The Morality of Digital Currencies

Through the lens of Islam.

A REPORT BY MUHAMMAD DYEN ASIF

What is cryptocurrency?

A digital payment method that does not depend on banks to validate transactions is
cryptocurrency. Anyone can send and receive money using this peer-to-peer system.
Cryptocurrency payments only exist as digital entries to an online database detailing particular
transactions, rather than as actual cash that is carried around and exchanged in the real world.
Transactions involving cryptocurrency transfers are documented in a shared blockchain. Crypto
wallets are used to store cryptocurrency.

Cryptocurrency received its name because it uses encryption to verify transactions. This means
advanced coding is involved in storing and transmitting cryptocurrency data between wallets
and to public ledgers. The aim of encryption is to provide security and safety.

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known
today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times
driving prices skyward.

How does cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all

transactions updated and held by currency holders.
The Morality of Digital Currencies 24I-0608
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Units of cryptocurrency are created through a process called mining, which involves
using computer power to solve complicated mathematical problems that generate coins.
Users can also buy the currencies from brokers, then store and spend them using
cryptographic wallets.

You don't own anything material if you own cryptocurrency. You possess a key that
enables you to transfer a record or a unit of measurement between individuals without
the assistance of a reliable third party.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of
blockchain technology are still emerging in financial terms, and more uses are expected
in the future. Transactions including bonds, stocks, and other financial assets could
eventually be traded using the technology.

Cryptocurrency examples

There are thousands of cryptocurrencies. Some of the best known include:

Bitcoin:

Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly
traded. The currency was developed by Satoshi Nakamoto – widely believed to be a
The Morality of Digital Currencies 24I-0608
Through the lens of Islam. Muhammad Dyen Asif

pseudonym for an individual or group of people whose precise identity remains

unknown.

Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency,

called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is most similar to bitcoin but has moved more quickly to develop new
innovations, including faster payments and processes to allow more transactions.

Ripple:

Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to
track different kinds of transactions, not just cryptocurrency. The company behind it has
worked with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them

from the original.

https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency

Significance of Islamic Finance

Islamic finance is a financial system that operates in accordance with Shariah (Islamic
law), emphasizing ethical and socially responsible financial practices. It prohibits
interest (riba), excessive uncertainty (gharar), and investments in prohibited (haram)
industries such as alcohol, gambling, and speculative activities. Instead, it promotes
risk-sharing, asset-backed transactions, and fairness through contracts like mudarabah
(profit-sharing), musharakah (joint venture), and ijarah (leasing).

- Mudarabah (Profit-Sharing): A partnership where one party provides capital,

and the other contributes expertise, with profits distributed according to an
agreed ratio.
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- Musharakah (Joint Venture): A shared investment where partners contribute

capital and share both profits and losses.
- Ijarah (Leasing): A leasing agreement where one party rents an asset to another
in exchange for payments without transferring ownership.
- Takaful (Islamic Insurance): A cooperative insurance model based on mutual
assistance and risk-sharing.

Islamic finance is significant because it prioritizes financial inclusion, justice, and

transparency. It promotes economic stability and investments that benefit society by
guaranteeing that wealth is created ethically. For both Muslim and non-Muslim investors
looking for moral financial solutions, its tenets of sustainable finance and responsible
investing make it a compelling substitute.

The Bayt al-mal (Government Treasury) played a role in managing funds and included a
branch for lending and receiving repayments of interest-free loans. This system
emphasized fairness and the prohibition of interest (ribâ) as stated in the Qur’ân
(2:275):

