Can Zakat be Paid in Bitcoin or Does it Have to be in Fiat?
Introduction
Zakat is from the five pillars of Islam are the foundation of Islam, namely, the Shahadah (testimony of the Oneness of God), Salah, Zakat, Fasting, and Hajj. These pillars are connected in strengthening an individual and the community. These pillars work together to form the basis of a successful and strong community. From the five pillars, the Qur’an mentions the three pillars of Iman, Salat and Zakat together repeatedly. In particular, the Qur’an interlinks Salat and Zakat 28 times.
Zakat, constituting 2.5% of a Muslim's qualifying assets, is a divine injunction designed to support the faithful in their faith, and balance social inequality, allowing wealth to flow from those who have been blessed with abundance to those who face hardship and poverty. By the flow of Zakat, the community remains united, forming a prosperous, harmonious, and successful society.
How is Zakat paid
Zakat is about enabling the beneficiary and empowering them. This happens by transferring something of value to them which the beneficiary can use to empower themselves. The beneficiary can then utilise the asset they have to fulfill their needs in the most efficient way. The scholars refer to this concept as ‘Tamlik’, which means delivering ownership of an asset. Zakat is about building asset ownership in those that do not have ownership. By granting asset ownership, it gives those struggling a foundation and base to build wealth and fulfil their needs.
Hence, the Islamic scholars write that simply providing a paid service for free to a beneficiary does not count as ‘Zakat’. Imam Ala’ al-Din al-Bukhari (d.730 AH) writes that the purpose of giving Zakat is to empower and enrich the needy, that happens by giving them ownership of valuable assets.
Anything of value that can be transferred in ownership can be given to the Zakat beneficiary to cover the Zakat liability. It is not necessary to pay Zakat in cash only.
Giving Zakat in Bitcoin
Bitcoin is a payment system. From a Shariah perspective, its objective is to function as payment (Thaman). For something to function as payment, it just needs to be:
- An asset that is storable and retrievable.
- Acceptance as a medium of exchange.
According to Islamic jurists, an asset is something that has utility - that utility is realised by holding and using it, or by spending. Assets like sofas, clocks, and phones provide utility from within themselves. Currencies and money provide utility upon spending, not by holding. It is still the asset itself providing benefit, but this type of benefit is unique with money, that its use case and utility is to function as a medium of exchange.
In regard to function as a medium of exchange, there is nothing fixed from the Shariah. Anything that people agree and use can function as a payment system and medium of exchange. Of course, people will only use something that naturally can function in this. Hence, Bitcoin does function as a payment system. It can be used and is being used in parts of the world as a payment system.
Its utility is in use as a payment system, but more importantly, its utility is in the ideas and technical properties that underpin Bitcoin. Bitcoin is a decentralized digital payment system that operates on a peer-to-peer network, emphasizing trust minimization, consensus without authority, and resistance to censorship. Its governance is shaped by the community through a consensus-building process, avoiding centralized control and promoting protocol changes only with user consent. Key to its utility are principles like decentralization, which distributes power to prevent single points of failure or control; pseudonymity, ensuring users can transact without revealing their identities; and an open-source approach, allowing anyone to verify and participate in the network. Bitcoin's design seeks to minimize trust by relying on cryptographic proof, making it a unique form of electronic cash that addresses the pitfalls of traditional currencies by being more secure, transparent, and equitable.
Bitcoin is a viable asset with a genuine utility. However, the most important thing to remember is that Zakat is there to fulfil real needs of people. Scholars like Imam al-Haskafi and others write the idea that it is desirable and recommended to give enough Zakat to fulfill the current needs of the beneficiary for the day.
Practical considerations of Zakat in Bitcoin
Whoever collects Zakat in Bitcoin must have a system to ensure that the beneficiary can actually use or benefit from the Bitcoin.
Further, the beneficiary must own their own wallet to which Bitcoin is being transferred to, or that they have delegated another person or entity to have a wallet on their behalf and take possession of the Bitcoin on their behalf. Thus, the following are essential in order to ascertain the correct Zakat payment to a beneficiary:
- A Bitcoin Address: This serves as a public identifier for receiving transactions. It's akin to an account number that can be shared with others to receive Bitcoin. However, merely having an address doesn't grant ownership or control; it's more about where the Bitcoin is sent. This Bitcoin address can belong to the Zakat beneficiary or a representative of the beneficiary. Alternatively, a charity organization can collect the Bitcoin as an agent of the Zakat payment and distribute the Bitcoin to Zakat beneficiaries.
