God's Money: Fix the Money, Fix the World

REPORT ON THE SOAS-QFC PUBLIC LECTURE ON ISLAMIC FINANCE, 15 June 2022

(“Cryptocurrencies: How will Islamic finance and law (fiqh) adapt to the new economic paradigm?”)

Harris Irfan

A version of this report appears in the SOAS-QFC Public Lecture and Workshop reports 2022

Introduction

This lecture attempts to answer three questions:

1.      Is something wrong with our current monetary and financial system?

2.      Does Islam offer an alternative socially just economic model?

3.      Is there room for bitcoin (BTC) in the future of Islamic (and Judeo-Christian) finance?

Over thirty years ago, I had my first brush with Islamic finance: a group of bankers from a Middle East Islamic bank presented the concept of Islamic finance to my university Islamic Society. Disappointingly, the evening was not a success: they spoke in impenetrable jargon, focused on technical minutiae and failed to connect with their audience. They missed an opportunity to make the subject relevant to the world we live in and introduce our young minds to the importance of a just, ḥalāl economic system. I strongly believe the reason is that they simply didn’t understand their subject matter well enough. In the words of the physicist Richard Feynman, “If you want to master something, teach it.” They were not masters of their subject.

In the following three decades, I have not seen much improvement in the ability of the Islamic banking industry to appeal to the hearts and minds of their target demographic. Nowhere is this better demonstrated than in the UK, where the UK’s only retail Islamic bank has a 2% penetration rate of its target market and has recently shuttered its last remaining retail branch.

Muslims without any background in finance or economics have started to question whether Islamic banking is truly ḥalāl and indeed whether the bankers themselves understand the Islamic economic model. There is a trust gap between bankers and their customers which we shall examine further in this lecture. We shall also investigate how the Islamic economic model might be better served by looking outside the existing monetary system and consider instead recent advances in cryptocurrency.

What is Money and How Did it Originate?

The commonly accepted view is that money is a medium of exchange, a store of value and a unit of account. It is used to measure value in real goods and services, the “real economy”. Its essential purpose is not to be a commodity to be traded.

Although economists may disagree, some anthropologists postulate that money originated as debt: an IOU for goods or services issued by a credible individual that circulates in the community and acts as a medium of exchange for other goods and services, allowing immediate needs to be satisfied without the inefficiencies of a barter economy[1]. However, the original purpose of money becomes distorted by greed and the pursuit of power – on this point, both orthodox and heterodox economists will agree.

Slavery originated through the conquer of civilisations by more powerful neighbours: thus human beings were reduced to property. But slavery was not merely a consequence of military conquest – in fact interest-bearing debt led to the same result. Temples lent commodities at a fixed rate of interest to merchants for trading purposes, often with collateral requirements; if the merchant was unable to repay, and collateral was insufficient, then the merchant’s family could be offered as debt peons instead[2]. Debt led to slavery.

Violent coercion was the primary enforcement mechanism to ensure debt peonage was passed down through the generations. However, the threat of revolt by a slave population that had become too numerous created an incentive for rulers to “wipe the slate clean” periodically. Thus we see, for example, the Law of Jubilee instituted by the governor of Judea in the fifth century BCE: every sabbath (seventh) year, debt peons would be returned to their families (Nehemiah 10:32, Deuteronomy 15:1-11).

Abrahamic religions outlawed interest for the sake of fairness, equality and social justice. The Islamic framework for the elimination of interest was the most developed. This model developed from Quranic injunctions, hadīth and the work of subsequent scholars who codified the jurisprudence of commercial transactions (fiqh al-muʿāmalat). Amongst scholars, the consensus opinion is that interest represents an excess of money on money and is ḥarām. Any act of creating money out of money (or out of nothing) must also therefore be ḥarām. This is the essence of the modern fractional reserve banking system, to which even Islamic banks must adhere. We shall explore this topic later.

I contend that modern economics is driven by the political ideology of lawmakers who misunderstand how the monetary system works. For example, in November 2014, the UK’s House of Commons debated money creation for the first time in 170 years and at that same time were polled privately on this subject. 71% of MPs incorrectly believed only government has the power to create money, whereas in fact 97% of money in the UK economy is created by private banks through the act of credit creation[3].

Exchange Value vs Experiential Value

Empirically-based statistical analysis of economic history is widely ignored by high school and university economics curricula. Lobbying and funding of MBA schools and economics faculties by large corporations has led to a selective amnesia resulting in swathes of economic history being ignored[4].

The result is a dogma that is not based on empirical evidence, but rather a dogma that celebrates the financialisation of the economy which leads to more debt and more financial services. Prior to its spectacular collapse, for example, for six consecutive years Enron was feted as “America’s Most Innovative Company” by Fortune magazine. Its practice of hiding debt and toxic assets in off-balance-sheet special purpose vehicles was the kind of financial trickery encouraged by financialisation.

