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Examining the Compliance of Cryptocurrencies with the Principles of Sunni Islamic Sharia

The video “Sharia-Compliant Crypto: The Next $200 Billion Market?” published on the Coin Bureau YouTube channel, concisely discusses the opening of Islamic Sharia compliance doors to the blockchain and cryptocurrency industry. In this article, with a look at this video, we aim to discuss the role of Sharia among Sunni Muslims (specifically focusing on Shafi’i jurisprudence, as most of the countries mentioned in this text follow the Shafi’i school) in entering the realm of digital assets. However, it is important to note that the topics discussed contain many details, which are covered here from a general perspective and in a very concise manner; therefore, it may contain inaccuracies from the viewpoint of Sharia and jurisprudence experts.

Sharia: The Clear Path of Life

Sharia is an inseparable aspect of Islam and can be understood as a comprehensive way of life based on God’s will for humanity. This framework provides an ideal for Muslims to lead a complete and devout life while strengthening their closeness to God. The term “Sharia” itself translates to “the clear path.”

However, it should be understood that the concept of Sharia among Muslims is not entirely synonymous with “Sharia in Islam.” Instead, Sharia represents the interpretation of the high values of God, whereas what is considered Islamic Sharia is derived from these interpretations. Since Sharia varies depending on how it is interpreted, this diversity affects the creation of specific Islamic laws. To clarify, consider an example: The Quran explicitly prohibits usury, but within the framework of Sharia, which has been structured through the jurisprudential efforts of scholars for contemporary Muslims, various aspects and surrounding issues have been considered that are tied to emerging events and challenges throughout history. However, in the mind of a devout Muslim, usury is something beyond legal rulings and jurisprudence, where the concept of “waging war against God” is central. Thus, Sharia is regarded as a perspective and way of life for Muslims, embodying a broader concept of purpose, values, and commitment to human welfare.

In general, Sharia is established to protect six fundamental universal principles of human well-being: life, intellect, religion, honor, family, and wealth. For instance, the principle of intellect in Islamic culture prohibits alcoholic beverages because they clearly impair judgment and decision-making abilities. Similarly, adultery is forbidden as it undermines the principle of family. These same principles also relate the subject of Sharia to digital currency. This connection is tied to the final principle, which is wealth. To understand why adherence to Sharia makes cryptocurrency a complex subject, it is necessary to delve into the world of Islamic finance.

Sunni Sharia and Finance

Islamic finance, sometimes referred to as Islamic banking, encompasses financial activities that comply with the principles of Sharia. In fact, Islamic banking should be considered a distinct industry because conventional banking often involves practices that are deemed unethical according to Sharia and are labeled “haram” (forbidden).

Sharia and Finance

The most well-known rule in Islamic finance is the prohibition of usury which is often understood as the collection of interest on loans. Simply put, making a pure profit from money and even assets is forbidden. This principle states that wealth is a blessing from God and has no intrinsic value and should not be exploited or hoarded. This concept is referred to as usury.

Before proceeding further, it is appropriate to broadly discuss the concept of usury among Sunnis and, more specifically, within Shafi’i jurisprudence. Fundamentally, the philosophy of forbidding any form of usury is more or less the same: “creating enmity among people, harming the spirit of cooperation, establishing a privileged class without public benefit, exploitation, and oppression of the weak, etc.”

usury has two main categories: usury in debt and usury in trade. Usury in debt is further divided into usury in loans and jahiliyeh usury. Usury in loans is explicitly mentioned in the Quran and refers to demanding an extra amount as interest or in another form on a borrowed loan. Jahiliyeh usury refers to requesting an additional amount due to a delay in debt repayment or in case of bankruptcy and failure of the purpose for which the loan was taken.

Usury in trade is divided into two types: fazl and nesie, which pertain to transactions and sales between individuals. Fazl usury refers to excessive profit in a trade. For example, if someone stipulates that an item worth ten gold coins must be sold to a specific person for twelve coins with the condition that the sale must be at a higher price. If a penalty or additional charge is imposed due to a delay in payment or delivery of goods or services, it constitutes nesie usury. According to a hadith from the Prophet Muhammad (PBUH), which Sunnis strongly adhere to, six items—gold, silver, wheat, barley, dates, and salt—are included in trade or any kind of transaction. However, many scholars, depending on the circumstances of the time, classify any increase, whether money for money, food for food, or transactions backed by such principles, in this category.

