Many Muslims all around the world, especially those in the Islamic finance and Islamic banking space, have been getting more and more interested in the world of cryptocurrencies, particularly Bitcoin. Being disillusioned with the heavy involvement of Riba in the current financial system, some Muslims, including the author, have been exploring and learning about Bitcoin as a potential alternative to escape Riba. To some Muslims, Bitcoin shows great promise to serve as a foundation to build a financial system without the filth of Riba being involved in the source code.
However, we’ve noticed an increasingly significant portion of this group of Muslims that are looking beyond Bitcoin. This group looks at Bitcoin and the cryptocurrency space and thinks to themselves: “We need to make our own Islamic crypto with our own halal blockchain. We’ll make sure that our minted NFTs are shariah compliant and that our DeFi protocols are scholar approved. We’ll revolutionize Islamic finance and tap into this three trillion dollar industry to make it successful. We’ll make our own halal metaverse!”.
What these “halal blockchain” promoters fail to realize is the real innovation and value proposition of Bitcoin, which is absolute digital scarcity that is immutable, secure, censorship resistant, and truly decentralized. Bitcoin seeks to be actual sound money and not some stock or security. As we’ll see, these altcoin projects, even with a halal label, are unethical at their very foundations due to a number of issues that we’ll explore. We will conclude by making the case that, unlike the crypto space, Bitcoin’s properties and genesis provide a solid foundation that is ethical.
The ethical issues of “halal” crypto
Altcoins serve one purpose: to replicate the success of Bitcoin and attempt to improve its design. These attempts almost always emerge in the same fashion, where a group of developers form a company that announces some supposedly new application of blockchain. And there’s always a token that addresses some utility that Bitcoin cannot meet. There may be a different or novel consensus protocol that reduces fees or allows for faster transaction times. So, in order to raise funds for this new venture, the developers and financial backers participate in what’s called an initial coin offering or ICO. An ICO is where the very first tokens that are generated are selectively sold, at a discount, to the developers and VCs and other financial backers. After the ICO, retail investors are given the opportunity to purchase the tokens.
So Ahmad from the Islamic finance world looking at these emerging altcoin projects thinks to himself that he can just copy this same model and make it shariah compliant and market it to Muslims as a halal digital commodity. Ahmad could even get some scholars that he’s worked with before to sign off on this venture and get a “shariah compliant” sticker to go with it. He considers the idea of having a shariah advisory board to oversee the crypto project to prove to his investors that he’s taking this shariah compliance thing very seriously and that the “tokenomics” are totally halal.
Muslims, especially from the Islamic finance space, will look at Ahmad’s halal crypto business idea and think that it’s a reasonable venture to pursue. They may assert that it’s basically taking the idea of Bitcoin, but improving it and making it shariah compliant. However, what Ahmad is doing is actually very unethical for several reasons.
For what purpose is Ahmad starting a crypto project? Well, he’s trying to redesign the technology of money. But what Ahmad is building cannot be called money. Any crypto project that is pursued almost always emerges from a company or startup. The founders are always involved in an ICO to handle the initial distribution of the tokens, which allows the founding company to fund itself through the production of new tokens to sell to traders. The project has to have a development team for maintenance, a marketing team to create hype, and a finance team to manage expenditures and revenues. What we’re describing now cannot be called money; it’s more accurate to describe this project or issued token as a security since it’s managed by a central company. This new halal coin, by definition, cannot be a commodity, since the supply and distribution is managed in a central way. And let’s say that this halal crypto coin is supposedly decentralized where the users and participants can vote on the issuance policy of the token. It’s still not a commodity, because if users can change the token issuance policy with a vote, how is this process of voting any different than voting shares? The ability to vote on certain protocol and consensus changes does not mean that the network is decentralized. Any rational person will look at these properties of this “halal” crypto project and will correctly infer that it is indeed not a type of money or currency, but it is an unregistered security, which has unethical implications.
So is it ethical for Ahmad to market this crypto project as the new “sound money” that Muslims all over the world will start using? We contend that, no, it is not. It’s essentially a financial stock that doesn’t have any assets to back up its absurdly high market cap. It’s an unregistered security with no disclosure agreement to the investors, and the initial tokens are always distributed in an unethical and unfair manner. Any yield that these halal washed tokens generate are supposed to come from economically productive assets, but that’s clearly not the case, as there are no productive assets pegged to these crypto projects. Like most other crypto projects offering a yield, these halal blockchains offer yield products financed by speculation by traders, rehypothecation, and leverage. Allen Farrington and Anders Larson, in their essay “Only the Strong Survive”, correctly point out the issue with yield in the DeFi and crypto space:
“So what yield is being farmed in crypto? There is transparently none.There are flows, but they are not generated by economically productive assets over time but rather appear near instantaneously as a result of speculative pricing across non-productive assets. The word “speculative” is not a denigration. There is nothing wrong with speculative value. But there is something bizarre and circular about discrepancies between different speculations on the potential future value itself forming the basis of profitable arbitrage that is then mislabeled as a “yield.””
So it should be clear that any halal crypto that is pursued can only be built on unethical foundations, as the founders are trying to profit unfairly and secretly from the project because it is the only way to keep the project going. The founders always claim that it is decentralized, but we can see from several angles that this is false. These projects are always initiated by a central company issuing these coins or at least issuing the first batch of these coins. The “road map” and monetary policy of the protocol is primarily directed and influenced by the founding startup.