And yet, despite this and other obvious failures, the banking lobby labels criticism of money creation or intangible derivatives instruments that are far removed from the real economy as extreme or unbalanced, like medieval priests speaking Latin, allowing them to stand between the people and the truth in order to obfuscate and control.

Examples of the failure of the monetary system abound: the 2007-2010 financial crisis involved banking bailouts in the trillions of dollars. Bailouts and boom/bust are recurrent events. Does the fault lie with the banking and monetary system, or rather with its managers?  The public appears to believe it is the latter: by re-electing new governments and re-appointing new central bankers promising more prudent management of the economy, apparently our boom/bust cycles will even themselves out. However, government and central bank policy has been consistently ineffective – for example, in the late 1980s, higher UK interest rates did not curb the money supply and did not reduce inflation as neoclassical economic theory suggested[5]. The logical conclusion is that the fault lies with the system.

Financialisation of the economy has led to GDP as the primary measure of progress and the unbridled pursuit of profit. As a result, governments and corporations make decisions that yield a short-term benefit but a long-term loss. Exchange value increases but experiential value decreases[6]. I refer to two examples to illustrate the point: the first from my own experience, the financing of the Abraj Al-Bait towers in Makkah which I will discuss below, and the second, a forest fire[7]. In a forest fire, perversely and despite the loss of experiential value (because there is no more forest), exchange value or GDP increases due to the use and cost of resources to mobilise and put out the fire.

Neoclassical economics establishes a framework for valuation methodologies that have similarly perverse outcomes. For example, in extremis, discounted cash flow analysis of a farming project prioritises short-term gains that may lead to desertification of originally fertile land rather than long-term sustainable farming[8].

GDP does not measure other metrics of human progress: literacy, mental health, divorce, suicide or environmental pollution. Reliance on GDP as a measure of success leads to a market society that prefers exchange value as a metric instead of experiential value. As a result, our “time preference” increases. The resilience and sustainability of society decreases since we consume and prepare only for the immediate future. We prefer to spend money and replace things more frequently because money devalues fast. We spend money on socially useless ventures and build in obsolescence into new products. We don’t mend broken things, instead we throw them away and buy new things. We pollute and desertify. We demonstrate “high time preference”.

Saifedean Ammous describes the Fiat Business Model in simple terms as follows:

1.      Find anything to sell, even (or preferably) at a loss.

2.      Borrow from the Fed/Central Bank at 2%.

3.      Give credit cards to customers at 20%.

4.      People are in debt for stupid things they don’t need but it’s OK because inflationary fiat money loses value anyway.

5.      “GDP number go up”[9].

This high time preference model of borrow-spend-consume tends us towards an extreme model of a market society, a joyless place that will ultimately leave us numb and spiritually unsatisfied.

The Social Effect of High Time Preference

In 2002, I led the structuring of Deutsche Bank’s financing of Safa Tower in Abraj al-Bait, Makkah. It was the first time a western investment bank had been invited into the Holy City to finance real estate. The sophistication of this transaction and its implications for the development of the global sukuk industry distracted me from the fact that I was naively participating in the erasure of my own cultural history. Once built, the towers overlooking the Kabah would not only overshadow it, but also replace the surrounding ancient landscape and buildings of immense historical significance.

By designing contractual structures that met the technical requirements of fiqh al muʿāmalat, my transaction team observed the letter of the law, but we had failed to observe its spirit.

Fiat money by its nature encourages us to engage in projects that lead to immediate gratification but may have questionable long-term social values. It allows those who are privileged to sit close to the money spigot (central banks and the financial services sector) to become richer because they have access to money before it devalues, but at the expense of a much larger number of ordinary people far away from the money spigot, as well as (ultimately) their history, culture and values. 

This is because fiat money intrinsically relies on money creation through credit. Consequentially, it engenders high time preference by borrowing, spending and consuming as fast as possible, measured in aggregate by one blunt metric, GDP. We collectively lose the virtues of patience, of disciplining the nafs (self), of rejecting consumerism, of protecting the planet. High time preference is a mindset encouraged by financialisation and it reduces the quality of society’s output. Consumerism triumphs over saving and investment in long term sustainable projects.

Because fiat money has no asset backing it is open to manipulation by the state. The world has experienced vicious economic cycles since the expropriation of citizens’ gold by Roosevelt in 1933 and the removal of the gold peg by Nixon in 1971. No longer is a government constrained by its own reserves in financing war. Now it effectively depletes the wealth of all citizens (by printing money which leads to inflation) in order to maintain a perpetual state of war. It is also no coincidence that not only have the last 100 years been the bloodiest in history, but also the most environmentally destructive[10].