‫ط ٰـنُ مِنَ ْٱل َم ِس ٰ َذ ِلكَ ِبأَنَّ ُه ْم قَالُ ٓو ۟ا ِإنَّ َما ْٱل َب ْي ُع‬
َ ‫ش ْي‬ ِ َ‫َّٱلذِينَ َيأ ْ ُك ُلون‬
ُ َّ‫ٱلر َب ٰو ۟ا ََل َي ُقو ُمونَ ِإ ََّل َك َما َي ُقو ُم َّٱلذِى َيت َ َخب‬
َّ ‫طهُ ٱل‬
‫ف َوأ َ ْم ُرهُۥٓ ِإلَى‬ َ ‫ظةٌ مِن َّربِهِۦ فَٱنت َ َه ٰى فَلَهُۥ َما‬
َ َ‫سل‬ َ ‫ٱلربَ ٰو ۟ا فَ َمن َجا ٓ َءهُۥ َم ْو ِع‬ ُ َّ ‫ٱلربَ ٰو ۟ا َوأ َ َح َّل‬
ِ ‫ٱَّلل ْٱلبَ ْي َع َو َح َّر َم‬ ِ ‫مِ ثْ ُل‬
‫ار هُ ْم فِي َها َخ ٰـ ِلدُون‬ ْ َ ‫عا َد فَأ ُ ۟ولَ ٰـٓئِكَ أ‬
ِ َّ‫ص َح ٰـبُ ٱلن‬ َ ‫َٱَّلل َو َم ْن‬
ِ َّ

“ Those who devour usury will not stand except as stand one whom the Evil one by his
touch Hath driven to madness. That is because they say: 'Trade is like usury', but Allah
hath permitted trade and forbidden usury. Those who after receiving direction from their
Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those
who repeat (The offence) are companions of the Fire: They will abide therein (for ever).”

The Prophet Muhammad ‫ ﷺ‬was the first to use the mudârabah (silent partnership) in
trading with a wealthy woman named Khadijah (who later became his wife). At the time,
Muslims practiced mushârakah (full partnership) when they operated large-scale
commercial enterprises on the principle of sharing profits and losses. In addition, the
Prophet Muhammad ‫ ﷺ‬allowed people to use credit sales (bay’ salâm) to finance
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consumption or production without usury, and he encouraged Muslims to provide

benevolent loans (qard hasan). Of course, banks, as financial institutions, did not exist
in this time.

https://www.islamicity.org/102749/how-has-islamic-finance-evolved-as-a-system-of-justice-and-ethical-prosperity/

Prohibition of interest in Islam

Islamic finance strictly prohibits interest (riba) as it is considered a form of economic

exploitation. This ban aims to encourage fair financial transactions, risk-sharing, and
equitable wealth distribution while preventing excessive wealth accumulation among a
few individuals. As stated in the Quran:

‫َّللا لَعَلَّكُ ْم ت ُ ْف ِل ُحون‬

َ َّ ‫عفَةً َواتَّقُوا‬ َ ‫ضعَافًا ُم‬
َ ‫ضا‬ ِ ‫َيَا أَيُّ َها الَّذِينَ آ َمنُوا ََل ت َأْكُلُوا‬
ْ َ ‫الربَا أ‬

"O you who believe! Do not consume interest, doubled and multiplied, but fear Allah that
you may be successful."

(Surah Aal-e-Imran 3:130) (Elahi & Alam, 2015)

The prohibition of riba aligns with broader principles of social and economic justice.
Interest-bearing loans often lead to wealth concentration, widening the gap between the
rich and the poor. By eliminating riba, Islamic finance fosters a fairer economic system
where wealth circulates more evenly, ensuring greater access to financial resources for
all.

Profit and Loss Sharing: A Core Principle

Islamic finance promotes profit and loss sharing, encouraging joint financial
responsibility between investors and entrepreneurs. This principle is implemented
through two key contracts:
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Mudarabah (Investment Partnership):

One party provides capital while the other contributes labor and expertise. Profits are
shared based on a pre-agreed ratio, while any financial loss is borne solely by the
capital provider unless caused by mismanagement.

Musharakah (Joint Venture):

All partners contribute capital and share both profits and losses in proportion to their
investment. This structure encourages entrepreneurship and innovation, as all
participants have a vested interest in the venture’s success.

