Bit by Bit Journey of Bitcoin

Bitcoin Global Sadaqah

Everywhere we go there is talk of Blockchain and Bitcoin. It has created a buzz in every corner of the globe. People are comparing blockchain to the discovery of the Internet. 

Imam al-Bukhari titled a chapter in his Sahih demonstrating a very important attribute that a Muslim must observe. The title is: العلم قبل القول والعمل. – Knowledge Precedes Speech and Action. This was to demonstrate that knowledge is required before a person embarks on making a move or talking about something. We will look at Blockchain, Bitcoin, mining Bitcoins and discuss a few matters regarding them from an Islamic lens. This article is NOT meant to discuss the permissibility or impermissibility of Bitcoin in any manner. There is still research being done on the matter by qualified scholars. Read what Sheikh Sajid Umar has to say regarding Bitcoins here. Alright then, let’s begin.

What Is Blockchain?

There seems to be a lot of confusion between blockchain and Bitcoin. Blockchain is not Bitcoin and neither is it a cryptocurrency. Bitcoin is based on the blockchain whereas blockchain is the name the technology. As the name states, it is a sequence of blocks or groups of transactions that are chained together and distributed among the users in a network. Think of it as a ledger or a database to record data. Blockchain is a distributed ledger technology (DLT) that allows data to be stored globally on thousands of servers while letting anyone on the network see everyone else’s entries in near real-time.

It works as an immutable record of transactions that do not require relying on an external authority to validate the authenticity and integrity of the data. It is an unchangeable record of transactions, where each block is time-stamped and linked to the previous one. Every time a set of transactions is added, that data becomes another block in the chain. Hence the name, blockchain. Transactions on the blockchain are typically economic in nature, but we can store basically any kind of information in these blocks.

What is Bitcoin?

In a research paper introducing the digital currency, Bitcoin’s pseudonymous creator, Satoshi Nakamoto, referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”. Bitcoin is a digital currency created in January 2009. One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a Satoshi.

These coins are not physical in nature. They are balances kept on a public ledger that everyone has transparent access to that are verified by a massive amount of computing power as we will soon see. The balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bitcoins. The private key (comparable to an ATM PIN) is meant to be a guarded secret and only used to authorize Bitcoin transmissions.

As mentioned at the start, the Bitcoin protocol is built on a blockchain. Simply put, Bitcoin merely uses blockchain as a means to transparently record a ledger of payments. By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates many of the processing and transaction fees. It can also give those in countries with unstable currencies or financial infrastructures a more stable currency with more applications and a wider network of individuals and institutions they can do business with, both domestically and internationally.

Mining Bitcoins

Users need to meet an agreement about the validity of the chain before adding more blocks. Every time a node adds a new block, all the users have to validate the block by using a common protocol. Typically, the nodes reach a consensus about the correctness of a new block by ‘Proof of Work’ or ‘Proof of Stake’ methods. Bitcoin networks depend on this incentive mechanism. Rewards are awarded to miners who validate transactions and create blocks in the Bitcoin blockchain. This process is known as Bitcoin Mining.

The Bitcoin network follows a leader election-based consensus mechanism. In order to select the block, the network selects a node as a leader and the leader node publishes the block he created. To elect the leader, the Bitcoin network uses a consensus algorithm called Proof of Work (PoW). According to this algorithm, the nodes competing to become the leader needs to solve a cryptographic puzzle. Whoever solves this puzzle will be selected as the leader. Other nodes can verify the genuineness of the leader by checking the solution he found for the puzzle. The nodes competing in solving this puzzle is known as mining nodes or miners. These miners are responsible for the creation of new blocks in Bitcoin. Miners are rewarded with a fixed amount of Bitcoins as a reward for doing these works. Initially, the reward was 50 Bitcoins, and this reward will be halved every four years. By the year 2140, all the Bitcoins will be mined and there won’t be any mining reward from the network; instead, the miners will get an incentive in the form of transaction fees.

The term “wallet” is a bit misleading, as Bitcoin’s decentralized nature means that it is never stored “in” a wallet, but rather decentrally on a blockchain. Because of the decentralized nature of Bitcoin’s blockchain, all transactions can be transparently viewed by either having a personal node or by using blockchain explorers that allow anyone to see transactions occurring live. Each node has its own copy of the chain that gets updated as fresh blocks are confirmed and added. This means that if you wanted to, you could track Bitcoin wherever it goes. For someone to mess around with Bitcoin, the bad actor would need to operate 51% of the computing power that makes up Bitcoin. Bitcoin has around 47,000 nodes as of May 2020 and this number is growing, making such an attack quite unlikely or frankly, next to impossible.

What Is Islamic Currency?

Firstly, there is no such thing as an ‘Islamic Currency’ that existed at the time of the Messenger of Allah. They used gold and silver just like it was being used for centuries by the people of their time and those before them. Secondly, Islam did not come to invent an entirely new system of the conception of trade, finance, and economics. Rather, it brought principles upon which or in the boundaries of which the transactions were to be conducted.

Do We Know Who Issues Bitcoins?