Another unethical aspect of these halal tokens is that they always include a group of scholars or some shariah advisory board that signs off on the project that gives it the false assurance that it’s Shariah compliant. This obviously presents a conflict of interest, where the approving scholar is typically a member of the founding team, or at least an ambassador, for the crypto project. Of course they’re going to label their token as shariah compliant, it’s what they’re paid to do! Any opinion issued by a scholar that promotes a specific halal crypto token is questionable and not legitimate, even if issued with the right intentions.
To summarize, the very foundations of these “halal blockchain” projects are inherently unethical. The premines and ICOs only allow a select few insiders to profit at the expense of dumping on retail traders. The economic policy and consensus rules can be changed at any time, which is subject to voting dictated and directed by the founding team. These halal crypto projects attempt to make a new “shariah compliant” digital money to be used by Muslims, but they’re really just unregistered securities, and therefore do not qualify as money. The yield generated by these projects are not real, in that it’s not based on any productive capital. Lastly, the scholars that promote these halal washed tokens are always members of the founding members that are in control of the token issuance, which presents a conflict of interest.
So, if these “halal blockchain” projects are securities, why not invest in an actual shariah compliant security that has the benefit of being registered? After all, a shariah compliant ETF or mutual fund would have actual underlying productive capital backing it up. With “halal blockchain”, the only thing that appears to be backing it are some combination of speculation, hype, and rehypothecation.
Bitcoin is ethical money
The issues with crypto laid out above are nonexistent with the only ethical digital sound money: Bitcoin. Bitcoin already fulfills the requirement of money in Islam, in that it must be a commodity that can facilitate the function of being a medium of exchange. In stark contrast to the rest of crypto, Bitcoin’s distribution was fair and ethical.
With Bitcoin, there is no founding company that’s issued a premine or ICO. Satoshi Nakamoto posted the Bitcoin project in a public manner, where anyone and everyone was free to join him in mining the first blocks. Bitcoin did not even have a fiat price when it was first created, so there was no way for Satoshi to make a profit and dump it on retailers. The initial distribution of bitcoin was conducted in an ethical, fair, and transparent manner that simply cannot be replicated. The reason why it cannot be replicated is because the participants of the early Bitcoin network were not aware of what was being invented, or rather, discovered. The ethical foundation of Bitcoin’s genesis cannot be recreated with any other digital asset. Knut Svanholm in his book “Bitcoin: Independence Reimagined”, explains:
“Absolute mathematical scarcity achieved by consensus in a sufficiently decentralized distributed network was a discovery rather than an invention. It cannot be achieved again by a network made up of participants aware of this discovery, since the very thing discovered was resistance to replicability itself”
Satoshi did not engage in an ICO or premine to distribute bitcoin. The concept of ICO did not even exist at the time of Bitcoin’s discovery. The bitcoin project was publicly available for anyone to participate in mining the initial coins. There were no initial insiders or founders that could have profited from Bitcoin’s early days. Satoshi, along with other cypherpunks, abided by the same rules, where they needed to expend energy in the real world to attain more coins. All of these details concerning Bitcoin’s genesis highlight that Bitcoin was fairly and ethically distributed in an open and transparent manner. Bitcoin is actually decentralized and permissionless, which is unlike all of these “halal” blockchains. Anyone, regardless of jurisdiction, can participate in the Bitcoin network. Users can run a node, which allows for verification of the entire chain of blocks. Users can also mine newly issued bitcoin, provided that they expend the energy required to find the next block. There are thousands of users running nodes and miners all over the world.
Now it could be argued that there are currently “whales”, or individuals and institutions that hold a significant amount of bitcoin, that manipulate and hoard bitcoin, and this supposedly makes bitcoin unethical because, while Bitcoin’s initial distribution was fair, it’s currently not distributed in an equal manner. However, bitcoin’s ethicality is not contingent on an equal distribution. This is a socialist talking point, and the requirement of the equal distribution of wealth is not even aligned with Islamic principles. Sayyid Abul A’la Mawdudi in his book “First Principles of Islamic Economics” elucidates that Islam seeks to achieve an equitable rather than an equal distribution of wealth and means of production:
“Another basic principle of Islam’s economic system is that it aims at an equitable, but not necessarily equal, distribution of wealth. It does not seek an absolutely equal distribution of the means of living for every human being. Anybody studying the Qur’an will notice that such an equality does not exist anywhere in the whole of the universe. The very concept of parity is contrary to the dictates of nature.”
Also, this criticism misses the entire point of the permissionless nature of bitcoin. Are the node runners supposed to upgrade the bitcoin software, such that some people are not allowed to hold and transact bitcoin to insure everyone holds some arbitrarily “fair” amount of bitcoin? It would be impossible to know, and actually, it would be unethical to dictate how much money each person is allowed to hold. Under this fictitious scenario, the incentives to participate in the bitcoin network then becomes a matter of who can dictate how many bitcoins each person is allowed to own. Readers that desire this unethical network effect are encouraged to stick to fiat currency.
Like all other altcoins, the centralized “halal” crypto projects are merely morally bankrupt attempts at recreating fiat, where the production and distribution of money is arbitrarily manipulated to the benefit of the founders and insiders. Bitcoin, on the other hand, has no central authority, is actually decentralized and permissionless, was fairly distributed upon its emergence, and does not force its users into any manipulation of its production or distribution. By these metrics, we conclude that Bitcoin is ethical and is in line with Islamic principles, while altcoins, especially those projects with the halal label, are unethical and completely antithetical to the moral teachings of Islam.