By emphasizing shared risk and reward, these contracts align business interests and
promote financial inclusivity.

Asset-Backed Financing: Ensuring Transparency and Stability

A defining feature of Islamic finance is asset-backed financing, ensuring that all financial
transactions are tied to real economic activities. This eliminates excessive speculation
and enhances financial transparency. Two primary contracts used for this purpose are:

Murabahah (Cost-Plus Financing):

The financier purchases an asset and sells it to the client at a marked-up price, with
repayment made over time. This model ensures transparency and avoids the
uncertainties of interest-based lending.

Ijarah (Islamic Leasing):

The financier acquires an asset and leases it to a client for a specified period. The client
makes rental payments while ownership remains with the financier until the lease term
is complete. This ensures that financial transactions remain linked to tangible assets,
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reducing speculative risks. Through asset-backed financing, Islamic finance promotes

responsible investment and economic stability.

Gharar (Excessive Uncertainty):

Contracts with high levels of uncertainty or ambiguity are not allowed, as they can lead
to unfair practices and exploitation. This principle ensures clarity and fairness in
financial agreements.

Maysir (Gambling and Speculation):

Gambling and high-risk speculative investments are forbidden as they promote reckless
financial behavior, which can destabilize the economy. By discouraging excessive risk-
taking, Islamic finance encourages prudent financial management. (Wahab et al., 2020)

https://www.researchgate.net/publication/381916588_ISLAMIC_PRINCIPLES_AND_THEIR_APPLICATION_IN_PERSONAL_FINANCIAL_DECISION_MAKING

Assessing Digital Currencies Against Islamic Financial

Principles

Riba (Usury/Interest)

Nature of Returns

Bitcoin and other cryptocurrencies are often used as speculative assets, where
investors hold them in hopes of significant price appreciation. Many crypto lending
platforms offer interest-like returns on deposited assets. For example, platforms like
BlockFi and Celsius previously allowed users to earn annual interest on their Bitcoin
holdings, sometimes exceeding 10%, which resembles the concept of riba, strictly
prohibited in Islam.

Staking and Lending

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Some cryptocurrencies use a proof-of-stake mechanism, where users "stake" their

assets to validate transactions and earn rewards. These rewards function similarly to
interest, as users earn money merely by holding and locking up their assets. Islamic
finance prohibits earning money without productive effort, making this mechanism
questionable from an Islamic perspective.

Gharar (Uncertainty)

Market Volatility

Bitcoin is known for extreme price fluctuations. In 2017, Bitcoin rose from around $1,000
to nearly $20,000 before crashing to $3,000 in 2018. More recently, in 2021, Bitcoin
reached $69,000 and fell below $20,000 in 2022. This level of unpredictability aligns
with gharar, which Islam discourages in financial transactions as it leads to financial
instability and unfair losses.

Complexity of Mechanisms

The functioning of Bitcoin involves cryptographic protocols, decentralized networks, and

blockchain technology—concepts that most investors do not fully understand. This
complexity makes it difficult for a layperson to assess the risks involved, increasing the
level of gharar. Furthermore, smart contracts and algorithmic trading introduce
additional risks that may not be transparent to users.

Maysir (Gambling)

Speculative Trading

A significant portion of Bitcoin trading is purely speculative, where traders buy and sell
within short time frames to capitalize on price fluctuations. This behavior closely
resembles gambling, as seen in the 2021 Bitcoin price surge followed by a massive
decline. Many traders have lost their life savings due to impulsive investments, a
practice Islam strongly discourages.

Initial Coin Offerings (ICOs)

Many cryptocurrency projects launch Initial Coin Offerings (ICOs) where investors buy
tokens in early-stage projects. However, many ICOs have turned out to be scams, with
developers disappearing after raising millions. For instance, the 2017 "Pincoin and iFan"
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ICO scam in Vietnam defrauded investors of $660 million. Such high-risk and deceptive
investment models closely align with maysir and are against Islamic finance principles.

