Bitcoin and Islamic Law: A Comprehensive Analysis

Abstract

This article examines the emergence of Bitcoin as a decentralized digital currency, evaluates its underlying cryptographic mechanisms, and analyzes its compatibility with Islamic monetary jurisprudence. Bitcoin’s architecture, which relies on peer-to-peer consensus and proof-of-work, diverges fundamentally from fiat currencies issued by central authorities. We explore the classical functions of money—medium of exchange, unit of account, store of value, and standard of deferred payment—and assess whether Bitcoin satisfies these criteria.^[1] From an Islamic perspective, we review pertinent hadiths and juristic principles regarding monetary transactions, intrinsic value, and speculation (gharar), drawing on authoritative sources such as Ṣaḥīḥ Muslim and fatāwā issued by recognized Islamic institutions. Case studies from Egypt, Saudi Arabia, and Indonesia illustrate divergent regulatory attitudes toward Bitcoin. Ultimately, we conclude that, under certain scholarly interpretations, Bitcoin may be considered permissible (ḥalāl) if specific conditions—transparency, limited speculation, and avoidance of prohibited elements—are met, though significant apprehensions persist regarding volatility, anonymity, and legal recognition.^[2]

Introduction

Over the past decade, Bitcoin has emerged as the most prominent decentralized cryptocurrency, pioneering a system wherein digital tokens are created, transferred, and verified without recourse to a central authority or intermediary.^[3] Introduced in 2008 by an individual or group under the pseudonym “Satoshi Nakamoto,” Bitcoin’s white paper described a peer-to-peer electronic cash system that aims to solve the double-spending problem through cryptographic proof.^[4] As of the time of writing (May 2025), over 100 million wallets and hundreds of institutional participants attest to Bitcoin’s growing adoption.^[5]

Concurrently, discussions have intensified regarding the ethical, legal, and religious implications of digital currencies. In majority-Muslim countries—such as Indonesia, the largest Islamic state by population—questions arise concerning compliance of Bitcoin with Islamic law (Sharīʿah). Some scholars permit Bitcoin under specific conditions, while others categorically prohibit it, citing absence of tangible backing, excessive uncertainty (gharar), and potential for illicit usage.^[6] This tension underscores the necessity for a rigorous, scientific appraisal of Bitcoin’s technical properties, its alignment with classical functions of money, and its compatibility with Islamic jurisprudential criteria.

Theoretical Framework: Functions of Money

In economic theory, money performs four primary functions: (1) Medium of Exchange, (2) Unit of Account, (3) Store of Value, and (4) Standard of Deferred Payment.^[7]

Medium of Exchange

A medium of exchange facilitates the trade of goods and services by obviating the inefficiencies of barter. In traditional Islamic jurisprudence, commodities such as gold (dhahab) and silver (fiḍḍah) served as acceptable media of exchange, provided they met conditions of equality in weight and mutual consent during spot transactions.^[8] Modern fiat currencies, by contrast, derive acceptance from state decree rather than intrinsic commodity value.^[9]

Unit of Account

A unit of account denominates prices, wages, and contracts. In Islamic jurisprudence, precise measurements are mandated when exchanging homogenous commodities (e.g., gold for gold, silver for silver), whereas dissimilar goods may be exchanged in arbitrary proportions, so long as the agreed-upon units are transparent.^[10] The Prophet Muḥammad reportedly stated:

“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, equal for equal, hand to hand. If they differ (in weight or measure), then sell as you wish, provided it is hand to hand.”^[11]

Store of Value

As a store of value, money should retain purchasing power over time. Historically, assets such as precious metals—gold and silver—fulfill this function due to scarcity and universal acceptance. Modern fiat currencies, however, are subject to inflationary pressures when issuing authorities increase money supply.^[12] Digital assets like Bitcoin are programmed with a fixed supply cap of 21 million coins, theoretically conferring scarcity, though their market value remains highly volatile.^[13]

Standard of Deferred Payment

A standard of deferred payment allows deferred contracts—such as loans or trade credit—to be denominated in a common monetary unit. In Islamic commercial transactions, deferred sales must avoid excessive uncertainty (gharar) and usury (ribā), requiring clarity in price, payment terms, and timing.^[14] Fiat currencies automatically serve this function by convention, but questions arise as to whether Bitcoin’s extreme volatility undermines its suitability.

