A recent declaration by an Islamic scholar that Bitcoin is compliant with Sharia law could be the cause behind today’s $1000 price surge, opening the market to Muslim investors who were previously unsure if the cryptocurrency qualified as money under the strict definitions outlined by scholars.
Muslims account for 23% of the world’s population, with 1.6 billion Muslims throughout the world, mostly in Asia Pacific nations like India and Indonesia. Sharia Law, or Islamic Canonical Law, prohibits the practice of lending money at high-interest rates, known as usury. Debate has raged since the popularity of Bitcoin in the Islamic Scholar community as to whether Bitcoin trading was a form of usury due to the volatility and huge profit and loss margins.
As the fastest growing religion in the world, Islam has become a central issue for financial authorities of late, with the International Monetary Fund (IMF) holding their first formal discussion about Islamic banking needs last year. In Islam, commodities with an intrinsic value (gold, silver, salt) are considered currency. Fiat money actually stands on thinner ice than commodities when it comes to being considered Islamic money – digital or paper money is usually only permitted if it is backed by a commodity of intrinsic value and at a fixed exchange rate. The gold standard allows for gold-backed currencies to be Sharia compliant, for example.
Bitcoin has been a difficult currency to quantify, acting as a commodity and a currency all at once. It does, however, fall under certain definitions of customary money in Sharia law – anything that becomes widely accepted as currency by society or government mandate.
Mufti Muhammad Abu Bakar, a Sharia adviser and compliance officer at Blossom Finance in Jakarta, published a paper on whether Bitcoin is Halal (permitted) or Haram (forbidden) on Tuesday 10 April.
The paper essentially ruled that in certain cases, Bitcoin can indeed be Halal, permitted.
An excerpt read:
“In Germany, Bitcoin is recognized as a legal currency and therefore qualifies as Islamic money in Germany. In countries such as the US, Bitcoin lacks official legal monetary status but is accepted for payment at a variety of merchants, and therefore qualifies as Islamic customary money.”
Sharia has strong ideas about the preservation of wealth, something that has led ICOs and the volatile crypto-trading market to be viewed in a negative light. Bitcoin and blockchain technology, however, actually align well with Sharia ideology. Fractional reserve banking where ownership of the money involved is considered usury, which is forbidden. Because blockchain undeniably proves ownership, it is actually more compliant with Sharia than banking, and this was all included in the paper published by Mufti Muhammad Abu Bakar. The ruling comes only one day after a major Islamic scholar conference concerning cryptocurrencies, demonstrating that this has become a pressing issue among the Muslim population.
As Muslims account for almost 1 in 4 people in the world, the ruling could open up the market to many investors who were previously avoiding it for religious reasons, something that we may well already be seeing with the recent surge in Bitcoin value.