Another significant issue here is that in Islamic finance, all transactions must be backed by tangible assets, such as gold, and must pursue a socially beneficial objective. These factors are thoroughly evaluated before permitting any form of borrowing, trade, or credit allocation, ensuring complete transparency between borrower and lender. Based on this principle, Islamic banks in most Muslim countries, instead of directly lending money, use these funds to purchase a primary asset or product and then sell it at a higher price to the borrower, creating a halal (permissible) profit.

For example, suppose you want to borrow ten million tomans for a washing machine. In conventional finance, you would have to commit to repaying eleven million tomans, including interest. This process is considered haram because the bank profits regardless of the financial pressure it may impose on the borrower.

In Islamic finance, the bank purchases the washing machine and, thus, owns it. The borrower then buys the appliance from the bank either in installments at a fixed rate or at an agreed price higher than the market value. This transaction is considered halal due to its adherence to Sharia principles. Why is such a process chosen? There are several key reasons. First, a transaction considered “halal” must pursue objectives that are beneficial to society or at least not harmful. In other words, every transaction should resemble an ethical investment for the well-being of society. For example, purchasing a washing machine means improving public hygiene and ensuring access to clean clothing, which is fully in line with societal benefits and Islamic teachings. The second crucial reason is that profitability in halal transactions arises from real and tangible activities and equally shares risks and transaction uncertainties between parties rather than favoring one side. A bank that owns a product and sells it earns a profit that can cover various risks, such as purchasing and storing the underlying product and the potential risk of selling it to a customer who may not be able to pay. Therefore, this shared risk between the lender and the borrower, or the parties to the contract, is also considered a cornerstone of Islamic finance.

This ethical and structured approach has significantly contributed to the success and resilience of the Islamic finance industry. During critical times, such as the global financial crisis in 2008 or the COVID-19 pandemic, this industry demonstrated remarkable stability. For example, during the pandemic, the compound annual growth rate reached 10%, compared to conventional financing processes, which grew by approximately 6% over the same period. This resilience can be attributed to various factors. The “risk-sharing” model minimizes the vulnerability of both parties to sudden economic shocks. Additionally, the requirement that all transactions be backed by tangible assets prevents the accumulation of excessive debt.

Today, the Islamic financial industry is worth nearly $4 trillion. This figure is a remarkable achievement for an industry that barely existed 30 years ago. According to a 2023 report, the value of this industry is expected to rise to $6 trillion by 2026, representing a 50% growth forecast over the next two years.

With this understanding of Islamic finance, the question arises: How is this related to cryptocurrency?

Digital Assets and Sunni Islamic Finance

The same principles governing Islamic finance also apply to cryptocurrencies. The concept of Sharia-compliant cryptocurrencies has been a topic of interest since the early days of Bitcoin (BTC), as Muslims began to examine its compatibility with Islamic principles. However, it was only recently that the issue of Sharia compliance in cryptocurrencies gained significant attention, with a major milestone occurring in 2018.

Digital Assets and Sunni Islamic Finance

Bitcoin and cryptocurrency markets initially faced significant criticism from Islamic leaders in countries such as Egypt and Indonesia, who highlighted the high-risk nature of cryptocurrencies as a key concern. However, in April 2018, a Sharia advisor working with a fintech company declared Bitcoin halal under Islamic law. This sparked an ongoing debate about the permissibility of other cryptocurrencies, a discussion that continues to this day.

In response to this uncertainty, some cryptocurrency projects have attempted to achieve Sharia compliance to attract Islamic investors. For example, in July 2018, the Shariyah Review Bureau (SRB) certified Stellar as the first Sharia-compliant blockchain for use in payments and asset tokenization. Just over a year later, in September 2019, Emani Advisors (the first Islamic financial advisory firm) also declared Ethereum (ETH) to be compliant with Islamic principles. Two months later, in November 2019, Algorand received a similar certification from the Bahrain-based Shariyah Review Bureau.