Bitcoins are not issued by its anonymous creator, Satoshi Nakamoto. Bitcoin is not issued by some mysterious group of people, society, or authority that we don’t know about. Bitcoins are created by a process known as ‘mining’ on the blockchain. that uses a methodology called ‘Proof of Work’ to mine Bitcoins. They are not printing imaginary money out of thin air like certain institutions. It is similar to miners digging up gold in the old fashioned way to showcase a ‘Proof of Work’ to get paid. Bitcoins are finite in nature. Bitcoins are created at a known rate of 12.5BTC every 10 minutes. The supply is capped at 21 million BTC thus increasing their value over time. A limited supply keeps Bitcoin stable to a large extent. Add to that, these miners are people who are identified and a part of the blockchain.

For a minute, let’s say the issuer was unknown. How does this negate Bitcoin from an Islamic perspective? It shouldn’t. Do we know who exactly invented paper? We don’t, yet the world runs on paper currency. Unlike the sciences of Hadith, anonymity is not a factor that plays a role in the acceptance or rejection of a currency.

Do We Need A Central Authority To Issue Money?

There wasn’t a central authority to issue or back money at the time of the Messenger of Allah. All monetary systems as we know them today, are fiat systems based on debt and not based on value or resources. Fiat currency itself doesn’t have any intrinsic value but it stands strong because of its utility in the market and is considered legal tender. The deposits that we see in our bank accounts are basically just numbers that show the funds allocated under our name, with a promise from the bank that if we wish to extract cash from the bank, then that amount will be paid. Based on this Bitcoins are much more tangible in nature.

Muslims didn’t even have their own so-called coin till the caliphate of Umar ibn al-Khattab. Before this, Muslims and even the Arabs, in general, were using the barter system, other precious goods or metals, or gold or silver coins that were minted by the neighbouring Persian or Roman empires to trade. They didn’t really regulate or even have any degree of control over the currency that they used in their transactions. To put it in perspective, it wasn’t until the caliphate of Abdul-Malik bin Marwan of the Umayyad dynasty that an actual monetary system was established and enforced upon the public. Today, there is no monetary fiat system that is based on gold. The US dollar ceased to be based on gold after the collapse of the Bretton Woods system.

What is interesting is that despite coins being issued in the caliphate of both Umar ibn al-Khattab and Ali Ibn Abi Talib, many people still continued to trade using the barter system. The minted coins were not THE currency. This shows that having a central authority like a bank has no definitive basis for currency. In reality, the ultimate basis of how money is used and what would be a valid form of exchange constituting money will be determined by the acceptance of the people. It is what the culture has accepted as a medium of exchange.

What is funny to note is that Bitcoin actually came into existence to reduce the corruption, frauds, and scams that plague the traditional fiat systems. The utility of money is not negated simply because criminals perform illegal activities by using it. Bitcoin and other cryptocurrencies don’t need regulation because they are based on a decentralized network.

A Medium Of Exchange

Bitcoin has its very own strong market where it is used for trade and evaluating goods and services. Unfamiliarity cannot be used as the premise of declaring bitcoin to not be a medium of exchange. We have already established that currencies come into play based on what the people have agreed to be valid to exchange their goods or services for.

The Gharar Argument

Abu Huraira said: “The Messenger of Allah (ﷺ) forbade Gharar transactions and Hasah transactions.” [Muslim] Gharar refers to an extreme uncertainty and a Hasah sale is an ambiguous sale. An example of this is when the seller says to the buyer that he will sell to him whatever the coin he tosses falls upon or similar. The end result of a commodity being bought and sold is unknown.

Without a doubt, the Shariah prohibits gharar transactions. But it needs to be understood that gharar takes place in the realm of transactions and contracts. Currencies cannot be gharar. Only transactions can be termed as ghirari by nature. For anyone who has studied the blockchain and the basics of cryptocurrency, it is clear that it is known what the person is going to get at the end of the mining process. It is stored on a public ledger that is irrevocable meaning that it cannot be tampered with or changed. Add to that, the presence of smart contracts in new currencies etc makes it even more transparent and clear of what the process is and how many coins are being generated. Normal fiat currencies like the US Dollar has also seen many bubbles where the currency fluctuates and all these bubbles have burst. Risk is the backbone of Islamic transactions. Blockchain has the potential of eradicating gharar from our transactions completely or at least to a very large extent.

Datuk Mohd Daud, who chairs Bank Negara Malaysia, Securities Commission of Malaysia (SC), and the Labuan Financial Services Authorities Shariah Advisory Council said, “From a fatwa standpoint, a government can declare something haram because of the risk. But in terms of Shariah, it can’t be said that something is haram because there is a risk. Datuk Mohd Daud outlines some examples of how this could be applied in Malaysia.

“For example, if we pay zakat through Bitcoin—if this is allowed by fatwa—then we can see exactly how the money is spent. Another example is BR1M allowances. We can observe exactly where the money is spent, whether in schoolbooks and etc.” He further added, “Digital currency was created based on a feeling of trust or peer-to-peer. Meanwhile, fiat money is also based in trust.” Giving an example of the US Dollar, he said, “If even America can lose faith in its own currency, does that mean the USD is not a currency? Not necessarily. In fact, there have been cases such as wars and boycotts that led to currency values falling. This did not take its values as currency away.”

I would like to thank Ustadh Ali al-Boriqee for his explanation series on Bitcoin that has formed the skeleton of this entire article which also takes from multiple other sources and comprehensively presents them in a manner to the reader to understand the ongoing discourse on the subject.

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