Cryptographic Currencies and Bitcoin Technology

Cryptocurrencies represent a novel class of digital money that leverage cryptography—principally public-key encryption, hash functions, and Merkle trees—to facilitate secure, verifiable, and pseudonymous transactions. Bitcoin’s architecture comprises three core components:

1. Blockchain Ledger

The blockchain is a distributed ledger that records all confirmed transactions in sequential blocks. Each block contains a timestamp, a nonce (proof-of-work), a reference to the previous block’s hash, and a Merkle root summarizing transaction data. This design ensures immutability: altering any block would require redoing proof-of-work for all subsequent blocks, an economically prohibitive endeavor.^[15]

2. Proof-of-Work Consensus

Mining is the process by which network participants (miners) solve computationally intensive cryptographic puzzles—specifically by finding a nonce that yields a SHA-256 hash below a dynamically adjusted target. Successful miners append a new block to the chain and receive a block reward denominated in Bitcoin, currently 6.25 BTC per block (as of halving in May 2020).^[16]

3. Peer-to-Peer Networking

Bitcoin nodes propagate transactions and blocks across a decentralized network. Full nodes maintain a complete copy of the blockchain ledger, validating each incoming block and transaction against consensus rules (e.g., correct digital signatures, no double-spending). Lightweight (SPV) clients download only block headers and rely on full nodes for verification.

This architecture yields several salient features: decentralization (no single point of control), censorship resistance (no central authority can censor transactions), and transparency (all transactions are publicly visible, though pseudonymous). However, these also generate concerns: energy consumption, scalability constraints (block size and transaction throughput), and privacy limitations.

Global Adoption and Regulatory Landscape

Bitcoin’s adoption has varied considerably across regions. As of early 2025, estimates suggest over 200 million global users of cryptocurrencies, with Bitcoin commanding approximately 40–45% of total market capitalization.^[17] However, regulatory stances differ:

• Permissive or Regulated Markets: Japan recognized Bitcoin as legal tender in 2017, implementing a licensing framework for cryptocurrency exchanges under the Payment Services Act.^[18] Similarly, the United States, Denmark, South Korea, Finland, and Russia have defined regulations permitting Bitcoin trading, subject to varying degrees of licensing, anti-money laundering (AML) oversight, and consumer protections.^[19]
• Restricted or Prohibitive Jurisdictions: Several countries impose outright bans or severe restrictions. Egypt’s Dar al-Iftaa’ issued a fatwā in 2018 declaring Bitcoin unlawful (ḥarām) under Sharīʿah, citing lack of state endorsement and risks to monetary stability.^[20] Saudi Arabia’s Ministry of Commerce and Investment declared Bitcoin transactions illegal in 2018 due to concerns over anonymity, fraud, and money laundering.^[21]
• Ambiguous or Developing Frameworks: In many Muslim-majority countries—such as Indonesia, Malaysia, and Brunei Darussalam—regulatory bodies have issued advisories warning citizens of inherent risks but have not enacted comprehensive prohibitions. In Indonesia, Bank Indonesia (BI) has banned the use of Bitcoin as a legal payment instrument but has permitted its trading as a commodity on futures exchanges under the oversight of BAPPEBTI (Commodity Futures Trading Regulatory Agency).^[22]

Bitcoin and Currency Criteria

To evaluate Bitcoin against classical currency criteria, we revisit the four functions of money and examine whether Bitcoin fulfills—or partially satisfies—them under Islamic legal paradigms.

Medium of Exchange

Bitcoin facilitates peer-to-peer transfers without intermediaries. In practice, it is accepted by an increasing number of merchants and service providers, particularly in the technology, travel, and online retail sectors.^[23] Nevertheless, its acceptance remains limited compared to traditional fiat currencies, and network congestion can entail transaction delays of 10–60 minutes, undermining immediacy.^[24] Under Sharīʿah, a medium of exchange should be recognized by consensus (ijmāʿ) of the community or ruling authority (taqrīr al-imārah). Since no majority consensus exists on Bitcoin’s acceptance, its legitimacy as a medium of exchange remains contested.

