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Is Crypto Halal or Haram? A Guide For Muslim Investors [2024]
According to a report from crypto data firm Chainalysis, in 2023, the Middle East and North Africa was the sixth largest crypto economy of any region, and accounted for nearly 7.2% of global transaction volume between July 2022 and June 2023. Given how the predominant religion in this part of the world is Islam, it is safe to say that there is a big demand for crypto in the Muslim world.
To many readers, this may simply be an interesting piece of information. Yet unlike many other religions, Islam has specific guidelines for Muslims who want to invest in financial products or asset classes, and this includes crypto.This is predominantly influenced by Sharia, which is a strict form of Islamic guidance that many Muslims use to guide their daily actions, so knowing what types of crypto assets and instruments are permissible is essential.
For this reason, this article will draw upon contemporary Islamic research to provide guidance to Muslim investors who are considering investing in crypto.
We’ll discuss:
- Core Principles of Islamic Finance Affecting Investment Decisions
- Cryptocurrency as a Medium of Exchange and Commodity
- Analysis of Common Crypto Practices
- Review of ICONOMI for Sharia compliance
- Is Crypto Halal or Haram?
Let's dive right in!
Core Principles of Islamic Finance Affecting Investment Decisions
Before we delve into a more detailed analysis of Islamic guidance for cryptocurrency, it's important to first have an overview of the core principles for Islamic finance in general.
Let's have a look at three core tenets of Islamic finance — the prohibition of Riba, avoidance of Gharar, and how this links in with ethical investment requirements under Sharia law.
Prohibition of Riba (Interest)
Riba in Islamic finance is the term given to accruing interest and is a strictly prohibited activity for Muslims.
This comes from teaching in the Quran and Hadith, where earning interest is considered to be both unjust and exploitative. The rationale behind this (according to Islamic teachings) is that money should not be generating further wealth unless it is through economic activity that is productive. Therefore, Muslims are taught that money should only be generated off the back of legitimate business activities and investments in assets with real intrinsic value.
So it is recommended that Muslim investors are cautious with any activity that can be seen as Riba, and to gain further clarity, it may help to seek guidance from Islamic scholars who have knowledge of Islamic finance, or Muslim financial advisors.
Avoidance of Gharar (Uncertainty)
In Islamic law, Gharar is used to describe any ambiguity or uncertainty in transactions and contracts. When Gharar is identified, Muslims are not allowed to take part. The underlying rationale behind Gharar is that financial dealings should be fair and transparent, and this is to ensure that everyone involved has a clear understanding of the nature of any transaction, as well as the intended outcome. This is to prevent exploitation, as, in theory, one party would be able to take advantage of the other's lack of understanding if there is a lack of clarity present. So, Gharar is essentially laying the foundations for a more stable and ethical financial environment.
Again, it is advisable to get advice from Islamic scholars who have knowledge of Islamic finance or Muslim financial advisors.
Ethical investment requirements under Sharia Law
As can be seen, Islamic finance is deeply rooted in ethical investment principles, and avoiding interest (Riba) and uncertainty (Gharar) is necessary to promote social justice and economic fairness.So what can be taken from this?
Firstly, investing in haram (forbidden) activities is strictly forbidden. The rationale behind this is to ensure that the wealth generated by Muslim investors contributes positively to society and aligns with their religious beliefs. Investments must also adhere to the principles of fair profit and loss sharing. This means engaging in transactions that reflect genuine economic activity and risk-taking rather than speculative or deceptive practices.
When it comes to cryptocurrencies, it is important to be aware that certain scholars differ in their view of whether certain aspects of cryptocurrency trading and investing are permissible under Sharia. But what they all agree upon is the core foundational argument of what makes crypto halal (permissible), and that is whether it is a medium of exchange or commodity.
Cryptocurrency as a Medium of Exchange and Commodity
When it comes to whether crypto is haram or halal, the first step is to determine whether it is a medium of exchange or a commodity.
