Dr. Abdulazeem Abozaid, Associate Professor of Islamic Finance at QF member Hamad Bin Khalifa University’s College of Islamic Studies, on why the likes of Bitcoin may not pass the validity test as a Shariah currency.
Both Islamic and conventional economics share the same view with regard to the criteria of a valid currency and its perceived economic functions. From both perspectives, despite cryptocurrencies being an innovative mode of payment and a trading instrument, they still do not qualify as being a legal tender, simply because they fail to possess the features of a currency - being a means of exchange, a unit of account, and a store of value.
Bitcoin is still lacking the necessary characteristics of a valid currency in view of its limited acceptance, some security-related issues, and its high volatility in terms of value
Although these three features exist in cryptocurrencies to some extent, they are not evident or entrenched to the extent that cryptocurrencies would qualify as becoming valid currencies. It is possible that, in the future, cryptocurrencies may evolve to successfully attain full currency status, or even replace conventional currencies, but this may take some time and require the appropriate governance to regulate them and subject them to scrutiny and control to avoid the high risks and concerns currently associated with dealing in them. According to the Bank of International Settlements - which is considered the central bank for all central banks, “While digital currencies are a revolutionary tool, they remain far too risky to be used as legal tender any time soon”.
With Bitcoin specifically, it has excelled and superseded other cryptocurrencies, but most likely as a speculative trading tool more than anything else. However, Bitcoin is still lacking the necessary characteristics of a valid currency in view of its limited acceptance, some security-related issues, and its high volatility in terms of value. Starting with a value far below US$1, Bitcoin appreciated in 2017 from US$1,000 to US$20,000, and towards the end of the year it lost around 50 percent of its value. In March this year, it reached US$61,259 – after falling to US$4,500 in 2020.
Nevertheless, Bitcoin may have the potential to evolve and acquire the features of a valid global currency if the world authorities recognize it unconditionally and subject it to the necessary regulations and controls.
There is no Shariah objection, in principle, to the creation of a new currency, such as a digital currency or a cryptocurrency, as long as it meets the Shariah conditions of a valid currency
Generally, to sum up the Shariah stance on cryptocurrencies as I understand it, the following points can be highlighted:
Trading in cryptocurrencies is highly risky given their high volatility. This makes investing in them a gambling-like business, which in turn calls for Shariah objection
Cryptocurrencies still do not possess the necessary Shariah characteristics of a valid currency, and the high risks associated with their trading give it a gambling nature. It is only if those issues are resolved that the Shariah may recognize them as valid currencies, similar to what it did to paper (fiat) money.
Dr. Abdulazeem Abozaid holds a PhD and Master’s degree in Islamic financial law. He has conducted many workshops and training courses at Islamic banks, financial institutions and universities, has worked in Islamic banks, and has released more than 70 publications in Islamic finance. He is currently an Associate Professor of Islamic Finance at Qatar Foundation’s Hamad Bin Khalifa University.