By Zaid Khan
Bitcoin is a virtual currency, or cryptocurrency, that’s controlled by a decentralized network of users and isn’t directly subject to the whims of central banking authorities or national governments. Although there are hundreds of cryptocurrencies in active use today, Bitcoin is by far the most popular and widely used for speculation. But here is an enormous dark side of cryptocurrency.
An interesting question that arises here for Muslims is: Whether Bitcoin is money as per Islam. Let’s examine it from the Islamic prospect.
Bitcoin and Islam
Islam supports intrinsic commodities that can be used as currency or medium of exchange. Paper or electronic money can also be used but they should be backed by an intrinsic commodity or least a legitimate promise. So should Bitcoin be counted as money then? The answer is obviously No, because Bitcoin is free-floating currency as its value is totally determined by market. In other words, only people who use bitcoin think it is money and use it as money but actually it’s nothing but a virtual software.
“Historically, Islam has only recognized commodities of intrinsic value as money including things like gold (Dinar), silver (Dirham), rice, dates, wheat, barley and salt. In a strict interpretation of what qualifies as money, Bitcoin absolutely misses the parameter.”
Bitcoin can be used to facilitate illicit activity, such as the purchase of illegal drugs on “dark web” marketplaces and it encourages unlawful activities.
For all its promise, Bitcoin remains a niche currency that’s subject to wild value fluctuations. Despite the wild-eyed pronouncements of hardcore proponents, it’s certainly not a legitimate investment or trading vehicle, as is the case with stable national currencies, such as the U.S. dollar and Indian rupee.
How Does Bitcoin Work?
Bitcoin is a cryptocurrency, meaning it’s supported by a source code that uses highly complex algorithms to prevent unauthorized duplication or creation of Bitcoin units. The code’s underlying principles, known as cryptography, are based on advanced mathematical and computer engineering principles. It’s virtually impossible to break Bitcoin’s source code and manipulate the currency’s supply.
Although it was preceded by other virtual currencies, Bitcoin is known as the first modern cryptocurrency. That’s because Bitcoin is the first to blend certain key features shared by most subsequently created cryptocurrencies.
Intense privacy protections are baked into Bitcoin’s source code. The system is designed to publicly record Bitcoin transactions and other relevant data without revealing the identity of the individuals or groups involved. Instead, Bitcoin users are identified by public keys, or numerical codes that identify them to other users, and sometimes pseudonymous handles or usernames.
Every Bitcoin user has at least one private key (basically, a password), which is a whole number between 1 and 78 digits in length. Individual users can have multiple anonymous handles, each with its own private key. Private keys confirm their owners’ identities and allow them to spend or receive Bitcoin. Without them, users can’t complete transactions – meaning they can’t access their holdings until they recover the corresponding key. When a key is lost for good, the corresponding holdings move into a sort of permanent limbo and can’t be recovered.
Bitcoin exchanges allow users to exchange Bitcoin units for fiat currencies, such as the U.S. dollar and euro, at variable exchange rates.
Bitcoin exchanges ensure that the Bitcoin market remains liquid, setting their value relative to traditional currencies – and allowing holders to profit from speculation on fluctuations in that value. That said, Bitcoin users must understand that Bitcoin’s value is subject to wild swings – weekly moves of 50% in either direction have occurred before. Such swings are unheard of among stable fiat currencies because the encrypted currency has no value; it’s completely determined by market sentiment and anyone owns it on their own risk unlike other currency like US dollar and Indian rupee which are backed by central bank like RBI.
RBI had cautioned on its website in February 2017.
“Any user, holder, investor or trader dealing with virtual currencies like bitcoin is doing it at their own risk.”
The RBI has been repeatedly flagging concerns about Bitcoins, stating that they pose potential financial, legal, customer protection and security-related risks. And according to Harvard economics professor Kenneth Rogoff, “Collapse of Bitcoin Inevitable”
Therefore, before you rush out and cash in your fiat money for Bitcoin, remember that Bitcoin has a long way to go before it’s a legitimate currency on par with the U.S. dollar, euro, rupee or pound. And despite the seductiveness of cryptocurrency as a means of exchange, there’s no guarantee that Bitcoin – or any other decentralized, virtual currency not controlled by a national bank – will ever be a viable alternative to fiat currencies.
For the time being, treat Bitcoin as you would any speculative asset: Move cautiously, or not at all, and never invest money that you can’t afford to lose.