For example, cryptocurrencies like Bitcoin and Ethereum can serve both roles. As a medium of exchange, they both have real-world use, such as facilitating the purchase of goods and services (as seen in some stores that accept Bitcoin), or being used to power a legitimate blockchain economy (such as Ethereum). These examples demonstrate an absence of Riba (interest) and Gharar (excessive uncertainty). Therefore, both are widely considered to be halal.
Opposingly, cryptocurrencies can also be viewed as commodities, especially when they are traded for investment purposes. Crypto tokens outside of Bitcoin and Ethereum are much more likely to fall under the commodity category (which falls into Gharar), meaning there is much more scrutiny under Sharia. Investments should be backed by tangible assets and real economic activity to be deemed permissible, so many Islamic scholars would categorise meme coins like Shiba Inu as haram.
Again, because Islamic scholars have slightly nuanced interpretations of what is permissible and what isn't, seeking guidance from knowledgeable Islamic scholars (or financial advisors) may help to see whether a crypto token is a speculative commodity or medium of exchange.
Analysis of Common Crypto Practices
Now we have a foundational understanding of the underlying logic behind what makes crypto halal or haram, let's have a look at a few common crypto activities, and whether they are permissible or not under Sharia.
Blockchain projects (token sales, utility tokens)
Investing in token sales or utility tokens is a common way of investing in (or supporting) blockchain projects, and this presents some unique challenges under Sharia principles.
For example, when it comes to token sales, investors purchase tokens before a project is properly established, and this can create an environment of Gharar due to the uncertainty surrounding a project's utility and future value.
However, if a token has established utility for a legitimate economic activity, and is transparent about the benefits and risks, then it can be considered Halal under Sharia due to avoiding excessive speculation.
Futures trading
Most Sharia scholars would agree that crypto futures trading is highly speculative in nature and has the potential to earn interest, which is considered to be Riba (forbidden). Therefore, crypto futures are widely upheld as involving excessive Gharar (uncertainty), which simultaneously makes them fall under a Qimar (uncertainty) activity.
Furthermore, because crypto futures trading includes shorting, this also adds further weight to this activity being haram, as short traders profit from the losses of others, which is contrary to the principles of fairness and mutual benefit emphasised in Sharia. What's more, shorting involves betting on the decline of an asset's price, which can, at times, foster instability for a specific cryptocurrency (or the entire market, depending on its influence).
Staking
The Islamic consensus appears to be that staking can be permissible if it aligns with the profit and loss sharing (PLS) principles of Islamic finance.
However, if the rewards resemble interest (Riba) or if the process lacks transparency, it may be deemed haram. The key considerations include whether the staking rewards are generated from legitimate economic activities or if the process avoids excessive uncertainty (Gharar).
Because each staking operation is unique and relies upon different factors, reaching out to the core team behind a staking operation asking for transparent information regarding how they generate staking rewards is advisable.
Crypto lending
Crypto lending involves loaning digital assets for interest payments, which directly conflicts with Sharia law's prohibition of Riba (interest).
It is therefore undeniable that crypto lending is classed as haram (forbidden), as it generates income without productive economic activity. Moreover, crypto lending can introduce significant Gharar (uncertainty) due to market volatility and default risks, and there is also a high-chance of there being no mutual benefit; making it even more incompatible under Sharia.
Crypto Copy Trading and Strategies
Whether crypto copy trading (or strategies) is halal or haram is a highly debatable subject. Islamic scholars will often differ on this, with some allowing this activity (but under strict conditions), while others will advise against it due to the risks and incompatibility with Islamic principles.
On one hand, some Islamic scholars and financial advisors may deem copy trading as permissible if trades or investments are made into cryptocurrencies with real world-use, that don't generate interest in a dubious manner, and the investment strategy involves transparent and ethical practices. For example, copying a trader who invests in halal assets and adheres to risk management aligned with Sharia principles could be considered permissible.