The Modern Islamic Finance Era

The origins of the modern Islamic finance era might reasonably be traced back to 1963 and the Mit Ghamr experiment. Eighty kilometres north of Cairo, the economist Dr Ahmed El-naggar founded the Mit Ghamr Savings Bank, a profit-sharing institution that neither charged nor paid interest and engaged in real economy transactions, the essence of the Islamic economic model.

Depositors became investors in local industry, sharing in the returns with the manager of their money, the ‘bank’.  Rather than engaging in money creation, the bank operated on a 100% reserve ratio: every penny was put to work to invest and develop businesses in a tangible way.

The experiment lasted four years during which time eight other similar institutions sprang up in Egypt. By the mid-1970s, the first Islamic banks in the GCC were capitalised, including the largest bank in the UAE, Dubai Islamic Bank. At first, the experimental phase of the modern Islamic finance industry was true to the principles of risk sharing but as the business model matured, institutions began mimicking the practices, operations and products of conventional banks.

The baton of progress was handed over to the Malaysians in the 1980s before HSBC entered the scene in the mid-90s with its Amanah brand, the first large international bank to operate a retail Islamic ‘window’. Up until this point, Islamic finance had been relatively parochial, unsophisticated and expensive.

However it wasn’t until the early 2000s with the arrival of Deutsche Bank - the so-called ‘flow monster’ of bulge bracket firms – that the Islamic finance market exploded, as the investment bank focused its attention on this relative backwater.

Deutsche Bank introduced sophisticated investment products into the Islamic finance market for the first time. These included single-platform structured investment products, treasury management and hedging instruments, as well as a full range of corporate financing and capital markets services such as cross-border leveraged acquisitions, and hybrid/non-vanilla benchmark-size international debt capital markets[11].

The Doomsday Fatwa and the Great Vampire Squid

My team at Deutsche created a new market, developing techniques previously unseen. For two years, we had 100% market share in many products with zero competition.  Other international investment banks followed suit, hiring staff who were not only technically capable but also themselves buyers of the product they were to manufacture. By and large, this new breed of Muslim banker believed Islamic finance was a force for good, servicing a wholesome real economy and upholding the maqāsid al-sharīʿa (objectives of sharīʿa).

But it was our invention of the double- waʿd total return swap, a black box technique designed to replicate the return of any financial instrument in an apparently sharīʿa compliant format, that was to spoil the party: the double-waʿd became our Manhattan Project.  With this technique, we split the atom, but the power unleashed was liable to abuse. And indeed, it was abused by an aggressive investment banking sales culture resulting in the replication of, for example, credit default swaps on Greek sovereign debt[12]: like an arsonist insuring his neighbour’s house, then setting fire to it.

An ugly public spat developed between Sheikh Hussain Hamed Hassan, the chairman of Deutsche’s sharīʿa board, and Sheikh Yusuf DeLorenzo. Sheikh Yusuf decried what he termed the Doomsday Fatwa in an open letter to the senior scholar[13]. Whilst Sheikh Hussein could not be held responsible for the actions of bad actors, nevertheless the parallels with other historical attempts to circumvent religious law (such as the contractum trinius versus tawarruq[14]) were clear.

Goldman Sachs, too, courted their own Islamic finance controversy by failing to consider spirit of the law as an essential element of the structuring process. In 2011, I was asked to help them structure a benchmark-sized sukuk and they were insistent on a deliberately opaque structure and process. The use of commodity murabaha for “general corporate purposes” should have been two immediate red flags, but they were undeterred after I declined to advise.  The sukuk failed to launch and they were eventually forced to return to the market with an alternative structure[15].

Case Study: the Failure of British Islamic Banks

Halfway into a lecture on Islamic finance and crypto, I have so far barely mentioned crypto. This is deliberate: before we can talk about alternative monetary and financial systems, we must understand where we are today.

The British Islamic banking industry is a perfect case study in how not to implement Islamic finance (despite a promising start). All five CEOs of the five Islamic banks in the UK today are conventional bankers[16]. Their personal wealth is largely conventional, they have no cultural affinity with the customers they serve, and they hire and promote people in their own mould. In March 2022, some 17 years after its formation, one of these banks announced the appointment of its first board member to wear hijāb (or, according to one source, the first female board member). She was in the role only eight months. So much for representation.

That’s not to say the CEO of an Islamic bank must be Muslim. Of course not. But at the very least, make the effort to understand the nuts and bolts of creating Islamic financial products. Conventionally trained bankers do not know this. Nor can cultural affinity be artificially synthesised.

