Home > Money > Is Bitcoin Sharia Compliant? Davi Barker

Is Bitcoin Sharia Compliant? Davi Barker

Source: http://dailyanarchist.com/2013/01/30/is-bitcoin-sharia-compliant/


This is intended for a Muslim audience but I will endeavor to make it accessible to a general audience. It is really an appeal to Muslims for a little monetary sanity.

I am  in the uncomfortable position of being the only person I know even remotely qualified to answer this question. There’s no pride in that claim, but despair for the lack of interest in this subject in the Muslim community.

The Muslim scholars I’ve asked don’t really understand what Bitcoin is, and the average Bitcoin enthusiast doesn’t know anything about what has become a relatively esoteric area of Islamic law. So, I may be the only bridge between these two communities.

There are certain areas of Islamic law that only apply to money, specifically the rules for lending and the rules for charity, which is why we see the emergence of so-called “Sharia compliant” banking and “Zakat eligible” charity in the West. In fact, many have speculated that quashing Islamic banking is the real reason that central planners target Muslim countries, and targeting Islamic charities has absolutely been part of their domestic policy.

Zakat is an annual charity given by Muslims, calculated as 2.5% of their surplus wealth, including certain commodities, like precious metals. The money should go to the poor, the hungry, the orphan, or the traveler as directly as possible.

Now, I have serious doubts about the validity of paper money. I don’t see how a paper note printed by the Federal Reserve is any different from a paper note printed by Parker Brothers, and we don’t give Zakat on Monopoly money. It is only out of an abundance of caution that I give Zakat on paper money. I give Zakat on my precious metals with precious metals, and give a separate donation on my paper money with paper money. I will not give Zakat on precious metals with paper money, which means I had to find a Zakat eligible charity that would accept precious metals. I give to the Hidaya Foundation because I admire the integrity of their work, and I trust them to use my contribution with the correct intention. But no Zakat eligible charity that I know of accepts Bitcoin.

We’ve got to start by asking, “What is money in Islam?” To answer this I rely on the works of Imran Hosein, specifically his book “The Gold Dinar and Silver Dirham.” He is one of the most reliable Islamic scholars I know of on the subject.

Imran Hosein identifies six commodities that were used as money in Muhammad’s (SAW) community. Gold and silver are explicitly mentioned in the Quran, but when they were in short supply the Muslims would use dates, wheat, barley and salt. Further, we have records of Muhammad (SAW) applying the rules associated with money to these commodities, but not to other goods, like livestock, which were not used as money.

In later generations Muslims accepted some foreign coins, while rejecting others, and used other commodities in regions where the original six were uncommon. Rice in Indonesia, and sugar in Cuba for example.

So, why accept some coins and reject others? Why use some commodities, and not others? Imran Hosein identifies six traits common to all of these that amount to a definition of money in Islam.

  1. Money is either precious metals or food.
  2. Money is abundant and freely available.
  3. Money is durable and does not spoil or corrode.
  4. Money has intrinsic value.
  5. Money exists in creation and is made valuable by God.
  6. Money functions as a medium exchange.

I actually want to dispute the first trait. Imran Hosein is inferring the requirement of being metal or food from the original list, but that’s not explicit in the text. It may be that those commodities were used because they best fulfilled the other five traits. In explaining the first requirement he writes:

“Some scholars of Islam argue that mankind is free to use anything, even a grain of sand, as money. They then go on to declare that there is no prohibition to printing paper for use as money and then assigning any value to the paper. Our response is that only Allah Most High is al-Razzaq, the Creator of wealth. Whoever attempts to assume the divine prerogative by creating wealth out of paper, or arbitrarily assigning to grains of sand a value quite different from their natural value, would be guilty of Shirk (Idolatry).”

His objection to sand and paper is not that they are not metal or food, but that they have no intrinsic value. When describing intrinsic value, natural value, and God given value, which he uses interchangeably, his test is that the value is determined by supply and demand, and not artificially assigned by central planners. It seems to me, if a commodity is not metal nor food, but fulfills the other five traits it would make perfectly good money. For example, the Rai stones of Micronesia, the Wampum beads used by some Native Americans, or beaver pelts used as currency in pre-Revolutionary America.

Now we’ve got to ask, “What is Bitcoin?”