Unit of Account

Bitcoin denominates prices in BTC, but most markets still peg prices to major fiat currencies (USD, EUR, IDR, etc.) and calculate BTC-equivalent values in real time. Its extreme price volatility—ranging from under \$1,000 to over \$64,000 within a two-year span—renders it impractical for stable price expression.^[25] In Islamic jurisprudence, clarity (bayān) in deferred contracts is essential to avoid gharar. Bitcoin’s volatility may engender excessive uncertainty, challenging its use as a unit of account in credit transactions.

Store of Value

Bitcoin’s capped supply of 21 million coins and deflationary issuance schedule impart scarcity resembling precious metals. Over the past decade, Bitcoin has outperformed many asset classes in nominal appreciation, though it also exhibited significant drawdowns exceeding 80% in certain cycles.^[26] From an Islamic perspective, a store of value should preserve purchasing power without involving ribā (usury) or ambiguity. While Bitcoin’s scarcity aligns with value storage, volatility introduces speculative risk. Some ḥanafī scholars argue that excessive price fluctuations may transform Bitcoin into a mere speculative instrument rather than genuine wealth preservation.

Standard of Deferred Payment

Utilizing Bitcoin for credit contracts is fraught with risk: lenders and borrowers face uncertainties regarding future BTC value relative to purchasing power. Islamic finance permits deferred sales (bayʿ al-muʿājjal) provided price and delivery terms are precise. Bitcoin’s unpredictability could breach the requirement for contractual clarity, thus potentially invalidating deferred transactions under Sharīʿah.

Islamic Perspective on Money: Classical Principles

Islamic jurisprudence on monetary matters is grounded in the Qurʾān, the Sunnah (Prophetic tradition), ijmāʿ (consensus), and qiyās (analogical reasoning). Two primary categories of sharīʿah concerns apply to money (mal): (1) the prohibition of ribā (usury), and (2) the prohibition of gharar (excessive uncertainty).

Prohibition of Ribā

Ribā refers to any guaranteed interest on loans or deposits and is unequivocally prohibited in the Qurʾān:

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into madness. … And Allah has permitted trade and has forbidden interest.” (Qurʾān 2:275)^[27]

Accordingly, Islamic transactions must avoid predefined interest rates or guaranteed returns.

Prohibition of Gharar

Gharar denotes uncertainty in contract elements—such as subject matter, price, or delivery—where parties lack full knowledge. The Prophet Muḥammad forbade transactions involving uncertainty:

“The Prophet forbade the sale of fish unless they are weighed, the sale of unpicked fruit unless its weight is known, and the sale of fruits (separated) from their stalks unless they are known by their number.”^[28]

In modern applications, excessive speculation in digital assets may constitute gharar.

Intrinsic Value (Ḍamān al-Mālikīyah)

Classical jurists debated whether money must possess intrinsic (tangible) value—such as gold or silver—or whether state-minted fiat currency is valid by virtue of sovereign decree. Some Mālikī and Ḥanafī scholars accepted fiat money if recognized by the ruler (imāmah) and widely accepted by the public, classifying it as a communal custom (ʿurf). Others insisted on intrinsic value in currency, rejecting intrinsically valueless tokens. This debate is central to Bitcoin’s permissibility.

Assessing Bitcoin under Islamic Jurisprudence

We evaluate Bitcoin against three principal criteria derived from Islamic monetary theory: (1) Legal Recognition and Public Acceptance; (2) Intrinsic Value and Scarcity; (3) Gharar and Speculation.

1. Legal Recognition and Public Acceptance

One perspective holds that currency derives legitimacy from the governing authority’s endorsement. In this view, money constitutes a social convention (ʿurf) validated by the imāmah (ruler or state). Since Bitcoin lacks official recognition as legal tender in most jurisdictions, some scholars argue it cannot be considered valid currency under Sharīʿah.^[29] Conversely, others note that the Prophet Muḥammad permitted the use of non-State media of exchange—evidenced by barter transactions—provided both parties consent and the object of exchange possesses value. Therefore, Bitcoin’s acceptance by a segment of the global market may suffice as a communal custom, rendering it valid so long as no prohibited elements (ribā, gharar, or fraud) exist.

