Is Crypto Trading Halal or Haram? Crypto Spot and Futures in Islam
Is Crypto Trading Halal or Haram? The main coins that are allowed are: Bitcoin, Ethereum, Polkadot, Litecoin, Monero, Chainlink. Prohibited coins include high-risk coins that encourage gambling. For example: Uniswap, Compound, SushiSwap, Kusama.
Cryptocurrency has taken the globe by storm. It has grown in popularity and has been adopted across many nations. But, like any new thing, debates have raged about digital currencies. There is no place the debate on crypto is more fierce than in the Muslim world.
The big question is whether cryptocurrency is halal or haram.
The Islam Holy book, the Quran, gives rules governing the types of investment. For example, some things are halal, and some that are haram. In the background of these laws, individuals differ in opinion about cryptocurrency. In this article, we dig deep into the Quran's rules on investment, how it relates to cryptocurrency, what authorities say about it being halal or haram, and provide a crypto halal guide.
We aim to help you make an informed decision!
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Is margin trading halal?
Margin trading is risky and involves the use of leverage/debt which is generally deemed haram. Most scholars advise avoiding it.
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Are crypto derivatives like futures halal?
Nearly all scholars agree cryptocurrency derivatives that involve speculation and open risk like futures trading are strictly haram.
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Is mining cryptocurrency halal?
Most scholars say cryptocurrency mining is halal as long as the coin/project itself is halal and free from interest/gambling. Mining requires productivity and contributes to the network's security.
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Can Muslims work for cryptocurrency companies?
In general, most scholars say it is permissible for Muslims to work for cryptocurrency companies as long as the job itself and the company activities are free from prohibited elements.
Main Rules of Islamic Finance
The Quran is strict about finances, and every Muslim should follow the rules. Here are some of the most important financial or investment rules that all Muslim traders should know
No Muslim is allowed to invest in a business or organization that reaps considerable gains from haram activities such as the sale of alcohol, gambling, pornography, tobacco or cigarette sale, Insurance, weapons manufacturing, or pork production.
A Muslim investor must carry out due diligence before investing in a company. They must investigate the company in time to ascertain whether its activities and financial statements are halal.
Investing to earn through interest is prohibited. It is considered haram, guided by Islam's core, protected tenets.
Any Muslim business and merchant must share profit and loss while receiving zero interest.
It is haram to invest or be part of a company with over 33% total debt compared to their overall market capitalization on a yearly average.
It is haram to invest in bonds and interest-driven ventures.
It is wrong to buy stocks of companies with high debt baggage(high leverage).
The 5% rule allows Muslims to avoid haram activities by prohibiting investment in companies that make over 5% of their earnings from haram activities. The rule provides leverage to any Muslim investor.
A Muslim trader cannot invest in a company whose accounts receivables ranges over 45% compared to their total business assets on a year-long average.
The law was written and is subject to different interpretations. As such, opinions vary, making the range of halal investments vary from place to place. As a Muslim trader, caution is critical as you cannot always avoid haram investment.
Is Cryptocurrency Halal or Haram?
Cryptocurrency is halal and haram, depending on who you are asking. The Quran teaches Muslims that some things are right before the eyes of Allah and some are not. One of those things not allowed by Islamic law is gambling and usury or interest.
During debates, those who say it is prohibited will usually show the aspects of futures and staking in cryptocurrencies.
Futures work on a similar principle to gambling. It entails a trader analyzing data, making predictions of a digital coin price, and taking a position. When they are right, they earn; when wrong, they lose. It is comparable to gambling activities such as poker and betting on a team to win.
Secondly, most cryptocurrency brokers provide staking to users. Staking means storing your coins for a certain duration and receiving interest on the coins depending on the annual percentage yield(APY). Since APY is an interest received, some Muslims consider it haram.
On the other hand, most scholars and other Muslims have no issue with cryptocurrency. As can be observed, numerous Muslim countries have adopted crypto and digital assets. The main argument is that a cryptocurrency is a form of exchange and a way to pay for goods and services.
Another reason why some Muslims see cryptocurrency as halal is due to spot trading in crypto. It involves a user buying and putting their cryptocurrency in their wallet. They have the option to trade, buy, and sell the currency on the current market value. This is the only form of crypto trading that is considered halal by some scholars.
More on the scholars and theologians later.
What Cryptocurrencies are Halal and Haram?
There is a lot to be considered for something to be halal or haram. Since cryptocurrencies differ in many ways, such as how to earn and use them, each must be considered differently. Therefore, some are haram, and others are halal.
What Cryptocurrencies are Halal?
Most well-established cryptocurrencies are halal, according to most Muslim theologians and scholars. They state that they are tried and proven means of payment. These halal cryptocurrencies include:
Bitcoin
Ethereum
Binance coin
Litecoin
Polkadot
Chainlink
Monero
What Cryptocurrencies are Haram?
Not well-established cryptocurrencies pose a high risk of uncertainty and harm, missing the standards of sharia law on investment. Other currencies also encourage haram activities such as gambling, making them illegal as per Islamic financial law.
