How Halal Crypto Upholds Transparency and Ethical Standards in the Digital Age

In 2009, Bitcoin (BTC), the world's first blockchain network and cryptocurrency, was launched. Soon afterward, Bitcoin ushered in the era of active crypto trading and investing. Cryptocurrencies — digital assets securely exchanged and held on decentralized network platforms called blockchains — are now a major asset class within the world of finance. Many aspects of cryptocurrency and crypto trading align with the principles of Islamic finance. For instance, there's no concept of interest in blockchain-based crypto transactions. Thanks to the benefits that crypto might deliver to faith-conscious Muslim investors, halal crypto products are now gaining widespread adoption.

In this article, we cover the major concepts related to Islamic finance, blockchain and halal crypto in order to help you better understand the emerging niche of Shariah-compliant cryptocurrency investing.

Key Takeaways:

• Cryptocurrencies are digital assets that are securely exchanged and stored on blockchain networks.

• Blockchain-based crypto operations promote transparency and are free from interest (riba), while Shariah-compliant crypto trading products can help Muslim investors trade in accordance with the ethical principles of their faith.

• Bybit is the first major crypto exchange that has launched a Shariah-compliant Islamic Account designed for Muslim investors.

Understanding Islamic Finance Principles

Islamic finance refers to financial products, platforms, transactions and general principles that align and comply with Shariah law (based on the Quran), which governs the social, economic and judicial principles of Islamic societies. Compliance with the principles of Shariah is the key requirement for Islamic finance products and services to be considered halal — and, therefore, to be available to Muslim individuals for their use and investment.

Any financial product that is clearly in breach of the Shariah law principles is considered haram, and Muslims are discouraged from using such products.

Islamic financial principles emphasize the importance of values like fairness, societal and personal betterment, real-world utility, transparency and the avoidance of exploitation. The Shariah compliance of financial products is often assessed by authoritative Islamic scholars and Shariah law experts. Their opinions are published in the form of advisory notes or, if the scholar is so authorized, official fatwas — legal rulings on specific aspects of Shariah law and its applications.

Key Principles of Islamic Finance

There are several key Islamic finance principles, described below, that are critical in defining the Shariah-compliant status of financial products.

1. Prohibition of Riba

Riba means unreasonably high interest (or usury). The term is used to refer to the interest derived from financial products. Riba is strictly prohibited in the Islamic faith, and Islamic finance considers both charging interest and earning income from interest to be in direct violation of Shariah law. Interest is considered an exploitative and unjust instrument, and Muslims are discouraged from investing in any interest-bearing products. This hinges on the general principle that income and value should only be generated from tangible assets and activities, not by re-using the same capital with no real value added. The prohibition of riba is probably the most well-known element of Islamic finance, both in the Muslim world and beyond.

2. Prohibition of Gharar

Gharar refers to excessive uncertainty in financial transactions or ambiguity in contracts. For example, financial products or strategies with high levels of volatility might be considered gharar since they involve substantial uncertainty or risk. Shariah also states that all transacting parties must have a clear understanding of their contractual relationship, with no ambiguity present.

3. Prohibition of Maysir

Maysir, or gambling, is another activity that’s strictly prohibited in Islamic finance. Anything connected to gambling or speculation, or income derived from gambling-related or highly speculative activities, falls under the definition of maysir. Thus, Muslim investors need to research and invest only in assets and products that don't involve speculative, gambling-like features or strategies.

4. No Investment in Haram-Linked Products

Investing in any financial product, company, industry or business activity related to Haram practices or products — such as alcohol, pork or drugs — is strictly prohibited in Islamic finance.

5. Fair Profit-and-Loss Sharing

Islamic finance requires that all contractual relationships and partnerships involve sharing of profit and loss in a fair, ethical and reasonable way. This is achieved through several contract types permitted in Shariah law, specifically Mudarabah and Musharakah. Mudarabah refers to a partnership where one party provides the capital and the other party manages it, with profits and losses split based on a pre-agreed ratio. Musharakah is a venture in which all parties involved provide capital, and share profits and losses proportionally based on their investment shares.

6. Real-World Utility and Value of Economic Activity

All investment and trading activity must be based on products and strategies that generate tangible value and are based on real-world utility. Thus, it's important to invest only in cryptocurrencies with real-world applications and use cases.

In addition to these specific principles, Islamic banking and finance are also based on the general principles of the fairness, transparency and ethical nature of all transactions, products and contractual relationships.

What Is Blockchain?

