The global cryptocurrency trading market was around USD535bn in 2017, according to Zion Market Research, although values dropped significantly in 2018 following a crypto-crash, it was back up to USD1.5 trillion in 2021. The market is expected to grow at around 6.2% up to 2024.

Currently 1.9bn of the world’s population is Muslim, a number expected to grow to over a quarter of the world’s population by 2030.

The crypto market has been a growing phenomenon since Bitcoin emerged in 2009 and was replicated by a plethora of other blockchain-backed cryptocurrencies. Crypto was enthusiastically adopted by scores of tech-savvy, often young people who used it both as a transactional asset, a store of wealth and a speculative investment.

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The attraction of Bitcoin, Ethereum, and other digital currencies are that they operate independently of central banks and governments. They rely on encryption techniques to regulate the generation of units of currency and verify the transfer of funds, something discussed on a recent podcast with Alan Vey of Aventus Network.

Some analysts believe that cryptocurrency will become an alternative, almost shadow, global currency that will run alongside regulated, fiat currency. Governments have taken note, and various nations are collaborating on the development of a Central Bank Digital Currency.

Rapid growth of Islamic finance

The Islamic Finance market, in the modern sense, went through a renaissance starting in the 1950s with the foundation of a bank in Pakistan that complied with Islamic principles. The experiment was repeated in rural Egypt, bringing financial services to the unbanked.

In the 1970, with the rapid rise in wealth in the Persian Gulf, the Islamic banking sector experienced a spectacular expansion, driven by the foundation of the Islamic Development Bank and is expected to grow to USD3.7 trillion by 2024.

Both markets represent big numbers, and in the Venn Diagram of global finance eventually Islamic Finance will cross into the territory of cryptocurrency and vice versa. However, the issue of whether cryptocurrency is permissible under Islamic Finance’s strict rules is a hot topic.

Trading Crypto Haram vs Halal

Islamic finance is a financial system that runs on an interpretation of Islamic Law, or Shari’ah. Some activities are ‘permissible’ or ‘Halal’, and others are ‘prohibited’ or ‘Haram’. Shari’ah law is based on the Q’ran, the Sunnah, or teachings and practices of Prophet Mohammed, and the consensus of Islamic scholars. It is a comprehensive system of laws that covers all aspects of life, including economics and finance.

The big no-no’s in Islamic finance are riba and gharar. Riba is interest and in Islamic finance the charging or paying of interest is deemed Haram. This is because riba is considered exploitative and leads to inequality in society.

Islamic finance also proscribes certain activities and businesses that engage in these activities, including the production and sale of alcohol; the production and sale of pork products; gambling, tobacco and pornography are all deemed Haram.

The other main pillar of Islamic finance is the prohibition of gharar, or uncertainty. Islamic finance prohibits investments that involve excessive uncertainty or risk. This is because gharar can lead to gambling and speculation, which is Haram.

Uncertainty

And this is where cryptocurrency hits a wall in terms of acceptability to Muslims, as cryptocurrency is considered to be highly speculative and volatile. Given its speculative nature – it has evolved from a transactional vehicle and store of wealth, like gold, to a speculative ‘money-making’ opportunity – crypto in its current form falls foul of the gharar prohibitions under Shari’ah. Potentially CBDCs could be different as the value of the digital currency is backed by the wealth and assets of a nation.

Again, as with many of the issues in financial markets over the last few decades, including short-selling, derivates, hedging, gearing and leverage, it depends which scholar you ask as to what answer you can expect as to the legality under Shari’ah of various financial structures, transactions and products. And the Islamic finance has proved time and again that it can find mechanisms to adapt and engineer existing financial products that give transactions a veneer of Shari’ah compliance.

Proponents of crypto in the Islamic finance marketplace say crypto is Halal as the currencies serve as a transactional medium of exchange for the purposes of purchasing legitimate goods and services. They also cite crypto’s ability to increase financial inclusion and reduce corruption and fraud. They also say that crypto’s decentralized nature decouples users from governments and inter-state actors that may or may not have the benefit of the Ummah (or Muslim population) to heart and may or may not be involved in corrupt or illegal activities.

However, scholars on the other side of the debate argue crypto is Haram as it doesn’t have intrinsic value and is not backed up by real, physical assets. They also say that although crypto does promote financial inclusion and help fight fraud, it is also a medium for illegal activity including money laundering, drug trafficking and terrorism financing due to its face-less, anonymous shadowy nature.

The issue of gharar

Supporters in the Islamic finance sector try to dance around the gharar-issue, claiming that although crypto can wildly fluctuate in value, it is no different in terms of uncertainty and risk to other Halal transactions in commodities, equities and fiat currency.

The biggest stick that opponents in the Islamic finance industry have to beat crypto is gharar, and if you’ve been a crypto investor over the years, you’ll have experienced the rollercoaster ride various coins have taken. They say that crypto is undeniably a speculative asset, verging on spinning a roulette wheel or turning a card over in a casino.

It comes down to an issue of interpretation. The Islamic finance industry is a broad church, and various different schools of Islamic jurisprudence all interpret Shari’ah in slightly different ways. However, the issue of gharar and fact that most cryptocurrencies aren’t asset-backed is a major obstacle to the wholesale adoption of cryptocurrencies in Islamic finance.

Islamic Forex Accounts

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