Here are some of the haram cryptocurrencies according to Islam Finance Guru:
Compound
UMA
SushiSwap
Kusama
Celcius
Uniswap
Crypto Trading as Usury
In the Islamic world, interest is highly forbidden. The Quran calls interest riba or usury and defines it as a transaction where a party charges or offers interest. The Holy book is clear to the extent that it says:
'Those who consume interest cannot stand [on the Day of Resurrection] except as one stand who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns [to dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein."
- Quran - Chapter: Al-Baqarah, Verse: 275
Muslim theologians and scholars don't always agree on what is usury and what is not. However, there is a consensus that staking in cryptocurrency qualifies as riba.
Staking is an earning technique provided by cryptocurrency brokers. It lets the user stake their cryptocurrency for a certain period and earn more coins in the process. The earnings are given as an annual percentage yield (APY) that goes up to 300% on some DeFi platforms.
For example, if you store 2 BTC for three years and receive 3 BTC, it will be considered interest and haram in Islam.
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What Islamic Authorities Say About Crypto Trading
The idea of cryptocurrency is the subject of discussion in very many Islamic sittings. While others agree that it is permissible as a form of payment and storage of wealth, others argue that the elements of interest in cryptocurrency make them haram. As a result, different Muslim authorities around the globe have created different fatwas or rules in support and against crypto trading.
Prominent Muslim figures see a problem trading and using cryptocurrency.
One of the renowned Islam individuals who strongly believe cryptocurrency is haram is Sheikh Shawki Allam, the Grand Mufti of Egypt. According to a fatwa he issued, digital currencies are impermissible in Islamic law. Putting a spotlight on Bitcoin, he stated that the coin is open to fraudulent activities, is little understood, and is dishonest. Furthermore, he argues that virtual money's decentralized nature puts it at risk. Therefore, it would harm individuals, communities, and institutions, which is against the Quran's teachings.
Shaykh Haitham is a famous scholar in the Muslim world who echoes the view of the Grand Mufti of Egypt. The Islamic Tv personality and jurist wrote an Arabic research paper on cryptocurrency. In the paper, he argues that Bitcoin is haram- it is a virtual coin with no physical or tangible value. In discussing how that differs from the fiat currencies, he states control is the issue. He agrees that the decoupling of the dollar from gold in 1971 made fiat worthless but states the existence of a central authority makes them halal. Cryptocurrency is decentralized, making them haram. However, as much as the respected TV personality believes crypto is halal, he is open to the idea of a halal digital currency backed by gold.
Additionally, a fatwa by Sheikh Ibn Bazz, shows how cryptocurrency can be used as a currency as long as it is used at the moment. It reads:
"Dealing in currency, buying and selling, is permissible, but that is subject to the condition that the exchange is hand-to-hand if the currencies are different. For example, suppose a person sells Libyan currency for American or Egyptian or whatever currency hand to hand. In that case, there is nothing wrong with that, such as if he buys dollars for Libyan currency hand to hand, exchanging it in one sitting, or he buys Egyptian or English currency, etc. for the Libyan or whatever currency hand to hand, there is nothing wrong with that. But if there is a delay, then it is not permissible, and if the exchange is not done in the same sitting, it is not permissible because it falls under the category of riba-based transaction. So the exchange must take place in the same sitting, hand to hand if the currencies are different."
Majmoo’ Fataawa Ibn Baaz 19/171-174
Prominent Muslim figures see no problem trading and using cryptocurrency
On the other hand, some prominent Muslim figures see no problem trading and using cryptocurrency.
Maulana Jamal Ahmed and Mufti Faraz Adam from Islamqa.org believe that cryptocurrency is permissible by law. According to Mufti, the numerous concerns around digital assets is misleading. Instead, he argues that cryptocurrency is an asset with value attached to them. He says that in Sharia laws, Bitcoin has 'Maal,' meaning something that you can store, and 'Taqawwum' refers to something with legal value. His counterpart Jamal, an advocate of Hanafi fiqh, believes that Bitcoin doesn't exist in the real world and doesn't promote anything beneficial to society. According to him, Bitcoin is halal.
Mufti Abdul Qadir Barakatullah is another sharia scholar who sees no problem with cryptocurrency. His contributions include heading various Shariah supervisory boards and leading Islamic financial institutions. Mufti Abdul Qadir is convinced that cryptocurrencies can be used as a supporting instrument for making great developments in the field of Islamic finance. He believes that cryptocurrencies are halal due to the famous rule followed by Muslim jurists that if anything is widely accepted in society as a form of payment can be recognized as money in Shariah.
There are no official laws for Muslims regarding cryptocurrency. However, as technology improves and better options are created, we may see more Muslim authorities endorsing cryptocurrency.
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Cryptocurrency in itself can be confusing to anyone. But, for a Muslim, it can become way harder dues to the tricky nature of investment and finance rules. Therefore, any Muslim investor needs to follow the following tips to ensure they are using cryptocurrency in a halal manner.
1. Use a Halal Cryptocurrency and Broker
As stated in the Islam financial laws, you must investigate whether the broker you are using in Crypto trading follows Islam law. Carrying your due diligence helps you invest in a halal digital currency.