Blockchain is a type of distributed digital system in which all transactions are verified and confirmed by a decentralized network of nodes, each acting independently, with the validity of transactions confirmed through a consensus mechanism. The validated transactions are then permanently written into the blockchain's immutable ledger of records, and the ledger itself is also maintained in a decentralized way, which avoids the possibility of a single point of failure in case of hacking attempts.

The decentralized nature of transaction confirmation and ledger storage ensures that blockchains are extremely difficult to hack or take control of. For instance, Bitcoin, the world's largest and oldest blockchain, has thousands of nodes acting together as guardians of the ledger's integrity and consistency. Blockchains also ensure the security of all transactions and stored values by using a cryptographic encryption mechanism.

Nodes, Public Ledgers and Networks

In addition to the nodes who ensure the integrity and immutability of the ledger, there are specialized mining nodes on Bitcoin who use the hashing power of their computers to solve computational puzzles in order to validate transaction blocks. Over a million individuals currently participate in the mining process on Bitcoin using the power of their specialized computing machines. Every ten minutes, one miner node wins the race to be the first to solve the computational puzzle. This mining node receives the right to add the next validated block of transactions to the ledger. As a reward for their work, the winning miner node earns a reward in Bitcoin's native digital asset, the BTC cryptocurrency.

The BTC coin itself — also frequently referred to as Bitcoin — acts as an asset for transaction exchanges and value storage on the network. Mining nodes rewarded for their block processing activity are free to spend their earned BTC in any way they wish. Other network users can also buy, sell and store BTC as a form of digital currency.

There are now well over 100 public blockchain networks. Each blockchain has its own technical characteristics, native digital assets and transaction validation procedures, which may differ from the way Bitcoin’s chain operates.

Blockchain Key Principles

Blockchains exist and operate based on a number of key principles and ethos, including:

• Decentralization and independence from the control of a central entity, such as a national government.

• Acting as an alternative to the traditional banking system, which heavily utilizes interest in many of its financial products. In this regard, blockchain spot-based cryptocurrency transactions, which involve no concept of interest, are aligned with the key Islamic finance principle of no Riba.

• Privacy and anonymity of user accounts.

• Public nature of all transactions and records. While blockchains maintain the anonymity of user addresses, all transactions and balances on a typical blockchain network are publicly viewable. Anyone can look up a specific transaction or address balance on a blockchain. However, you'll only be able to ascertain that a specific address simply sent, received or holds x amount of cryptocurrency, without learning anything about the account holder's identity. The publicly verifiable nature of blockchain transactions also aligns with the Islamic finance principle of transparency.

The Concept of Halal in Cryptocurrency and Blockchain

The concepts of halal and its opposite, haram, are fundamental principles in Shariah law, and in the Islamic faith in general. Halal refers to any activity that is permissible or lawful for Muslims to engage in, while haram includes prohibited practices and behaviors, such as anything related to alcohol and pork consumption, gambling, drugs, pornography, unethical behavior and deceitful conduct, as well as activities that do not result in any tangible value for a person or society.

Many aspects of cryptocurrency and blockchain technology align with the concept of halal. By default, blockchain transactions are interest-free. While certain crypto trading products on external platforms might involve interest, the transfer and storage of crypto funds — for example, in BTC coins — are totally free from riba. Secondly, the public nature of blockchains ensures the transparency of operations, also a fundamental principle of Shariah law.

Many blockchains are capable of supporting programmable functionality that goes beyond the mere transfer and storage of funds. Some of the most prominent among these networks are Ethereum (ETH), Solana (SOL), Cardano (ADA), BNB Chain (BNB) and Avalanche (AVAX). The programmable functionality on these chains is supported through smart contracts, coded scripts that are programmed to automatically execute transactions based on pre-specified conditions and triggers. Smart contracts are usually open source, further promoting transparency, a key element of halal behavior.

Another aspect of Shariah law applicable to cryptocurrencies relates to the principle of real-world value and utility. While there are cryptocurrencies created without any meaningful utility (e.g., meme coins), major cryptocurrencies like Bitcoin (BTC) and Ether (ETH) provide the benefit of interest-free, digital storage and exchange of value in a decentralized, private and secure way, away from the traditional financial system. 

Moreover, some crypto projects are involved in tokenizing and bringing a variety of real-world assets (RWAs) to blockchains, from stablecoins like USDT and USDC to real-world data integration into blockchain, such as that of Chainlink (LINK).