On the other hand, copy trading may be prohibited if the trades or investments involve a high-degree of uncertainty, or rely on interest-based transactions. For example, copying a trader whose investments are in highly speculative DeFi protocols would likely be haram, as this would naturally introduce elements of gambling and Riba; both prohibited in Islam. Therefore, Muslim investors must thoroughly evaluate the nature of the strategies they are copying before they commit.
Review of ICONOMI for Sharia compliance
For European crypto investors who are looking to copy trading or crypto strategy platform, few platforms are more established and reputable than ICONOMI, which not only has been operating since 2016, but is one of the few crypto platforms to be regulated by the FCA (Financial Conduct Authority). Additionally, the platform also caters for business, as seen with its provision of crypto business accounts.
When it comes to Sharia principles, ICONOMI has yet to be evaluated by a Sharia scholar or financial advisor. So before deciding to invest on the platform, it may be worthwhile consulting one of the aforementioned experts before. However given how there appear to be clear guidelines of financial activities that are allowed or prohibited, it appears that Islamic investors can gauge ICONOMI's compatibility with Sharia.
ICONOMI under the Microscope of Sharia
The first thing to note is that ICONOMI is a platform which simply facilitates crypto strategy hosting and copying, meaning that users are not really dealing with the platform in and of itself, but much rather the crypto strategies and their owners. This allows users to evaluate on a case by case basis.
When it comes to evaluation, the good news is that ICONOMI has built a highly transparent platform, where users can easily see what cryptocurrencies are included within a crypto strategy, their weighting (by percent), and the historical performance of each strategy. Moreover, most strategists are fully transparent about the type of strategy they are employing (seen in the description), and will often provide message updates regarding performance and any changes. So given how key information is publicly available, it is quite possible to identify whether a crypto strategy may or may not be Sharia compliant.
For example, it appears that the Blockchain Index strategy can be viewed as Halal, as not only is its main weighting made up of Bitcoin and Ethereum (which as has been shown, are both considered to be Halal), but its core objective is to provide exposure to "nascent projects with potential strategic importance in the future distributed economy". This is in line with crypto being allowed as a means of exchange or commodity (with real-world use). But due to still being some speculation here, it may be worth double checking with an Islamic scholar or financial advisor. On the other hand, there are crypto strategies which may be seen as haram. For example, when looking at the Wisdom DeFi strategy, because it is made up of the 10 leading (by market cap) cryptocurrencies in the DeFi sector, it already is a contentious area seeing how many DeFi protocols have no legitimate business use. This strategy also publicly admits that this strategy has high volatility, which is also not compatible with Islamic finance principles.
So as can be seen, whether ICONOMI is Halal or Haram mainly comes down to the individual strategies themselves, what they are made up of, and their aims.
Halal Crypto Strategies on ICONOMI
Some Strategists have taken on themselves to provide Strategies which provide exposure to the most prominent Shariah-compliant projects. As such, you can invest in the growth of ethical crypto without compromising your faith or taking excess risk.
For instance, Shariah Index only includes cryptocurrencies aligned with Shariah. No meme coins and no Stablecoins. The criteria are transparent and rigorously applied.
Is Crypto Halal or Haram?
To sum things up, whether Muslims can invest in certain cryptocurrencies (or partake in certain crypto practices) is an ever-evolving debate, and can at times yield different answers based upon the Islamic scholar or financial professional giving out advice.
However, as was discussed, there are indeed rigid guidelines of what to avoid when partaking in financial activities, including Riba (interest) and Gharar (uncertainty), and the ever-present importance of ethical investment. Furthermore, it appears there is indeed a consensus when it comes to crypto as a medium of exchange, and how crypto as a commodity can also be permitted if there is underlying evidence of its practical business use; and if it isn't associated with anything to do with gambling or fraud.
In terms of potential developments, it's quite possible that we will see more Sharia-compliant crypto platforms being launched, and more refined guidance for Muslim investors. So keeping up-to-date with the latest news within Islamic finance, and consulting accredited Islamic scholars and financial professionals will continue to be an important step for making investment decisions within the world of crypto.
If you enjoyed this article, you may be interested in our other titles:
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