The UK’s Islamic banking industry has witnessed a mere 2% penetration rate of Muslim households despite a near monopoly position, resulting in £200m aggregate losses over 15 years[17]. The lack of appropriate expertise amongst senior managers is directly pertinent to a study of the performance and culture of these banks.

Podolny and Hansen wrote the following about Apple in the Harvard Business Review: "Apple is not a company where general managers oversee managers; rather, it is a company where experts lead experts." Apple’s success was directly attributable to obliterating a culture of mediocre “general managers” and instead hiring leaders who were experts first and foremost, immersed in product details and willing to question and debate. “It’s easier to train an expert to manage well than to train a manager to be an expert…. It’s like joining a sports team where you get to learn from and play with the best.”[18]

In contrast, the job description for the recently advertised position of CEO at one of the UK Islamic banks prioritised above all else the need for an existing strong relationship with the regulator – rather like choosing the captain of the football team on the basis of his relationship with the referee, and not on how well he plays football.

The industry’s problems do not merely result from lack of technical knowhow. Culture is also an issue: a high-profile employment case was brought against one of the banks, resulting in a positive outcome for the Muslim claimant against whom there was evidence of Islamophobia. That was a case in the public domain; privately I have discussed many other examples with shop-floor employees that were brushed off as “not worth the stigma of fighting”. Many shareholders and customers would also be appalled to hear of alcohol being served at corporate events.

The tone starts at the top: a combination of fractional reserve debt-based banking products and a culture that fails to differentiate itself from conventional banks has permeated Islamic banks.  Customers have accordingly voted with their feet. This is in stark contrast to the Deutsche days when young, technically excellent, ideologically aligned, culturally attuned Muslims understood the principles of the Islamic economic model, attempted (at least) to implement this model and – importantly - bought their own product. The result was a period of high profitability because the manufacturer knew what the customer wanted.

Today, Islamic banks are mistrusted by the community they are supposed to serve. I contend that the ownership and management of the Islamic finance industry must be in the hands of those who care about the maqāsid al-sharīʿa and are themselves customers.

Islamic FinTech

Disillusioned with the incumbents, and unable to find solutions to their own financial problems, young, entrepreneurial Muslims are setting up their own non-bank fintech intermediaries. For some, there is a deliberate ideological move away from the fractional reserve model. For others, particularly those fintechs set up by former bankers, there is replication in a smaller format.

In both cases, a grassroots Islamic economy is turning away from the traditional banks. Though the innovation once fostered by the international banks has largely left the IF space, entrepreneurs are now rediscovering the true potential of the ḥalāl economy.

But there is a still more radical solution than simply digitising banking: going back to the roots of real economy trade via risk-sharing financial instruments on a sound money system. The ḥalāl economy closest to its ideals would require an alternative monetary system and an equity- rather than debt-based approach to finance.

The Magic Money Tree

In the interests of time, I avoid a deep dive into how fractional reserve banking leads to money creation and how quantitative easing (QE) is the ultimate expression of this, but I do urge you to read Tarek El Diwany’s The Problem With Interest. When the banks lend you money, what they’re actually doing is creating new money. When, in the 16th century, citizens stored their gold in the goldsmith’s vault, the goldsmith issued receipts to be redeemed in physical gold on demand. Naturally, these receipts held value themselves and could be circulated as paper money in the wider economy. Once the goldsmith realised continual circulation of the notes meant that physical gold was hardly ever demanded, then he could simply issue more receipts than he held gold in his vault. Now there was more money in circulation without there being more physical backing in reserve. This is the essence of the fractional reserve system and describes (somewhat simplistically) the origin of the Bank of England in 1694. The system relies on trust in the ability of the bank to redeem the notes.

It does sound intuitively like a type of fraud, and indeed it is. But it’s perfectly legal and, simultaneously, perfectly immoral. It does not require “proof of work”, that is, energy expended to create new money (like mining gold to extract it from the ground). If you need more, just print more.

The net effect of fractional reserve banking and QE is an increase in money supply. Under QE, the central bank attempts to stimulate the economy by increasing the level of bank reserves in their accounts (recorded in a few keystrokes on a computer).  Financial institutions now hold more cash which they can then choose to hold, lend or use to buy other assets, inevitably leading to a rise in asset prices (stocks, bonds, real estate and so on).

Lower interest rates caused by the purchase of bonds by the central bank during QE means consumers are incentivised to borrow more to fund purchases which further increases asset prices. As a side effect, greater consumer borrowing leads to higher time preference: we lack the patience to seek out deferred gratification and long-term gains.

