysis of why cryptocurrency is a better store of value than their local currency.

Shaykh Mustafa Umar

President – California Islamic University, Executive Member of the Fiqh Council of North America

Is an Interest-Bearing Loan with a Guarantee of Forgiveness Permissible?

Short Answer

If it is almost certain that you will be able to meet all the requirements to have the loan forgiven, then it is permissible to take such a loan. If only part of the loan is guaranteed to be forgiven, then it is allowed as long as you consider the conditions of the loan upfront and are sure that you will not be charged more than the total amount you were loaned. If such a loan forgives the principal but requires you to pay the interest, it is still permissible, since it is not functionally equivalent to an interest-bearing loan.

Detailed Answer

The United States government passed the Coronavirus Aid, Relief, and Economic Security Act [CARES Act] on March 26, 2020 which allocated $2 trillion to help the country recover from the effects of the novel Coronavirus Disease 2019 [COVID-19]. This act includes loans for major industries and small businesses impacted by the coronavirus. The monetary aid by the government is given in the form of “loans” which are forgiven if certain requirements are met. As an example, here is a summary of one clause which mentions the conditions of loan forgiveness: “Any portion of the Section 7(a) loan used to maintain payroll, provided workers stay employed through to the end of June 2020, will be forgiven in an amount equal to the sum of the following costs incurred and payments made during the eight-week period beginning on the date of the origination of a covered loan: (i) payroll costs; (ii) interest payments on mortgages; (iii) covered rent obligations; and (iv) covered utility payments.”[1]

These loans were actually intended to function like grants or gifts to eligible institutions. The reason they are structured as loans is so that they can be easily and quickly administered through existing financial institutions and already-established processes: FDIC banks, credit unions, etc.[2] For this reason, the interest may still be due on these “loans” even when the principal is forgiven.

An important principle in Islamic Law is captured by the legal maxim: “the consideration in contracts is the functional meaning, not the wording” [al-ʿibrah fī l-uqūd li l-maʿānī lā li l-alfāẓ]. For example, if someone says, “I will give you this gift if you give me that gift”, the contract is viewed as a type of sale transaction. Even though the word ‘gift’ is used, since two items are being exchanged, it is functionally a sale contract and not a gift at all. This same principle is applied to a loan contract that has a guarantee of forgiveness. It is normally unlawful for a Muslim to enter into a contract that stipulates interest on a loan. However, exceptions to the rule can be made when there is an extremely high probability that this interest will not be incurred. The reason for the exception is that such a contract would in reality be functionally equivalent to an interest-free loan.

An example of such an exception is credit cards, which are permissible to use as long as certain conditions are met. The majority of contemporary Muslim scholars have allowed Muslims to sign up for and use credit cards if they can ensure they will pay off their balance before any interest accrues.[3]

As mentioned above, Islam considers how a contract functions practically, and not the words that are used in it. As Professor Mahmoud El-Gamal pointed out, “the term ‘interest’, as used in today’s economic and practical language, extends beyond fixed rates of return on loans in-kind”. Therefore, he drives home the point that “not all interest is the forbidden ribā”. An example of this is a modern car lease, a portion of which may be called “interest”, but it is functionally and practically considered a portion of the lease rental amount and is not a type of forbidden ribā. Another example would be selling an item [using a murābaḥah contract] with a higher deferred price than the immediate cash price and labeling the difference between the two profits “interest” — again, this is not considered forbidden ribā. The term interest is used in conventional finance to describe a portion of the profit in both of these examples. However this type of “interest” is Islamically permissible since it is not additional money on a monetary loan.[4]

A loan, with an almost guaranteed loan forgiveness stipulation, would fall in a similar category. Even if the loan required interest to be paid, but the principal would be forgiven, it would not truly function as an interest-bearing loan.

Therefore, since both the underlying intent and the functional reality of such a loan are not like an interest-bearing loan, it would be permissible to take as long as these conditions are almost certain to be met.

[Shaykh] Mustafa Umar and [Shaykh] Umer Khan

Anaheim, CA – April 2, 2020

[1] https://www.reedsmith.com/en/perspectives/2020/03/cares-act-overview

[2] According to Dr William Kindred Winecoff, Professor at Indiana University Bloomington

[3] http://www.daruliftaa.com/node/6139?txt_QuestionID

[4] Mahmoud El-Gamal, An Economic Explication of the Prohibition of Ribā in Classical Islamic Jurisprudence (Islamic Economic Studies, 2001, vol. 08-2, 29-58)