2. Do not trade Futures
Futures in cryptocurrency feature you analyzing and predicting the future price of a digital coin. This earning through prediction is considered gambling in the Islam culture and is haram. More information in the article: More information in the article: Can You Trade Futures In Islam? Is It Haram Or Halal?
3. Do not stake cryptocurrency
Staking in cryptocurrency means storing your coins in a digital wallet for a while and earning interest on it. It works on the same concept as a savings account and is considered haram in Islam financial law.
4. Pay your Taxes and follow the rules
If your country requires you to pay taxes on any income made from cryptocurrency, you ought to pay.
Is Cryptocurrency Trading Legal in Muslim Countries
Cryptocurrency was received by supporters and critics alike. The debate around its usability and legality raged on but simmered with time. Currently, there are numerous digital coins in circulation that they are starting to seem normal.
Small businesses increasingly allow customers to pay in cryptocurrency, while financial services such as Paypal allow crypto transactions. As a result, many governments are making laws to govern using cryptocurrency.
However, the situation is met with mixed reactions in the Muslim world. Some Muslim nations permit using digital coins, while some prohibit it.
For example, the United Arab Emirates, through its financial regulators, agreed to allow the use and trading of digital tokens in Dubai's free zone. Bahrain also issued rules on crypto in 2019 in a move that showed them backing cryptocurrency.
On the contrary, some dominant Muslim countries are against adopting, using, and trading cryptocurrencies. They have given laws and fatwas that prohibit or restrict digital coins. Such countries include:
Bangladesh
Indonesia
Egypt
Algeria
Iraq
Libya
Morocco
Qatar
Crypto Staking - Halal or Haram?
Crypto staking has become a popular way for individuals to earn passive income in the world of cryptocurrency. Staking involves holding and validating transactions on a blockchain network in return for rewards. However, when it comes to determining whether staking is halal (permissible) or haram (forbidden) in Islam, there are differing opinions among scholars. While some scholars argue that crypto staking can be considered halal, others raise valid concerns regarding the activity. Here are some of the grounds on which staking can be considered halal:
Proof-of-Stake Mechanism
Some scholars argue that crypto staking can be considered halal because it involves the proof-of-stake (PoS) mechanism rather than the proof-of-work (PoW) mechanism used in cryptocurrencies like Bitcoin. PoS relies on participants' existing stake in the network rather than solving complex mathematical problems. Since PoS does not involve wasteful energy consumption like PoW, it may be considered more aligned with Islamic principles of avoiding extravagance and waste.
Ownership and Investment
According to this perspective, crypto staking can be seen as a legitimate form of investment and ownership. When you stake your crypto, you essentially lock it up in a smart contract, contributing to the security and functionality of the blockchain network. In return, you earn staking rewards or a share of transaction fees.
Participation in Real Economic Activity
Staking can be viewed as a means of contributing to the functioning of a blockchain network, similar to investing in a company or supporting its operations. This perspective considers staking as a productive economic activity rather than a speculative one.
Why Do Some People Consider Crypto Haram?
As we pointed out earlier, not all scholars agree on the permissibility of staking. Several arguments have been put forth by these individuals based on their interpretation of Islamic principles. Here are five common reasons:
Speculation and Uncertainty
Islam encourages transparency, fairness, and avoiding activities that rely on chance and uncertainty. Some argue that cryptocurrency trading involves excessive speculation and uncertainty, resembling gambling. Islam prohibits engaging in activities that resemble gambling, as it can lead to unjust enrichment and harm to individuals and society.
Lack of Tangibility
Islamic principles emphasize the importance of tangible assets and transactions involving real goods and services. Cryptocurrencies are intangible digital assets without physical form. This lack of tangibility raises concerns for some scholars regarding their legitimacy in Islamic finance, as they do not align with the emphasis on real economic value.
Absence of Central Authority and Regulation
Cryptocurrencies operate in a decentralized manner without a central authority or regulatory oversight. In Islamic finance, the presence of a legitimate authority and a robust regulatory framework is considered important for ensuring fairness, transparency, and ethical conduct. The absence of such authority and regulation in cryptocurrencies can lead to potential risks and abuses, raising concerns for some scholars.
Lack of Intrinsic Value
Some scholars argue that cryptocurrencies lack intrinsic value, as they are not backed by any tangible assets or underlying commodities. Islam encourages transactions that involve tangible assets with inherent value, such as goods and services. The perceived lack of intrinsic value in cryptocurrencies raises questions about their compatibility with Islamic finance principles.
Potential for Unlawful Activities
Cryptocurrencies have been associated with illegal activities, such as money laundering, fraud, and financing of illicit practices. Islam strictly prohibits involvement in unlawful activities, and the association of cryptocurrencies with such practices raises concerns for those who consider them haram.
Summary
Cryptocurrency is increasingly brewing debate in the Muslim world. While most Muslim scholars have no problem with using cryptocurrency, other elements make it harder to decide if it is halal or haram. Experts advise that any Muslim user first checks the activities of the broker and currency provider to ensure they only do halal activities. It is also up to you to abstain from haram activities such as staking and trading futures, which are considered interest and gambling in Islam. You can, however, use digital coins to pay for goods and services.
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