Summary and analysis: Bitcoin is a currency and you should follow the same islamic rules that apply to other currencies. His concern is that if it is being traded in small quantities it can be manipulated.

Currently this is not an issue, because it is traded in large quantities daily. On the US market (https://www.bitstamp.net/) they are doing around 15,000BTC a day ($9 million USD) On the Chinese market Huobi they trade upto 150,000BTC a day. The popular Bulgarian site http://btc-e.com trades upto 40,000 BTC a day

This site has more details on the total quantities being traded: http://bitcoincharts.com/markets/

Question

Dear Dr. Kahf
Assalamu ‘alaikum warahmatullah

I pray this finds you in the best of health and iman. I’ve read some of your work and have found is extremely useful mashaAllah – jazakallahu khair.

I wonder if you can help shed some light on the Islamic perspective on bitcoins. Have you had a chance to investigate this phenomena at all? Do you have any thoughts on their shar`i permissibility or otherwise? They have been catching on in a very big way over the past few months. A very short summary of bitcoins is below my email. If not, can you recommend someone who is qualified to issue a ruling on this?

Jazakallahu khair
Wassalam

Bitcoin is a decentralized digital currency that is backed by cryptographic proof (i.e. as opposed to banks or governments). I can explain this in more detail if you like, but just to summarize: the currency is created at a constant rate, and its transfer is cryptographically verified by computing one-way hashes of the transaction log up until that point. This hash is virtually impossible to forge.

It was created to circumvent government controls over the transfer of currency. Essentially it is fiat currency (not backed by hard gold or silver or anything) and it’s “value” is largely based on speculation at the moment (from $6 a year ago to around $1000 today). It is a multi-billion dollar economy right now and growing really fast. A lot of people have questions about its permissibility.

More reading:
http://en.wikipedia.org/wiki/Bitcoin
http://www.economist.com/blogs/babbage/2011/06/virtual-currency (technical)
http://www.economist.com/blogs/economist-explains/2013/04/economist-explains-how-does-bitcoin-work
http://www.washingtonpost.com/blogs/the-switch/wp/2013/11/19/12-questions-you-were-too-embarrassed-to-ask-about-bitcoin/
http://www.aljazeera.com/indepth/opinion/2013/03/2013391325331795.html
http://www.aljazeera.com/indepth/opinion/2012/05/20125309437931677.html

Answer

Bismillah al Rahman al Rahim
Alhamdu Lillahi Rab al Alamin, wa al Salatu wa al Salamu ala Sayyidina Muhammad, wa ala Aalihi wa Sahbihi Ajma’in

Dear Br.
Assalamu Alaykum wa Rahmatu Allahi wa Barakatuh

I made some thinking on bitcoin and even asked one of my student to write a term paper on it…
Bitcoin is a unit of account for those who accept it.
Let me put it this way: if you and I agree that I buy a laptop from you for 20 units if X. I get the laptop and become under debt to you for 20 Xs. If several other persons come into this agreement and accept to make similar exchanges, let us say we become 100 and we exchanged goods of the value of 2000Xs. Don’t you think that this 2000 for this universe of 100 people is a money that they can exchange any within the accounting/settlement system they have among themselves? Is this any different than bitcoin? If we have more people accepting to price goods/services for Xs and give them in exchange of Xs this X becomes more common and more accepted.
A problem may come from two angles: 1) if people lost confidence in the accounting/settlement system the X money will then crumble. 2)if you want to value this X in terms of Dollars or Rials/ here you will need to go back to the market and find a relation between goods and Rials or Dollars and take then in proportion to relationships between these goods and services and the X money. If this these proportional relationship (pricing) are done in the open market and among a large number of transactors the price of X in terms of Dollar and Rial may be accepted as a product of market forces (they may not be rally ideal or immune to any manipulation but this is the nature of any market). but if these relationships are done in closed circles I have as great suspicion of manipulation and my confidence collapses in the X money. This is exactly what I have in bitcoin. Until it becomes traded in the open market chances of manipulation are high and my confidence in it is low.
Let us now look at the Shari’ah aspect. Like any other currency it is money within its community and exchanging it with other currencies is definitely subject, in my opinion, to same conditions of exchanging currencies which are: 1) had delivery of both at tine of exchange, no leverages and no futures, and 2) no speculations on currencies which means people who exchange it must have a cause to buy or to sell other than the idea of currency for currency (buy to use it or sell because you got it but in need for other currency)

Wa Allahu A’alam
Wa Alhamdu Lillahi Rab al Alamin
Wassalam
Prof. Dr. Monzer Kahf
Islamic Finance and Economics
Qatar Faculty of Islamic Studies
T: +974 4454 6567 F +974 4454 6576
http://monzer.kahf.com/