The Shariyah Review Bureau is a global institution specializing in Sharia advisory and the examination of emerging topics in Islamic jurisprudence. Established with the participation of 15 countries across Asia, Africa, Europe, and the Americas, it primarily provides financial advisory services to governments, corporations, and banks. The group aims to adopt a comprehensive approach by considering the perspectives of various Islamic schools of thought. Among the participating countries, Bahrain has taken a leading role, with its office playing a particularly active part in these discussions.

Emani Advisory Group is another independent consultancy specializing in Islamic jurisprudence and offering similar services. Both organizations, along with other Sharia advisory firms, are working at a rapid pace to examine the alignment of modern financial matters with Islamic law or, at the very least, to develop Sharia-compliant participation frameworks for Muslims.

Despite these promising developments, the debate remains ongoing. In July 2021, Malaysia’s Sharia Advisory Council declared digital asset trading permissible. However, in October 2021, a major Islamic organization in Indonesia issued a ruling declaring cryptocurrencies, including Bitcoin, haram. Between October 2021 and February 2022, several additional statements from Indonesian Islamic leaders reinforced this position.

Following this period of uncertainty, discussions about Sharia compliance in cryptocurrencies quieted down for a while. However, a shift toward a more optimistic outlook began in September 2022 when MHB Network, an Australian decentralized finance (DeFi) platform, reported growing interest in Sharia-compliant cryptocurrencies. This development fueled speculation about the future of Islamic-compliant decentralized financial protocols.

The most significant recent milestone occurred in late September 2023 when Bybit, a leading cryptocurrency exchange, introduced the first-ever Sharia-compliant crypto account. This account allows users to engage in spot trading of 75 cryptocurrencies (with 18 currently available), utilize a dollar-cost averaging (DCA) trading bot, and access other features—all in accordance with Islamic principles. This move represents a significant step forward in bridging the gap between the cryptocurrency market and Islamic finance.

Currently, determining whether a cryptocurrency complies with Sharia law remains a complex issue. Based on the principles discussed so far, it is evident why certain challenges persist. One of these challenges arises from the requirement that transactions must be backed by tangible assets.

For some cryptocurrencies, this requirement is straightforward. For example, Paxos Gold (PAXG) is backed by physical gold stored in Brink’s vaults in London. However, it is difficult to imagine how many meme coins could be backed by tangible assets. Nevertheless, it may be argued that a cryptocurrency does not necessarily need to be backed by physical assets to be Sharia-compliant, as long as it serves a legitimate and beneficial purpose—provided that it adheres to principles such as rationality and the avoidance of excessive uncertainty (gharar).

Setting aside the issue of rationality—which is intertwined with customs, legal frameworks, and governance—gharar presents a distinct challenge, as it refers to excessive uncertainty and risk. Cryptocurrencies driven primarily by speculation often fall into this category, failing to provide sufficient certainty and justification under Islamic jurisprudence. (It is worth noting that gharar is a point of consensus among most Sunni and Shia scholars, with little significant disagreement.) As a result, these cryptocurrencies are often classified as haram. However, not all cryptocurrencies face this challenge. For example, stablecoins (e.g., USDT, USDC) are shielded from speculative volatility, whereas assets like Bitcoin and Ethereum derive their value from practical applications such as value storage and powering decentralized applications.

A deeper exploration of gharar reveals that, according to Shafi’i scholars, gharar applies to any transaction where execution, quality, or value is “concealed” (rather than merely uncertain) and where the final outcome poses unreasonable risks or harms. Based on this definition, two types of gharar emerge: major (fahish) and minor (yasir). According to most scholars, minor gharar is present in almost all transactions and does not render them impermissible. The prohibition of gharar is rooted in the broader societal concern that it erodes public trust and disproportionately harms those with limited knowledge or financial capacity. Some scholars even classify gharar alongside gambling. The primary basis for this ruling comes from a hadith of the Prophet Muhammad, which prohibits speculative transactions such as buying an unborn animal in its mother’s womb, unmilked dairy animals, or war spoils before their acquisition. Consequently, all speculative trading, derivatives, short-term contracts with uncertain final prices or quality, and certain futures contracts are considered gharar-based and therefore haram.