The further away from the central bank’s money printer one gets, the greater the gap in wages and the prices of essential goods and services. Thus, the rich get richer and the poor get poorer – this is called the Cantillon effect. Meanwhile, money devaluation incentivises institutional investors to throw money at bad projects which further exacerbates systemic instability.

Previously I mentioned the Fiat Business Model[19]: find something to sell, borrow from the Fed at 2%, extend credit at 20%, consumers are in debt but it’s fine because money loses value, “GDP number go up”.

This is called capitalism but it is, in fact, fraud. We, the public, are made to feel rich because the value of our assets (houses, pensions) goes up whereas, in reality, inflation has allowed the government to extract a stealth tax from us and our purchasing power has decreased.  Money creation – whether through the act of private banks extending credit or through the central bank artificially increasing reserves – is alchemy.  It leads to horrendous inequality, environmental degradation and a state of perpetual war (since governments can finance war through effectively infinite printing).

We come back to one of my original questions: does Islam and the Judeo-Christian tradition offer a socially just alternative economic model? And how does the Islamic economic model relate to crypto and specifically bitcoin?

Why Sound Money is an Islamic Concept

In 2017, I delivered a lecture at which one participant asked me what I thought of bitcoin and its suitability for an Islamic economy. I replied that I knew very little about it and asked him to explain it to me. He described a form of money that was saleable across time and space, that was truly decentralised, fungible, scarce, censorship-resistant, immutable, durable, divisible, portable, verifiable and secure. To my amazement, it struck me that it had characteristics that potentially made it superior to gold as a store of value and medium of exchange. I now believe it to be the most sharīʿa compliant form of money ever invented.

If we consider periods of human history when gold was a common global currency (Rome at its height, Byzantium, the Islamic Golden Age, the second half of the 19th century), we also find that trade was borderless and fluid, with minimal tariffs and restrictions, there were periods of political stability, and both scientific and creative progress.

A decentralised, non-fiat money with a high stock-to-flow ratio that cannot be manipulated or controlled by a small group of people is a sound money that results in low time preference, which in turn leads to human progress. Humankind had space and time for higher pursuits. Now, instead, we live to service our debts (especially the poorer we are) because financial institutions are incentivised to lend as much cheap money as possible via the alchemy of money creation.

Can a sound money reset the economy to make us better human beings? To be stewards of our planet, instead of destroyers. To encourage deferred gratification that leads to better and more sustainable long-term decision making.

Muslims believe in a spiritual investment in the dunya (this world) for their akhīra (hereafter). This is the ultimate form of low time preference. Bitcoin represents a worldly form of long-term sabr (patience), an investment in our future in the dunya. We are encouraged to act responsibly and dutifully in this life as caretakers of our family, our community and our planet. We train our nafs (ego) during Ramadan. We focus on spiritual, mental and physical health. Our minds and our bodies are a gift from Allah. We recognise that mindless consumerism and material values will not help us in the next life.

We inherently, intuitively know that GDP is a poor measure of human progress, even if we know nothing about economics.

We know that ribā is a disease and preventing ribā would prevent many evils in our society. What better way to prevent ribā than to require that money demonstrates proof of work: the need to expend energy to extract new money and secure the digital ledger. Proof of work does not allow for easy money creation and therefore eliminates most modern forms of ribā at source.

At this point, the bitcoin critic may raise two types of FUD (fear, uncertainty and doubt): the environmental cost of proof of work and the theological argument against its use. Since both topics require some considerable analysis and time is short, I will summarise.

Environmental FUD is a key propaganda technique to discredit bitcoin. It contends that the energy usage of bitcoin is equivalent to that of a country like Malaysia or Sweden and is therefore damaging to the environment. Energy usage, however, is essential to a functioning society. Does bitcoin use more or less energy than, say, YouTube? Is YouTube essential to a functioning society? What about washer-driers? Can we save energy by replacing driers with washing lines instead? Is it desirable for us to do so?

Surely we agree that money is useful to a functioning society? So if bitcoin replaced fiat money (and therefore removed the energy wastage of cross-border tariffs, foreign exchange and other banking activities that consequently are made redundant), what impact does that have on overall energy usage? If a bitcoin-based financial system replaced the entire existing fiat banking system, how much does that save in energy usage?

And finally, the killer blow: since fiat money is intrinsically backed only by the threat of military violence (primarily to protect the petrodollar), how much energy does the US and its allies expend to maintain this hegemony? The answer, which thoroughly debunks environmental FUD, can be found in the works of Alden, Carter, Gladstein, Gigi, Paez, Farrington, Ammous and others[20].

Now let us address the theological FUD.