Bitcoin is a digital currency that is circulated within a world-wide peer-to-peer network. The network contains a public ledger of all transactions called theBlockchain, and private balances associated with user created accounts. While processing transactions Bitcoin minors attempt to solve a difficult math problem. When the solution is discovered a new block is created in the Blockchain and the minor is rewarded with new Bitcoins, which they distribute into circulation by transacting with other users. The production of Bitcoins decreases over time at a fixed rate, and can never exceed 21 million by design, but more importantly it can’t be manipulated by central planners.

Each public transaction has a corresponding private key so only the recipient can make the next transaction. Transactions are broadcast to the network, recorded in the ledger, and a new key is created giving the recipient effective ownership of the Bitcoin even though the information technically exists on every computer in the network.

The result is that Bitcoins can be exchanged freely by anyone in the network, even through national sanctions. This can be done without any central bank or government. It can be done from anywhere in the world that has access to the network. And it can potentially be done anonymously.

So how does this measure up to our definition of money?

First, is it a precious metal or a food? Well no, but as I’ve argued, I’m not sure this is a good criterion.

Second, is it of abundant supply and freely available? Absolutely. Anyone can become a Bitcoin miner simply by devoting the necessary computer processes, or they can acquire Bitcoin by exchanging some other currency for it, or accepting it as payment.

Third, is it durable? Absolutely. If you save your Bitcoins on a flash drive and hide it under your mattress for 20 years the data will still be intact. It is possible that the data could be corrupted, so it’s not as durable as gold or silver, but it is at least as durable as wheat or barley.

Fourth, does it have intrinsic value? People ask me what Bitcoin is backed by. The answer is it’s only valuable because people value it. What is gold backed by? The answer is the same. It’s only valuable because people value it. There is no central planner proclaiming that Bitcoin is valuable. It’s backed by itself, and that’s what intrinsic value means. Some people value it for the potential anonymity, others because it can be transferred over the internet without fees, others for the peace of mind that their account can’t be frozen by central planners. Whatever reason people value Bitcoin, it is for characteristics inherent to its design, not outside it.

Fifth, does it exist in creation, and is it made valuable by God? This is difficult to answer because it’s not typically part of an economic analysis. The test for this, according to Imran Hosein, is that the price is determined by supply and demand, and not arbitrarily by a central planner. So, for example, early Muslims accepted foreign copper coins, even though copper wasn’t one of the original six commodities used by Muhammad’s (SAW) community, but they ignored the face value of the coin and traded it at the market price of copper. Bitcoin has no face value. No central planner arbitrarily assigns a value to it different from their natural value. Exchange sites like MtGox trade Bitcoin like Kitco trades gold at a market driven price.

I think of it like this. Gold exists in creation, but it has no utility until it is mined and made into a useful form. It requires human work and design to unlock its value. Similarly, solutions to math problems exist in creation, maybe not materially, but they are discovered not invented. But they aren’t valuable until they are given utility through the work of Bitcoin minors and the design of the Bitcoin network. The economic laws that govern price fluctuations reflect a God given value, even if the form of the Bitcoin program, like a coin, is of human design. For me, Bitcoin satisfies this requirement, but I could see how others might dispute that conclusion.

Sixth, does it function as a medium of exchange? Absolutely. Bitcoin is used by thousands of people every day to buy, sell and trade and is divisible down to eight decimal places.

So, of our six requirements of money in Islam, Bitcoin easily satisfies four, satisfies one that could be disputed, and doesn’t satisfy one. And the one it fails to satisfy is the one I’d argue is an unnecessary requirement.

What if we compare that with paper money? Paper money is not metal or food. Because of inflation it is not durable, but devalues over time. Its value is not intrinsic, but comes from legal tender laws that obligate its use. Its price is not determined by supply and demand, but set by central planners. Paper money only fulfills two of these requirements. It is abundant, and it functions as a medium of exchange, and even then only because it is required by secular ­­­­law.

At best paper money fulfills two of the six traits of money in Islamic law, while Bitcoin fulfills four or five. So, Muslims who regard paper as money should certainly regard Bitcoin as money, probably more-so, and Muslims who reject paper money and are searching for alternatives should take a long hard look at Bitcoin. We operate in a market where physical precious metal is not nearly as prevalent among the common people as it was in the past. I see a kind of balanced elegance to the fact that in the past food based economies resorted to food when precious metal was scarce, and today our digital economy may resort to digital currency when precious metal is scarce, or even criminalized. So, I’m calling it money. You can certainly disagree if you wish. But I’ve got a donation waiting for the first Zakat eligible charity that accepts Bitcoin.

Categories: Money
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