- A Private Key: This is the most crucial component of Bitcoin ownership and control. The private key is a secure digital code that allows the holder to access and manage the Bitcoin associated with their address. Ownership and control are truly established through the private key because it enables the signing of transactions, effectively proving the owner's right to spend the Bitcoin. Without the private key, one cannot prove ownership or authorize transactions, leading to a loss of control over the Bitcoin. This can also be delegated, as long as the Zakat beneficiary is known to be the beneficial owner and the delegate is merely a trustee and agent on behalf of the Zakat beneficiary.
- A Bitcoin Wallet: This is a digital tool that manages Bitcoin addresses and private keys. Wallets can be software-based (online, desktop, or mobile), hardware-based (physical devices), or even paper-based (printed private keys and addresses). A wallet does not actually "store" your Bitcoin in the conventional sense; rather, it holds your private keys, allowing you to interact with your Bitcoin on the blockchain. Having a wallet is crucial for managing your Bitcoin, making transactions, and keeping your private keys secure.
Current Zakat Distribution via Bitcoin
At present, as far as Zakat is concerned, Bitcoin is probably most optimal as a bridge asset, in that it is used as a remittance system to transfer value to another country. The local receiving organization can convert the Bitcoin into local currency and then distribute Zakat. This will ensure that the local beneficiaries have the most wide use case of the value transferred to them. In addition, Zakat will be able to function to fulfil its core objective of empowering the beneficiary in real time.
There is certainly an argument to make that Bitcoin can be paid to the needy and saved for the long-term as an investment. Bitcoin is the hedge against the current deficiencies in the fiat system. However, to operationalise the giving of Bitcoin as long-term investments to beneficiaries, it must be that they become owners and have access and use of the Bitcoin if needed.
The Bottom Line
The question of whether Zakat can be paid in Bitcoin instead of traditional fiat currency touches upon both the foundational principles of Islam and the evolving nature of financial transactions in the digital age. This exploration has highlighted that, from a Shariah perspective, the essence of Zakat transcends the medium through which it is conveyed, focusing instead on the empowerment and ownership it provides to the beneficiaries. Bitcoin, with its inherent qualities of decentralization, security, and accessibility, aligns with the objectives of Zakat by enabling the transfer of valuable assets to those in need, thereby fulfilling the core aim of Zakat: to alleviate poverty and ensure a more equitable distribution of wealth within the Muslim community.
However, practical considerations are paramount to ensure that the transfer of Zakat through Bitcoin is both Shariah-compliant and beneficial to the recipient. This includes ensuring that beneficiaries have the means to access, control, and utilize Bitcoin, thereby empowering them not just in principle but in practice. The technological barrier to entry and the volatility of cryptocurrency markets necessitate a robust support system to guide beneficiaries in managing their digital assets effectively.
Current practices of distributing Zakat via Bitcoin, primarily as a bridge asset for remittance or as a long-term investment, underscore the potential for innovative approaches to fulfilling this pillar of Islam. Yet, they also highlight the need for continued scholarly debate and technological development to address challenges and maximize benefits. The integration of Bitcoin into Zakat practices represents a confluence of tradition and innovation, where the timeless values of Islamic charity meet the possibilities opened by modern technology.
In conclusion, the payment of Zakat in Bitcoin is not only permissible but also has the potential to enhance the effectiveness and reach of Zakat in the digital era. It offers a novel way to fulfill Islamic obligations while embracing the benefits of technology. As the Muslim community navigates this intersection of faith and innovation, it is crucial to maintain the principles of Zakat at the forefront: to provide for those in need, to purify one's wealth, and to work towards a more just and compassionate society. The journey of integrating Bitcoin into Zakat practices is an ongoing one, marked by both opportunities and challenges, but ultimately driven by the enduring spirit of generosity and equity that lies at the heart of Zakat.
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