Asset-Backed Requirement

Intrinsic Value

Unlike traditional currencies backed by government reserves, Bitcoin is not backed by

any tangible asset. While fiat currencies like the U.S. dollar are supported by
government regulation and economic stability, Bitcoin's value relies solely on market
speculation. Since Islamic finance emphasizes real economic value, Bitcoin's lack of
intrinsic value raises concerns.

Stablecoins and Tangibility

Some argue that stablecoins, such as USDT (Tether) or USDC, which are pegged to
real-world assets, align better with Islamic finance. However, even stablecoins have
faced issues, such as the collapse of TerraUSD (UST) in 2022, which lost its peg and
wiped out billions of dollars. This instability questions the legitimacy of stablecoins as
Shariah-compliant financial instruments.

Risk Sharing

Investment Structures

Islamic finance promotes profit-and-loss sharing structures like Mudarabah and

Musharakah, where risks and rewards are shared fairly. However, Bitcoin investment is
highly individualistic, with no built-in mechanisms for equitable risk distribution. Those
who enter at the wrong time suffer immense losses, while early adopters often gain
disproportionately.

Decentralized Finance (DeFi)

Decentralized Finance (DeFi) aims to create an open financial system without

intermediaries. While DeFi has the potential to align with risk-sharing principles, most
DeFi platforms currently operate on interest-based lending models, making them
incompatible with Islamic finance.
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What is money?
It is widely known that money was invented to solve two major problems of barter
exchanges:

1)-The double coincidence of wants.

2)-The indivisibility of exchanged items.

To address these issues, societies introduced money into their markets and
transactions. Essentially, any item that a society collectively agrees upon can function
as money. Bernard Lietaer, in his book The Future of Money, defines money as:

''Money is an agreement, within a community, to use something as a medium of

exchange.''

Throughout history, money has been adopted through free will or coercion, formally or
informally, consciously or unconsciously. Many Islamic and shari’ah scholars also align
with this definition, stating that any item considered halal can serve as money. As long
as it benefits society (maslahah), it is approved, and the principles of as-sarf and riba
apply. Consequently, all Islamic financial contracts and exchanges are based on the
form of money that the society has agreed upon.

Various commodities have historically been used as money, including cowry shells,
leather, gold, silver, wheat, and salt. Later, fiat money such as national currencies and
electronic money emerged. Today, cryptocurrencies present an interesting
phenomenon, as they are neither issued nor regulated by central authorities.

Over time, societies identified essential characteristics for money to be effective and
efficient:

1. Accepted – It must be widely desired and have intrinsic value.

2. Divisible – It should be easily broken into smaller units.

3. Homogeneous – It must be uniform and consistently divisible.

4. Durable – It should last long and resist destruction.

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5. Mobile – It must be easy to carry and transport.

6. Rare – Limited availability ensures a high value.

7. Stable – Its value should remain relatively steady over time, especially compared to
naturally occurring items.

Does bitcoin have good money characteristics?

This section examines Bitcoin from the perspective of Islamic money and payment
methods. The key question is: does Bitcoin meet the seven criteria of good money? The
answer is summarized in Table below.

Criteria Remarks Check

Accepted Widely accepted by people voluntarily, despite lacking intrinsic

value.

Divisible Being an electronic currency, it is easily divisible.

Homogenous As a digital asset, it maintains uniformity.

Mobile Being electronic, it is highly mobile.

Rare Its issuance is controlled through a mining process, ensuring

scarcity.

Stable value Bitcoin's value has been highly volatile in recent times.

Durable Stored as electronic bytes on a distributed ledger, making it highly

durable.