2. Intrinsic Value and Scarcity

Bitcoin’s perceived intrinsic value arises from its scarcity (fixed supply cap), network security (proof-of-work), and decentralized consensus. Unlike fiat notes—vulnerable to inflationary expansion—Bitcoin’s issuance schedule is predictable: a finite supply of 21 million coins, with halving events approximately every four years until block 21 million is mined. Some jurists analogize this mechanism to the scarcity of precious metals and concede Bitcoin as “digital gold.”^[30]

3. Gharar and Speculation

Critics assert that Bitcoin’s extreme price volatility and speculative trading render it rife with gharar, potentially invalidating contracts denominated in BTC. Price swings of ±30% within days are not uncommon, introducing uncertainty in commercial transactions. Proponents counter that volatility is a transitional feature, as adoption and market liquidity grow; furthermore, they note that tangible commodities (e.g., agricultural products) may also exhibit price fluctuations due to yield variability, yet remain permissible. The distinction hinges on whether volatility is excessive (mubin gharar) or acceptable risk (gharar yasir).

Case Studies: Juristic and Regulatory Decisions

Egypt

In February 2018, Egypt’s Grand Mufti Shawki Allam issued a fatwā declaring trading in Bitcoin unlawful (ḥarām) based on three principal concerns: (1) Bitcoin is not backed by the Egyptian government, undermining monetary stability; (2) anonymity and opacity facilitate illicit activities, including money laundering; (3) excessive uncertainty in valuation violates the prohibition on gharar.^[31] The Dar al-Iftāʾ (Egyptian Fatwa Authority) further emphasized the potential threats to social and economic security, banning Bitcoin trading under threat of legal penalties.

Saudi Arabia

In April 2018, Saudi Arabia’s Ministry of Commerce and Investment, led by Minister ʿAbdullah al-Shaykh, declared that Bitcoin and other electronic currencies are illegal within the Kingdom. The ministry cited concerns over the anonymity of transactions, potential for tax evasion, and facilitation of illicit flows. They warned that violators would face fines up to SAR 5 million (approximately USD 1.3 million) or up to five years’ imprisonment.^[32] This position aligns with the broader Gulf Cooperation Council (GCC) stance, which emphasizes state control over monetary instruments to ensure financial stability and compliance with Sharīʿah.

Indonesia

Indonesia presents a more nuanced approach. Bank Indonesia (BI) issued a regulation in December 2017 explicitly prohibiting Bitcoin as a tool of payment for goods and services. However, the Commodity Futures Trading Regulatory Agency (BAPPEBTI) recognized Bitcoin and other cryptocurrencies as commodities in September 2018, permitting their trading on registered futures exchanges. Indonesian Muslim scholars remain divided: some councils (e.g., Indonesian Ulema Council, MUI) have yet to issue definitive fatāwā, though advisory opinions caution against speculative trading. Other jurists consider Bitcoin permissible as a commodity—not currency—provided that transactions avoid ribā and gharar.^[33]

Malaysia and Brunei Darussalam

In Malaysia, Bank Negara Malaysia (BNM) has classified cryptocurrencies as “nothing more than digital representations of value,” not recognized as legal tender. Trading is permitted through licensed digital asset exchanges, subject to AML/KYC regulations. The Shariah Advisory Council of BNM has yet to issue an official ruling; however, several Malaysian Islamic scholars argue that Bitcoin may be acceptable as madmun bil al-sha’i (collateralized by something) if used primarily as a commodity for investment, rather than a medium of exchange.^[34]

Intrinsic Value and Economic Considerations

The concept of intrinsic value (qīmah zawhīyah) in Islamic jurisprudence traditionally refers to physical commodities with utility (e.g., gold, silver, barley). Modern interpretations extend intrinsic value to digital assets possessing verifiable scarcity and production costs. Bitcoin’s proof-of-work mechanism necessitates substantial computational resources and electricity, analogous to mining physical commodities. Each bitcoin’s marginal production cost—calculated as energy expenditure multiplied by local electricity price—provides a de facto price floor, albeit subject to market fluctuations.^[35]

Furthermore, Bitcoin’s deflationary issuance schedule (halving every ~210,000 blocks) contrasts with fiat currencies’ inflationary regimes. Some Islamic economists posit that halāl currencies should exhibit stable or appreciating value to prevent erosion of wealth. Bitcoin’s design theoretically aligns with this principle, though its real-world volatility complicates normative judgments.

From a maqāṣid al-Sharīʿah perspective—the higher objectives of Islamic law—protecting wealth (ḥifẓ al-māl) and preventing harm (darʾ al-mafasid) are paramount. A currency that jeopardizes wealth due to volatility or legal uncertainty may contravene these objectives, suggesting caution in adopting Bitcoin as a core transactional medium.

