Mohammed Amin's views on cryptocurrency

Cryptocurrencies are a “hot” investment topic. Indeed I have relatives who are trading cryptocurrencies.

What led to my subject for my November column in the magazine "Islamic Finance News" was focusing on the fact that cryptocurrencies are also attracting the attention of Shariah compliant investors, which I regard as somewhat surprising.

To summarise my views, I can see no purpose in owning Bitcoin apart from speculating on its price fluctuations, which is not something I do. Accordingly, I see no prospect of my ever owning Bitcoin.

The article did not have space to discuss related topics such as central bank issued digital currencies, which I regard as an entirely different proposition. See the Bank of England page "Central bank digital currencies."

A personal perspective on cryptocurrency

Almost every issue of this magazine mentions new cryptocurrency offerings aimed at Muslim investors. People’s desire to speculate in cryptocurrencies like Bitcoin is perfectly understandable when you look at its price history.

Shortly after its launch, the price of one Bitcoin was well under one US cent. I read that on 22 May 2010 Laszlo Hanyecz made the first real-world transaction by buying two pizzas in Jacksonville, Florida, for 10,000 Bitcoins. Compared to that, by October 2021 the price of one Bitcoin exceeded $66,000.

If you can successfully predict how the price of Bitcoin will fluctuate, you can of course make enormous amounts of money. Or lose it if your predictions are wrong!

The fact that owning Bitcoin can be promoted as Shariah compliant poses a very acute form of a wider question. Does the Shariah permissibility of Islamic finance derive just from its legal form, or is there a deeper underlying religious and moral principle?

For example, the economics of a diminishing musharaka home purchase plan are essentially identical to the economics of a conventional mortgage. Shariah scholars say that one is permissible, while the other is not permissible.

For many years, the American scholar Mahmoud El-Gamal, Professor of Economics and Statistics and holder of the Chair in Islamic Economics, Finance, and Management at Rice University in Texas has been very critical of Islamic finance. His contention is that Islamic financiers simply make money by arbitraging the legal form of contracts. For example, by offering diminishing musharaka contracts to Muslim customers at a price higher than a conventional mortgage would cost them.

Personally, I can see no purpose in owning Bitcoin apart from speculating on its price fluctuations.

It is not a useful medium of exchange because its price changes too quickly. While it is sometimes compared to gold or other commodities since their prices also fluctuate, the fundamental difference is that all other commodities are used to make things, even gold which has uses in electronics and dentistry quite apart from jewellery.

Bitcoin simply has no alternative use, unless you count paying ransom demands to terrorists as a valid use. Instead, the only reason for buying it is to speculate. My fundamental question is that if conventional insurance has too much gharar (Arabic for risk and uncertainty) to be Shariah compliant, how does one justify Bitcoin being a Shariah compliant asset?

While it is not directly relevant to the above question, I do find the concept of distributed ledgers (technology which underlies Bitcoin) interesting and potentially useful. We are used to having a trusted authority as a central registrar (for example of land titles.) Theoretically distributed ledgers can do away with the need for such a trusted authority. However I have yet to see a real world application of this take off.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.