Dogma vs. Rationale

When in the early 19th century the Ottoman governor of Egypt, Mehmet Ali Pasha, introduced water faucets at the Mehmet Ali Mosque in Cairo, the Egyptian ʿulemāʾ debated whether this new-fangled contraption was permissible in performing one’s ablutions before the prayer. The only scholars who ruled this innocent fixture to be permissible were from the Hanafi school, and hence taps came to be known as ḥanafīyyah in much of the Arab world.

For centuries, the use of the printing press by Muslims in the Ottoman Empire was banned on penalty of death, perhaps partly because this form of mass communication clashed with the oral scholarly tradition of information dissemination. Whilst there has been much debate on this subject, there is some evidence that the first printing press in Istanbul allowed by Sultan Aḥmet III in 1727 aroused so much suspicion from Ottoman scholars that it was subsequently shut down. Perhaps this suicidal willingness to embrace ignorance was a contributory factor in the inevitable decline of the Ottoman Empire.

In the 19th century, the ʿulemāʾ debated the minimum distance a telegraph wire could be sited near a mosque, concerned, they reasoned, that it conveyed the voice of Satan. In the early 20th century, Deobandi scholars banned the loudspeaker. In the 1980s, South African ʿulemāʾ banned the television, irrespective of its content.

Now we look back on these debates with detached amusement. Obviously our scholars couldn’t possibly make such mistakes today. They are much more sophisticated, in touch with their flock, connected by social media, tech savvy and scientifically aware, right? Well, not if you’ve been following the many fatāwa banning bitcoin. For many scholars, bitcoin represents rampant, unfettered speculation, a worthless intangible bubble, the worst excesses of modern capitalism.

I have written extensively on the topic, rebutting the claim by some scholars that bitcoin is ḥarām. Again, perhaps in the Q&A we may have the luxury of breaking down this topic, but as an introduction, may I refer you to my first piece on the subject in 2018, An Open Plea to the Scholars Who Have Declared Cryptocurrency Haram.

In it[21], I address the key arguments put forward by some scholars (with rebuttals in brackets) that bitcoin:

-         facilitates criminal activities (the most prevalent currency in money laundering, fraud and terrorism is in fact the US dollar);

-         has no set rules, making it a void contract (fiat has an even more nebulous set of “rules” at the whim of central banks; indeed bitcoin’s algorithm is public, transparent, immutable and readily understood);

-         is not created by a government unlike paper money (in fact 97% of fiat money is created by private banks, nor does Islam require money to be backed by the state);

-         is not backed by anything “real” (tangible asset-backing is not a requirement of fiqh, and nor is fiat backed by anything other than blind faith and the threat of violence);

-         is volatile (which is not in itself a reason to declare an asset or currency ḥarām).

In contrast to fiat money, bitcoin is a monetary system that is inherently anti-ribā. You cannot create it from thin air nor expand its supply. You must expend effort to find more of it. It requires proof of work to secure and justify its existence. It doesn’t benefit those closest to the money spigot because there is no central bank. It is scarce and anti-inflationary, reducing the inequality gap. It promotes low time preference and free markets since its value cannot be manipulated by a central authority. A truly sound monetary system is a free market system, inherently Islamic, free of human manipulation, monopolies and exploitation:

“The people said: Messenger of Allah, prices have shot up, so fix prices for us. Thereupon the Messenger of Allah ﷺ  said: Allah is the one Who fixes prices, Who withholds, gives lavishly and provides, and I hope that when I meet Allah, none of you will have any claim on me for an injustice regarding blood or property.” (Anas ibn Mālik)

Is Bitcoin Shari’a compliant?

We have already likened bitcoin to gold, the traditional currency of Islam (scarcity, high stock-to-flow ratio, anti-inflationary properties, decentralisation, divisibility, durability). Whilst it is not yet a common medium of exchange, its utility as currency is rapidly improving via so-called secondary layer payment protocols like Lightning Network.  It has advantages over gold such as portability, speed, lower storage and transaction costs, theft resistance (if properly stored) and natural resistance against counterfeiting. It is already being used as a store of value and a medium of exchange in some parts of the world.

As we saw earlier, there is a common misconception amongst Muslims that money must have tangibility. To simply negate the existence of bitcoin is illogical.  Bitcoin does “exist” since it has form in the guise of electronic digits (just as our bank balance is also a digitally stored number – does that not exist?).  It can be accessed, converted and exchanged. It has legal characteristics (taqawwum), even though it may not yet have wide usage (taʿmul) or social concurrence (istiḥlāḥ).

There are broadly three scholarly views on bitcoin[22]:

-         It is neither wealth (māl) nor has currency attributes (thamanīyyah).

-         It has the characteristics of wealth but not currency.

-         It has both wealth and currency attributes.