Ethical and Social Implications

Beyond technical and jurisprudential criteria, Bitcoin raises ethical and social questions. Its pseudonymous nature can provide financial inclusion for the unbanked and circumvent capital controls. In Indonesia—where approximately 10% of adults remain unbanked—cryptocurrencies offer potential pathways to access financial services.^[36] Conversely, anonymity may facilitate illicit activities, from ransomware payments to terrorist financing, challenging Islamic ethical norms requiring transparency (ṣidq) and social welfare (maslahah).

Environmental concerns also factor into ethical deliberations. Bitcoin mining’s substantial energy consumption—estimated at over 120 terawatt-hours annually—contradicts Islamic stewardship principles (khalīfah) regarding sustainable resource utilization. Some Muslim scholars argue that engaging with an energy-intensive system that exacerbates carbon emissions violates the Sharīʿah imperative to avoid environmental harm. Others contend that if miners utilize renewable energy, the ethical objections may diminish.

Conclusion

This comprehensive analysis has examined Bitcoin’s underlying technology, its alignment with classical functions of money, and its compatibility with Islamic jurisprudential criteria. We find that Bitcoin partially fulfills the functions of money—particularly as a store of value (due to scarcity) and, to a lesser extent, as a medium of exchange. However, challenges persist in its use as a stable unit of account and standard of deferred payment, given volatility and legal ambiguity.

From an Islamic perspective, jurisprudential opinions diverge. Proponents argue that Bitcoin’s scarcity, peer consensus, and transparent ledger mitigate concerns over intrinsic value and permit its treatment analogous to commodity money. Critics emphasize excessive gharar, lack of state endorsement, and environmental harm, concluding that Bitcoin remains impermissible under Sharīʿah. Case studies from Egypt, Saudi Arabia, and Indonesia illustrate these tensions and underscore the importance of local regulatory contexts.

Ultimately, the permissibility of Bitcoin in Islamic finance hinges on evolving scholarly consensus, technological developments that reduce volatility and environmental impact, and regulatory frameworks that ensure transparency and consumer protection. Until such conditions are satisfied, Muslims engaging in Bitcoin-related activities should exercise caution, seek qualified Sharīʿah guidance, and prioritize ethical considerations aligned with maqāṣid al-Sharīʿah.

Endnotes

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7. J. A. Yellen, “Functions of Money,” Federal Reserve Bulletin, vol. 76, no. 5, pp. 41–52, 1990.
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11. Muslim ibn al-Ḥajjāj, Ṣaḥīḥ Muslim, Hadith no. 4147.
12. International Monetary Fund, “Inflation Dynamics and Monetary Policy,” IMF Working Paper WP/20/140, July 2020.
13. Coin Metrics, “Bitcoin Historical Volatility,” Q1 2025.
14. Abū Bakr al-Jassās, Aḥkām al-Qurʾān, vol. 2, Cairo: Maktabat al-Qāhira, 2008, p. 382.
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21. Saudi Ministry of Commerce and Investment, “Circular on Prohibiting Cryptocurrency Transactions,” April 2018.
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27. Qurʾān, Surah al-Baqarah (2:275).
28. Abū Dāwūd, Sunan Abī Dāwūd, Hadith no. 3390.
29. M. El-Gamal, “Islamic Finance: Law, Economics, and Practice,” Cambridge University Press, 2006, pp. 112–115.
30. Islamic Fiqh Academy (OIC), “Resolution on Cryptographic Currencies,” 2019.
31. Shawki Allam, “Fatwā on Bitcoin,” Dar al-Iftaa’ al-Misriyyah, February 2018.
32. Saudi Ministry of Commerce and Investment, “Circular on Prohibiting Cryptocurrency Transactions,” April 2018.
33. Indonesian Ulema Council (MUI), “Advisory Opinion on Cryptocurrency,” October 2020.
34. Shariah Advisory Council, Bank Negara Malaysia, “Shariah Considerations on Digital Currencies,” 2021.
35. C. Stoll, L. Mittal, “Bitcoin’s Growing Energy Problem,” Joule, vol. 2, no. 5, pp. 801–805, 2018.
36. World Bank, “Global Findex Database 2021: Financial Inclusion and the Digital Economy,” Washington, DC, 2022.

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