Crypto Investing: Halal Or Haram?

The topic of whether or not crypto investing is halal is a highly debated one, with no clear consensus among Islamic scholars. On the one hand, some argue that cryptocurrencies are speculative and lack intrinsic value, rendering them a form of gambling, which is forbidden under Shariah law. Additionally, the anonymous nature of cryptocurrency transactions has made them attractive for illegal activities, further complicating their religious permissibility. However, others point out that cryptocurrencies are already used as currencies by some and that their lack of a central authority strengthens their value. The debate is evolving, and individual Muslims must decide whether to invest in cryptocurrencies based on their own interpretations and the intended use of the investment.

Cryptocurrency is not money

There are several reasons why cryptocurrency is not money. Firstly, cryptocurrencies like Bitcoin are highly volatile and subject to rapid price fluctuations, whereas the value of a dollar in your pocket remains the same today as it will tomorrow. Cryptocurrencies are decentralised and not controlled by governments, meaning their supply may vary, whereas governments can control the supply of cash by printing new money. Cryptocurrencies are also purely digital, so you'll never hold a bitcoin in your hand like a $20 bill.

Another key difference is that cash is a centralised fiat currency, issued, backed, and maintained by the government. Centralisation means there is one entity with control. For example, digital cash transactions are made through a third party, like paying for something with your bank card. Cryptocurrencies, on the other hand, were created to be decentralised, removing the need for third parties. All you need is an internet connection and a crypto wallet to complete a transaction directly with another person.

The high volatility of cryptocurrencies also sets them apart from traditional money. The market value of cryptocurrencies can change from day to day and even minute to minute, making them unpredictable. While cash is generally stable, backed by governments and central authorities, cryptocurrencies have no central authority to enforce their value, and their value is not linked to any established marketplace or economy.

Additionally, cryptocurrencies are not widely accepted or recognised as legal tender like traditional currencies. They are not backed by any authority, and their acceptance as a means of payment is limited to a small number of shops and platforms. Cryptocurrencies also lack the long history of usage that cash has. While paper currency in the US has been documented as early as 1690, the first successful cryptocurrency was launched only in 2009, making the crypto market relatively new and unpredictable.

Finally, cryptocurrencies are not insured or protected like traditional money. The FDIC (Federal Deposit Insurance Corporation) insures cash deposits in member banks, protecting up to $250,000. In contrast, if you lose your crypto, there is no recovery or protection option. The lack of centralised control and insurance makes cryptocurrencies riskier and more uncertain than traditional money.

Crypto is a form of gambling

There is a lot of debate surrounding the question of whether or not crypto investing is halal. With Muslims making up a quarter of the world's population, a clear consensus on the Islamic view of crypto has global implications.

According to Islamic Law, there are several criteria that individuals must adhere to, to ensure their investments are halal. Income obtained through unethical or exploitative means such as bribery, extortion, and profiteering is considered haram.

While there are no clear official guidelines on whether Muslims should or shouldn't invest in crypto, there are a number of arguments for why crypto is a form of gambling. Crypto is a high-risk, high-reward investment, and as with any high-risk investment, individuals must be comfortable with the fact that their investment may significantly underperform, and they could be left with losses of 70% or more. Crypto is also a relatively new type of investment class, and scholars are still grappling with the topic.

Crypto gambling is a form of online gambling based on smart contracts and uses cryptocurrencies as a means of payment. Crypto gambling is similar to traditional gambling, but instead of fiat currencies, cryptocurrencies are used. Crypto gambling also provides players with a provably fair gambling process due to the smart contracts used to define the regulations of the game. The rules of the game and the odds of winning are both included in the regulations outlined by smart contracts. In traditional gambling, players typically have no idea of the algorithms used in the game, nor do they know their odds of winning or losing.

Some people argue that crypto is not a form of gambling, but rather a currency that can be used to purchase goods, for self-banking, and for a wide variety of utilities. However, others argue that crypto is a form of gambling because it involves putting money on the line based on the outcome, which is what makes gambling what it is. Crypto critics often use a combination of broad blanket statements and conflation, and it's a pretty standard approach as it allows for dismissal and paves the way for ad hominem-type comments.

Overall, the question of whether or not crypto is a form of gambling is complex and depends on how individuals choose to treat the market.

Crypto is used for illegal activities

The use of cryptocurrencies for illegal activities is a concern for some. In 2019, US Treasury Secretary Steven Mnuchin stated that Bitcoin was a national security issue, as it had been used for illicit activities. Similarly, Janet Yellen, President-elect Joe Biden's pick for Secretary of the Treasury, expressed concern over the use of cryptocurrencies for criminal activity and terrorist financing. However, the data suggests that the majority of cryptocurrency is not used for illegal purposes. In 2020, criminal activity accounted for only 0.34% of all cryptocurrency transactions, or $10 billion in volume. This is significantly lower than the estimated 2-5% of global GDP, or $1.6 to $4 trillion, laundered annually through traditional financial systems.