Bad news sells, which is why we tend to read only about ʿulemāʾ who have declared bitcoin ḥarām. However, a careful analysis of their views often reveals shocking gaps in their fundamental grasp of the modern financial and monetary system. Some more technically proficient scholars, however, have recently been more thoughtful in their commentary and are tending towards the third view that bitcoin has both wealth and currency attributes.

It is my view that bitcoin is the most Islamic form of money ever invented. It is not just ḥalāl (permissible), it is positively tayyib (wholesome). A financial system based on sound money would return the economy to its trading roots, where the financial economy has a one-to-one relationship with the real economy. It may be a radical thought, one which requires a fundamental and perhaps messy reset of entrenched economic thought, but a financial system that cannot create new money nor issue unbacked currency without being revealed as fraudulent is a system that eliminates ribā, inflation and inequality. It is also a system that encourages long-term sustainable projects, high quality investment decisions and massive cost and efficiency savings.

And here we come back to Islamic finance. Islamic banks today operate on a fractional reserve basis using fiat currency which is debt by design. Consider instead a financial institution where financing is made on a 100% reserve basis, where due diligence on ventures must be thorough enough to justify long-term profitability rather than fixed returns irrespective of performance, where there is a direct link between the financial transaction and the underlying trade. That would be the foundational institution of a truly Islamic economic system.

Since a decentralised currency cannot be manipulated by governments to devalue it and raise asset prices, thus benefiting the rich at the expense of the poor, it is a radical solution to wealth inequality. Today the people of Lebanon and Gaza are turning to bitcoin to protect against hyperinflation and external meddling[23]. This is not a hypothetical dream of monetary utopia, this is already a reality.

For the Lebanese and Gazans, bitcoin cannot be expropriated as gold reserves once were for the American people. Gazans have no central bank and are reliant on the Israeli shekel. Their wages are suppressed and their movements restricted. For them, bitcoin is a censorship-resistant route out of dependency and towards economic freedom.

For those elsewhere living under sanctions, bitcoin is freedom money. For Afghans who starved over a bitter winter whilst the US froze $7bn of precious reserves, bitcoin could be a life-saver. A global ideology that professes freedom as its touchstone has been demonstrably anything but: repressive fiat regimes create a society of debt slaves and dependency.

Nowhere is this more illustrative than the work of the IMF and the World Bank. Though it is secular blasphemy to say it, the IMF is not a force for good: it represses poor countries and funnels their resources to rich creditor nations[24]. We are supposed to believe (those priests speaking Latin again!) that a supranational central bank is a helping hand to developing countries, reducing poverty, increasing shared prosperity and promoting sustainable development.  However short-term, high-interest-rate loans and local currencies that are not freely convertible result in chronic financial distress for these poor nations. Most governments turn to the quick fix of borrowing from the IMF, and the major creditors are only too happy to maintain the debt trap[25]. Time does not permit me to elaborate and so I urge you all to read Alex Gladstein’s tour de force essay on this, Structural Adjustment.

If the Global South no longer had to borrow in US dollars (while their own currencies lose value, causing them to pay two or three times the payment initially promised to reimburse creditors - a global Cantillon effect), then imagine bitcoin as a global money, accepted for business worldwide, where nations are financed in bitcoin and pay in bitcoin. Foreign governments can no longer demand repayment in currencies that the poor nation must earn but the rich can simply print. If the world tended to a bitcoin standard, supranational institutions must tend towards co-investment rather than lending (because fractional reserve and ribā are naturally restricted by proof of work). This results in equity financing rather than debt, linked to the profits of the real economy. One hundred per cent Islamic without the unnecessary complexity of modern Islamic banking.

You will note I have discussed bitcoin at length but not cryptocurrencies in general. This is deliberate. The two are not the same. The vast majority of the crypto world is proof of stake, centralised and often pre-mined. That makes it little different to fiat in nature. I particularly caution against the plethora of socially dubious crypto projects with “ḥalāl” labels.

In addition, many governments have signalled their intentions to launch their own central bank digital currencies (CBDCs). The politics of deficit financing are so attractive to governments that they will not willingly surrender their magic money tree. CBDCs give the illusion of a new type of digital money but they are merely an extension of fiat. In fact, I believe them to be worse since they allow for greater surveillance and control, for example through social credit scoring. In contrast, the pseudonymous nature of bitcoin is one of its core appeals.

Is Bitcoin the Future of Islamic Finance?

Despite all the time and effort invested in creating the Islamic banking industry over the past sixty years, it seems non-Muslims have invented the most Shari’a compliant economic model: by its nature, bitcoin fights fractional reserve banking and ribā. It encourages the Islamic values of low time preference, long-term discipline, equality, fairness and even the free market. It discourages infinite growth on a finite planet. It has the potential to replace the socially useless activities and energy waste of the conventional banking industry. It does not require the backing of military force to survive.  Investments under a bitcoin standard would tend towards a real economy, risk-sharing basis, the perfect foundation on which to rebuild Islamic finance.