Transparency is another key factor in Sharia compliance. Cryptocurrencies that lack transparency or rely on closed-source transaction mechanisms (especially those emphasizing privacy and anonymity) face additional ethical concerns and risks, making them incompatible with Islamic finance. This consideration eliminates many cryptocurrencies that cannot be fully audited for safety or adherence to ethical standards—further highlighting the relevance of gharar in this discussion.

Since the topic of futures and derivatives has been raised, it is also necessary to address riba (usury), as these financial instruments often involve interest-based transactions, which are explicitly and unequivocally forbidden in Islam. Additionally, activities that resemble gambling or generate profits based on inflationary rewards rather than transactional fees are also prohibited, even if they otherwise align with Sharia principles.

Arguably, the greatest challenge is the issue of maysir (gambling) and all gambling-like activities, which are strictly prohibited in Islamic law. This includes speculative behaviors that can lead to extreme gains or losses, ultimately destabilizing financial structures. Many meme coins and tap coins fall into this category, as their acquisition and profit potential often resemble a game of roulette—an activity that is unequivocally haram.

It is important to recognize that the determination of whether a cryptocurrency is halal or haram often depends on how Sharia guidelines are interpreted and the specific conditions at hand. For example, Dogecoin (DOGE) may derive its value from highly uncertain probabilities or even from Elon Musk’s behavior. However, it has also been used for payments and exhibits characteristics similar to Bitcoin in terms of value storage. While speculation remains a concern, Dogecoin’s large market capitalization may alleviate some worries regarding excessive speculation. Furthermore, speculation itself is not inherently haram, as it serves as a tool for managing risk and profit, and all investments involve some degree of risk.

To address these challenges, some cryptocurrency and blockchain projects have been specifically designed to comply with Sharia principles. Even fully Sharia-compliant blockchains exist, such as the system introduced by Bybit.

The Islamic World and the Growth of Cryptocurrencies

The Islamic World and the Growth of Cryptocurrencies

In simple terms, these advancements will be highly upward, especially for altcoins active on the Bybit network. The potential influx of billions of dollars into the crypto market, coupled with a significant increase in the number of users, could lead to unprecedented growth. Bybit, as the first exchange to offer Sharia-compliant crypto accounts, must lead the way by addressing the benefits, drawbacks, and challenges of this path. This could pave the way for other exchanges, making the entry of new capital into the industry’s markets easier. If you think such an outlook seems overly optimistic, consider the following:

First. Islamic Finance and Financial Markets Are a $4 Trillion Industry

It is predicted that this figure will experience significant growth in the coming years. If even 5% of Islamic financial assets flow into the cryptocurrency market, this would mean a new $200 billion investment. This is a conservative estimate, given that conventional finance is widely not compliant with Sharia law, and the Islamic finance industry addresses the related needs for Muslims. Therefore, cryptocurrencies can play a pivotal role in realizing this vision and connecting more Muslim countries to more diversified markets.

Second. Islam Is One of the World’s Largest Religions

With over 2 billion followers, nearly a quarter of the world’s population, Islam has a vast potential user base. While not all of these individuals may embrace cryptocurrencies, this demographic represents an enormous potential impact. In the Middle East alone, about 500 million people live, with 90% of them being Muslim. According to Chainalysis research, the Middle East currently accounts for 7.5% of global cryptocurrency transaction volume. Imagine how this figure could increase if the crypto space becomes more Sharia-compliant and addresses the existing ambiguities and concerns.

Third. Increasing Trust and Credibility for Cryptocurrencies

Beyond attracting new Islamic investors, greater Sharia compliance for Sunni Muslims could help address some of the uncertainties surrounding cryptocurrencies. The fact that crypto can meet specific Islamic legal standards might instill higher levels of trust among global investors. This level of trust could position cryptocurrencies as a key class of legitimate assets, drawing renewed attention from a broader, more diverse audience.

The ripple effects of these advancements could be memorable, not only bringing significant flows into cryptocurrencies but also acting as a catalyst for a new bullish market. This opportunity goes beyond Bitcoin’s potential for short-term gains; it could mark the beginning of sustainable growth across the entire crypto ecosystem. In summary, increased acceptance of Sharia-compliant crypto presents an incredible opportunity to welcome more people into the space and redefine the future of the cryptocurrency asset market. It remains to be seen how this trend will manifest its effects.

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