The transparency of blockchain technology and the active involvement of crypto exchanges aid law enforcement in combating criminal activity. Blockchain's inherent transparency means that all transactions are logged on a publicly accessible ledger, creating a clear trail of evidence that can be used to secure convictions. Crypto exchanges, such as Binance, actively collaborate with law enforcement agencies to detect and investigate illicit transactions. They share expertise and resources, assist in cybercrime investigations, and provide training to help authorities understand blockchain and cryptocurrency's role in illegal activities.

Despite these efforts, cryptocurrencies remain attractive to criminals due to the perceived anonymity they offer. Transactions are made between crypto addresses, which are random sets of characters, and the identities of the transaction makers are not linked to these addresses. This allows criminals to trade drugs, weapons, explosives, and other illegal goods and services without revealing their identities. Additionally, cryptocurrencies can be easily transferred globally without the need for a third-party mediator, making them useful for one-off sales and terror funding across borders. The ease of storage and transfer, as well as the lack of physical space required, further adds to their appeal for illegal activities.

While the use of cryptocurrencies for illegal activities is a concern, it is important to note that the majority of transactions are legitimate. The transparent nature of blockchain technology and the collaboration between crypto exchanges and law enforcement agencies help to mitigate the risks associated with illegal activities.

Crypto is a high-risk investment

Investing in cryptocurrencies like Bitcoin and Ethereum is a risky venture. Cryptocurrency is classed as a "high-risk, high-reward" investment, and its high risks can lead to either big payoffs or substantial losses.

The future of cryptocurrency is uncertain, and its success as a currency of the future is unknown. As a result, the price of digital coins fluctuates constantly. Cryptocurrency is also highly volatile, and investors can experience large price swings over hours or days. This volatility makes cryptocurrency vulnerable to market manipulation and scams.

Another risk is the lack of legal protection for cryptocurrency trades. Unlike fiat currencies, bank accounts, and registered exchanges, cryptocurrency trades are not protected by law. If a token's ownership is transferred, there is no way to reverse the transaction unless the new holder agrees to send it back.

Additionally, there are security risks associated with cryptocurrency wallets. It is easy to transfer assets to the wrong party, and investors can become targets of criminals. Billions of dollars have been lost to crypto scams, lost keys, and key thefts.

Cryptocurrency is also subject to regulatory risk. Governments and regulatory bodies have been pushing to track transactions, strip encryption protections, and regulate major exchanges, which could remove the benefit of privacy that boosts its usage and price.

Due to the high level of risk, it is recommended that investors only allocate a small percentage of their portfolio to cryptocurrency, typically suggested as 5-15%. It is also crucial to only invest money that you are comfortable losing, as there are no guarantees in the world of crypto.

Crypto is not regulated

Crypto is currently not regulated, and there are arguments both for and against its regulation.

The unregulated nature of cryptocurrency is central to the spirit of crypto; some would even say that the culture of crypto is rebellious and anti-establishment. However, this lack of regulation has also led to the crypto world being referred to as the "Wild West", due to its instability, lack of regulatory oversight, and high risk.

The debate around regulating crypto is complex. On the one hand, some argue that regulation could help prevent manipulation and fraudulent activity, and offer some level of accountability and investor protection. This is especially important given the recent collapse of major crypto exchanges, such as FTX, which caused significant losses for investors. Traditional financial companies operating in the crypto space have been prone to problems such as illiquidity, insolvency, and even fraud.

On the other hand, there are concerns that overbearing intervention in the market could become a barrier to innovation and trigger an exodus of service providers to less regulated jurisdictions. Additionally, it is challenging to regulate crypto since it transcends political borders and it is difficult to define as an asset—is it a currency, security, or commodity?

Some scholars and economists have offered their perspectives on the matter. The Grand Mufti of Egypt, Shaykh Shawki Allam, argues that crypto is haram due to its high degree of uncertainty, risk, and fraudulence, and the lack of systemic control or rules around the issuance of coins. He also notes that crypto is often used by criminal elements due to its untraceable nature. However, other scholars, such as Ziyaad Mahomed, argue that while crypto is volatile, the Sharia doesn't require that a currency has intrinsic value. As long as there is social acceptance that it has value and it can be used in transactions, it can be considered halal.

From an investor's perspective, there are benefits to regulating the crypto market to detect fraud and ensure accountability. However, it is important to consider the potential drawbacks of regulation, such as hindering innovation and driving away service providers. The debate around regulating crypto is ongoing, and it remains to be seen whether and how governments and institutions will choose to act.

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