Bitcoin meets five out of the seven criteria for good money. However, it lacks intrinsic
value and does not maintain a stable value—both crucial factors for money in Islamic
finance. Stability is particularly important because, in shari’ah, money must serve as a
store of value and a protector of wealth, aligning with the maqasid al-shari’ah
(objectives of Islamic law). Without intrinsic value, economic injustice could arise
through seigniorage, similar to fiat money.
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Through the lens of Islam. Muhammad Dyen Asif

https://bulletin.bmeb-bi.org/cgi/viewcontent.cgi?article=1130&context=bmeb

Seerah of Prophet ‫ﷺ‬ and cryptocurrency

Economic Stability

Arabic:

‫ قَال‬،ِ ‫سعِي ٍد ْال ُخد ِْري‬

َ ‫ع ْن أَبِي‬
َ َ:

" ‫ح مِ ثْ ًًل‬ ْ ‫مِل ُح بِ ْال‬

ِ ‫مِل‬ ْ ‫ِير َوالت َّ ْم ُر بِالت َّ ْم ِر َو ْال‬
ِ ‫شع‬َّ ‫ِير بِال‬
ُ ‫شع‬ َّ ‫ض ِة َو ْالب ُُّر بِ ْالب ُِر َوال‬
َّ ‫ضةُ بِ ْال ِف‬
َّ ‫ب َو ْال ِف‬
ِ ‫َكانَ الذَّهَبُ بِالذَّ َه‬
‫س َواء‬َ ‫ ْاْلخِ ذُ َو ْال ُمعْطِ ي فِي ِه‬،‫ فَ َم ْن زَ ا َد أ َ ِو ا ْست َزَ ا َد فَقَ ْد أ َ ْربَى‬،ٍ‫"ٌبِمِ ثْ ٍل يَدًا بِيَد‬
“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and
salt for salt—like for like, hand to hand. If anyone gives more or asks for more, they
have engaged in riba. The giver and taker are both the same.”

— (Sahih Muslim 1584b)

- The Prophet ‫ ﷺ‬encouraged stable and fair trade using physical assets like gold,
silver, and grains.
- Bitcoin, however, is extremely volatile, fluctuating in value unpredictably.
- This volatility creates an unstable economic model, conflicting with Islamic
finance principles.

Deceptive Pricing and Market Manipulation

Arabic:

َّ ِ‫ أ َ َّن النَّب‬، ٍ‫ع ْن أَن َِس ب ِْن َمالِك‬

‫ي ﷺ قَال‬ َ َ:

َ
"‫"َل تَنَا َجشُوا‬
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“Do not artificially inflate prices.”

— (Sahih Bukhari 2142, Sahih Muslim 1516)

- Pump-and-dump schemes in crypto markets resemble price inflation (najash).

- Many traders artificially boost Bitcoin’s price before selling, misleading investors.
- Islam prohibits market manipulation, which is common in cryptocurrency trading.

Avoiding Gharar (Excessive Uncertainty) in Trade

Arabic:

‫ قَال‬،َ ‫ع ْن أَبِي ه َُري َْرة‬

َ َ:

"‫ع ْن بَي ِْع ْالغ ََرر‬ َ ‫ع ْن بَي ِْع ْال َح‬

َ ‫صاةِ َو‬ ِ َّ ‫"ِنَ َهى َرسُو ُل‬
َ ‫َّللا ﷺ‬

“The Messenger of Allah (‫ )ﷺ‬forbade the sale of pebble transactions and the sale
involving uncertainty (gharar).”
— (Sahih Muslim 1513)

Bitcoin’s high volatility and unpredictable value align with gharar, which Islam
discourages in financial transactions.