Benefits of a Shariah-Compliant Blockchain

In recent years, several blockchain projects that focus on Shariah compliance and Islamic values have been initiated and successfully launched. Examples include the decentralized finance (DeFi) platform MRHB and the halal-only, crypto projects–focused HAQQ Network.

Shariah-compliant blockchains and apps can potentially provide significant benefits to the Muslim community and investors. First, such platforms enhance trust among investors, thanks to the adherence to the general Shariah principles of fairness and avoidance of exploitation. By offering Shariah-compliant products based on shared risk and profits, no maysir and no gharar, these platforms help investors reduce the overall investment risk as well. They also provide Muslim investors with access to global markets and products.

Shariah-compliant crypto projects also contribute to the overall development and innovation within the general crypto finance sphere by introducing products based on Islamic values.

Benefits of Halal Crypto Trading

Trading crypto and investing in crypto-based products can be profitable and rewarding for Muslim investors when carried out through Shariah-compliant finance opportunities. Such platforms and products promote ethical investment practices that align with Shariah law. Another critical benefit of Shariah-compliant crypto trading is improved financial inclusion. Many Muslim investors avoid the crypto market due to the non-compliant nature of many of its products. Shariah-compliant opportunities can help these investors participate more actively in the industry.

Shariah-compliant crypto trading products can also help Muslim investors participate in social impact investing, an essential consideration for Islamic finance. Moreover, appropriately designed Islamic crypto trading products can help facilitate the flexible payment of zakat and other charitable donations. Zakat — which stipulates that Muslims should donate 2.5% of their income to charitable causes if their wealth exceeds the financial threshold, or nisab — is one of the pillars of Islam. Products that help facilitate zakat payments fairly and ethically can be of tremendous value to Muslim investors.

Bybit’s crypto exchange offers investors a Shariah-compliant Islamic Account, the first of its kind in the industry. The account provides a range of benefits to Muslim crypto traders and investors, including global accessibility, no interest, transparent fee structures and adherence to the ethical considerations and practices of Shariah law.

Challenges to Crypto’s Halal Status

There are certain challenges that Muslim investors face in the overall crypto finance landscape when choosing products that align with their faith. For instance, many crypto products have riba built into them, thus violating the principles of Islamic finance. Certain crypto trading products may also involve wild volatility, making them unequivocally gharar. Fee structures and sources of yield may also be unclear or ambiguous on many crypto platforms.

Another challenge for Muslim investors in defining the halal status of crypto products is the variability in the interpretations of Shariah principles. In other words, different scholars and opinion-issuing institutions may disagree on specific matters, such as the level of volatility in products that may or may not qualify them as gharar. 

A key practice for Muslims who wish to overcome this challenge is to seek appropriately certified Shariah-compliant products from reputable crypto platforms. One example of this type of product is Bybit's Islamic Account, which was developed in collaboration with the trusted Shariah finance advisories CryptoHalal and ZICO Shariah.

Future of Halal Crypto

Islamic finance is a new growth area within the wider blockchain and crypto ecosystems. Cryptocurrency products have enjoyed strong growth rates among investors in the Muslim world over the past few years, with rates of crypto ownership rising to 30% in the United Arab Emirates (UAE) and 11% in Saudi Arabia.

Shariah-compliant crypto projects like HAQQ Network, which launched its mainnet in May 2022, and MRHB DeFi, which started in late 2021, have helped boost the growth rates of Islamic finance in the crypto industry, a trend that’s widely expected to continue.

As Shariah-compliant crypto opportunities increase, Muslim investors will be able to access a more diverse range of products.This will also positively impact the wider industry, thanks to the improved inclusion of new segments of users. Within the economies of Islamic countries, Shariah-compliant cryptocurrency products will also help improve the security and flexibility of payments based on digital assets.

Closing Thoughts

The future of halal crypto looks promising, as this niche is quite young and full of unexplored opportunities. Bybit's Islamic Account, MRHB DeFi solutions and HAQQ Network's products are innovations that will likely spur further growth for an increased variety of choices in this area.

This is positive news for Muslim investors who might be eager to join the crypto revolution, but have often been reluctant to do so due to the uncertain nature of many crypto products. By choosing Shariah-compliant platforms and products, these investors can now take advantage of crypto opportunities that align with the core principles of their faith.

Disclaimer: Due to varying opinions on Shariah compliance of crypto trading, we recommend you to conduct your own further research. Please note that the posts on Bybit Learn should not be considered as fatwa. Our aim is to present information on different topics to empower readers to make informed decisions.

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