Our industry has been failed by the Islamic banks. There is a trust gap, a lack of representation and a lack of vision. The very basis on which they exist is antithetical to the Islamic economic model. Bitcoin is the most disruptive event in financial history and the only widely adopted innovation that aligns fully with the Islamic economic model. Perhaps it will be the solution that saves Islamic finance.

[1] David Graeber, Debt: The First 5,000 Years (Melville House Publishing, 2013).

[2] Ibid.

[3] Positive Money, ‘Poll Results: Only 1 out of 10 MPs Understand that Banks Create Money’ (Poll Results, n.d.) < https://positivemoney.org/2014/08/7-10-mps-dont-know-creates-money-uk/>.

[4] Michael Hudson, ‘Interview by Renegade’ (28 October 2017) < https://michael-hudson.com/tag/renegade-economists/>.

[5] Tarek El Diwany, The Problem with Interest (Kreatoc Ltd, 2010).

[6] Yanis Varoufakis, Talking to My Daughter About the Economy (Bodley Head, 2017).

[7] Ibid.

[8] See Tarek Diwany (n 5) but see also Michael Lipton, ‘The Spectre at the Fast’ (Financial Times, 24 June 1992).

[9] Saifedean Ammous, The Fiat Standard: The Debt Slavery Alternative to Human Civilization (The Saif House, 2021).

[10] Saifedean Ammous, The Bitcoin Standard: The Decentralized Alternative to Central Banking (Wiley, 2018).

[11] Harris Irfan, Heaven’s Bankers: Inside the Hidden World of Islamic Finance (Constable, 2014).

[12] Ibid.

[13] Yusuf Talal DeLorenzo, The Total Returns Swap and the “Shariah Conversion Technology” Stratagem, (unpublished).

[14] Tarek Diwany (n 5), but see also Safdar Alam, Islamic Banking in Practice (Fidens Press, 2019) and other publications.

[15] Harris Irfan (n 11).

[16] As at the date of the lecture.

[17] Calculated from the financial statements of UK Islamic banks from 2005 to 2020 and also Mohammed Amin, ‘A Snapshot of the UK Islamic Banking Scene in 2021’ (30 July 2021) < https://www.mohammedamin.com/Islamic_finance/UK-Islamic-banking-scene-2021.html>.

[18] Joel M Podolny and Morten T Hansen, How Apple is Organised for Innovation, November-December (2020) Harvard Business Review.

[19] Saifedean Ammous (n 9).

[20] See for example: Lyn Alden, ‘Bitcoin’s Energy Usage Isn’t a Problem. Here’s Why’ (January 2023) < https://www.lynalden.com/bitcoin-energy/#:~:text=From%20an%20engineering%20perspective%2C%20Bitcoin's,approach%20than%20what%20bitcoin%20uses.> ; Nic Carter, ‘How Much Energy Does Bitcoin Actually Consume?’ 5 May 2021 Harvard Business Review; Alex Gladstein, ‘The Humanitarian and Environmental Case for Bitcoin’, 26 May 2021 Bitcoin Magazine; Der Gigi, ‘Bitcoin’s Energy Consumption’, 10 June 2018 < https://dergigi.com/2018/06/10/bitcoin-s-energy-consumption/>. Margot Paez, ‘Bitcoin Versus the Banks: Which is Better for the Planet?’ (Bitcoin Policy Institute, 23 May 2022); Allen Farrington and Anders Larson, ‘Only the Strong Survive’  < only the strong survive | stuff by allen (uncerto.com) >.

[21] Harris Irfan, ‘An Open Plea to the Scholars Who Have Declared Cryptocurrency Haram’ (31 Jan 2018) <https://islamicmarkets.com/articles/an-open-plea-to-the-scholars-who-have-declared-cryptocurrency>.

[22] Faraz Adam, Bitcoin: Shariah Compliant? (Amanah Finance Consultancy, n.d.) <https://afinanceorg.files.wordpress.com/2017/08/research-paper-on-bitcoin-mufti-faraz-adam.pdf>.

[23] Alex Gladstein, ‘Can Bitcoin Be Palestine’s Currency of Freedom?’ (Bitcoin Magazine, 21 September 2021).

[24] Alex Gladstein, ‘Structural Adjustment: How the IMF and World Bank Repress Poor Countries and Funnel Their Resources to Rich Ones’ (Bitcoin Magazine, 30 November 2022).

[25] Cheryl Payer, The Debt Trap: The International Monetary Fund and the Third World (Monthly Review Press, 1974).