Prohibition of Riba

Arabic:
‫ قَال‬،‫ع ْن َجا ِب ٍر‬
َ َ:

َ ‫ هُ ْم‬:َ‫ َوقَال‬،ِ‫ َوشَا ِه َد ْيه‬،ُ‫ َوكَاتِ َبه‬،ُ‫ َو ُمو ِكلَه‬،‫الر َبا‬

"‫س َواء‬ ِ َّ ‫”ٌلَ َعنَ َرسُو ُل‬
ِ ‫َّللا ﷺ آ ِك َل‬
“The Messenger of Allah (‫ )ﷺ‬cursed the one who consumes Riba, the one who gives it,
the one who records it, and the two who witness it. He said: ‘They are all the same.”
— (Sahih Muslim 1598)

Bitcoin lending and staking platforms often offer interest-based returns, which can
resemble riba, a practice strictly prohibited in Islam.
The Morality of Digital Currencies 24I-0608
Through the lens of Islam. Muhammad Dyen Asif

Using Gold and Silver as Money

Arabic:

َّ ‫سعِي ٍد ْال ُخد ِْري ِ أ َ َّن َرسُو َل‬

‫َّللاِ ﷺ قَال‬ َ ‫ع ْن أَبِي‬
َ َ:

"‫ َيدًا ِب َيد‬،‫ ِإ ََّل مِ ثْ ًًل ِبمِ ثْ ٍل‬،ِ‫ضة‬

َّ ‫ضةَ ِب ْال ِف‬
َّ ‫ َو ََل ْال ِف‬،‫ب‬
ِ ‫َب ِبالذَّ َه‬
َ ‫" ٍََل ت َ ِبي ُعوا الذَّه‬

“Do not sell gold for gold, nor silver for silver, except equal in weight and immediate
(hand to hand).”
— (Sahih Muslim 1584a)

Bitcoin has no physical backing, unlike gold and silver, which were used as currency in
the Prophet’s time. This raises concerns about its compliance with Islamic financial
principles.

Case Studies
1. OneGram: A Gold-Backed Cryptocurrency Aiming for Shariah
Compliance

OneGram is a cryptocurrency designed to follow Islamic financial principles. Each token is

backed by one gram of physical gold, ensuring that it has real intrinsic value.

Islamic finance prohibits speculation and interest-based transactions (riba). Since OneGram is
linked to a tangible asset, it aligns with these rules and offers stability compared to volatile
cryptocurrencies like Bitcoin.

Gold has long been a trusted store of value in Islamic economies. By using gold backing,
OneGram appeals to Muslim investors looking for ethical, Shariah-compliant digital assets.
The Morality of Digital Currencies 24I-0608
Through the lens of Islam. Muhammad Dyen Asif

https://www.reuters.com/article/markets/onegram-lists-islamic-cryptocurrency-on-its-own-virtual-exchange-idUSL8N1W41X9

2. X8 Currency: A Stablecoin Compliant with Shariah Principles

X8 Currency is a stablecoin created by X8 Financial Technology. Its value is tied to a basket of

eight fiat currencies and gold, making it more stable than traditional cryptocurrencies.

The project has received Shariah certification, confirming that it follows Islamic financial rules. It
avoids riba (interest), gharar (uncertainty), and maysir (gambling-like speculation), which are all
prohibited in Islam.

By maintaining reserves in strong fiat currencies and gold, X8 Currency provides a secure and
ethical digital asset option for Muslim investors.

https://irishtechnews.ie/x8currency-introduces-cash-and-gold-backed-tokens-for-islamic-investors

3. Tezos: A Shariah-Certified Blockchain Platform for XTZ

The Morality of Digital Currencies 24I-0608
Through the lens of Islam. Muhammad Dyen Asif

Tezos is a blockchain platform that has received Shariah certification for its native token, XTZ.
This certification confirms that its governance model and transaction mechanisms comply with
Islamic principles.

With Shariah approval, Tezos can now attract Muslim investors and financial institutions seeking
blockchain solutions that align with their faith.

https://shariyah.net/cryptocurrencies/tezos-report

Conclusion
The intersection of blockchain technology and Islamic finance
presents significant opportunities for innovation. By developing
Shariah-compliant digital financial products and services, there is
potential to enhance financial inclusion, improve transaction
transparency, and create ethical investment avenues that align with
the values of the Muslim community.