“An individual can be arrested for ‘manufacturing’ money in his own home but the commercial banking system is given the full protection of law in doing what amounts to the same thing. There is no justice in this … There are those who say that we must develop an Islamic alternative to modern commercial banking. But why must we do so? The Islamic alternative to the cigarette industry is no cigarette industry, and were we to remain true to our principles we might realize that the Islamic alternative to commercial banking is no commercial banking.”
– Tarek El Diwany
That Bitcoin can potentially be considered concordant with the teachings of Islamic finance is an insight I owe to conversation with Saifedean Ammous. What we mean by this is roughly as follows: as Bitcoin is a digital bearer asset and not a debt instrument, its natural state of safe custody is outside financial institutions. Also, without the ability to mint new Bitcoin as and when politically convenient, deposit insurance is impossible and loan origination requires the prior provision of liquid capital. Hence prospective intermediaries would not be able to guarantee investor protection from loss arising from the debtor’s activities.
In combination, it becomes comparatively much less likely that contributors of capital will accept a fixed upside and unlimited downside, particularly given the near-certainty of deflation rather than the contemporary norm of inflation that must be forcefully chased with low-volatility capital appreciation. Would-be depositors will either save unilaterally or demand the shared upside of equity, for the most part. Supply will contract and swathes of demand for leverage will be priced out of whatever market is left.
What remains of interpersonal, non-programmatic banking is likely to look very similar to the proscriptions of Islamic finance, with a dramatically reduced role for debt, and a focus on risk-sharing rather than risk-transfer. Bitcoin is halal.
To be clear, the reasoning that arrives at this outcome is quite different. In Islam, interest on monetary debt (riba, الربا) is unlawful (haram, حرام) on ethical grounds whereas I suggest it is unlikely to emerge to any great extent in a Bitcoin standard on purely economic grounds given the risks will (finally!) be properly priced, hence can be legitimately shared rather than dishonestly transferred. Even still, the resulting behavior has a clear ethical resemblance to the cultural norms in the Bitcoin community, centered first and foremost on low time preference. Consider the Islamist scholar Abul Alā Mawdūdī’s (ابو الاعلی مودودی) exhortation that,
“it is incumbent on every member of the Muslim community to live within his means. He is forbidden to let his expenditure exceed his income, thus compelling him to stretch his hands out to others in order to sustain his extravagance, use unfair means to grab the wealth of others or become indebted to others to help finance his unending needs and, by consuming his resources in clearing his debt, eventually join the ranks of the destitute.”
And even if we contest the underlying ethical objection, more similarities in attitude at a higher level are readily forthcoming. We might think, for example, that even in a Bitcoin standard there will still be some willing supply and demand for interest-bearing, at-risk capital; why then should consensual exchange be prevented? The Islamic response hinges on the haram feature of what is deemed “speculation”; given the inherent uncertainty of entrepreneurship, the commitment to pay interest on monetary debt finance is unavoidably fraudulent given the debtor does not and cannot really know she can meet her obligations. Only pari passu equity stakes are fair and honest, and furthermore, introduce no disharmony of incentives or outlooks between the capital providers. Once more, we may differ in our understanding of the ethics of such contracts, but Mawdūdī’s reckoning of the consequences of the proliferation of such “speculation” has a clear appeal:
“Due to the absence of a reasonable and healthy relationship of participatory cooperation between the capitalist [creditor] and the entrepreneur [debtor], the global economy suffers tremendously and faces alternative highs and lows that adversely affect the world’s economic health. The capitalist’s stranglehold had helped to boost the spirit of speculation and minting of money through interest. this has naturally poisoned the bilateral relationship between capital and enterprise, and the raising and lowering of interest rates are now done in such a way as to keep the entire world’s economic health always in risk.”
By simply substituting out “all debt” for “money as debt” and similarly tracing out the consequences, Bitcoiners would likely agree entirely. Economist and noted Islamic Finance scholar Mohammad Siddiqi dryly makes this connection in, A Vision for the Future of Islamic Economics, noting that, “almost all money in circulation is interest bearing debt transferring wealth from fund users to the owners of capital. It is not technically necessary for society’s means of payment to play this role.” In, The Problem with Interest, Tarek El Diwany makes a strikingly similar point to my own in The Capital Strip Mine, all the more remarkably from an entirely different basis, that, “polluted rivers, festering rubbish tips and resource-depleted seas may be just the first installment of the price that is paid for entering in to a race with compound interest.”
To a limited extent, believe it or not, the IMF seems to agree as well. In a 2010 working paper titled, The Effects of the Global Crisis on Islamic and Conventional Banking: A Comparative Study, Maher Hasan and Jemma Dridi conclude that Islamic banks’ asset-based, rather than debt-based, operations, “make their activities more closely related to the real economy and tend to reduce their contribution to excesses and bubbles.” The paper also includes the unintentionally hilarious deadpan explanation that,
“the profit/loss-sharing nature of investment deposits provides Islamic banks with an additional buffer. However, this feature was not tested in the crisis given that most banks remained profitable. In addition, in the context of the crisis and given the loose monetary stance in most countries, this feature is likely to put Islamic banks’ profitability at a disadvantage compared to conventional banks.”
The closest analogs to “loans” as we might think of them are qard al-hasan (قرض الحسن), a straightforward interest-free, benevolent loan, and sukuk (صكوك), a kind of pooled, fixed-term equity investment — curiously more like the Venetian colleganza than any common contemporary instrument. Collateral is uncommon in either case, but where it is taken there is a final intriguing comparison to be made: the collateral must be transferred to the possession of the creditor for the term, hence in the case of default, no repossession occurs. As with everything in Islamic finance, the ultimate rationale is simply fairness and justice; those who default on a mortgage are not kicked out of their home because the home is in possession and use by the debtor and could not have been halal collateral to begin with. The connection to Bitcoin is the likely incentive in a healthily deflationary environment not to recourse to hard assets to store value over the long-term, combined with an increased background incentive in financial transactions for all parties to access and retain sound money:
One need not personally subscribe to all, or any, tenets of Islamic finance to appreciate a broader point than its admittedly tenuous connections to Bitcoin. The study of Islamic economics and finance is intriguing as it is, to my mind, the only systematized, contemporary, and successful alternative to what we might call “Western” financial precepts, now, of course, near-globalized and seemingly omnipresent in commerce. Note, for example, the IMF describes “Islamic Banks” as opposed to “Conventional Banks” (and I stress “successful” above, by the way, to properly distinguish and contrast Islamic economics to socialism, of which, the reader might be interested to know, Mawdūdī’s Mankind’s Economic Problems and their Islamic Solutions provides possibly the most concise and effective refutation I have ever read, fusing Mises and Havel in a two-page polemic).
A common difficulty with the conceptual challenge posed by Bitcoin is that this omnipresence makes it difficult to think rigorously in terms outside the framework of mainstream Western finance at all. Western finance is water. But perspective can be achieved, and precepts can be challenged. Mawdūdī, Siddiqi, and El Diwany challenged them, Nakamoto challenged them, and the reader owes it to herself to challenge them too. Elevating morality above perceived efficiency makes for a profound starting point.