Introduction

The year 2025 witnessed the Islamic finance market exceed USD 5.4 trillion, growing 11% annually. The leading international standard-setting body for Islamic finance is the Accounting and Auditing Organization for Islamic Financial Institutions ("AAOIFI"), which is based in Bahrain. Bahrain has already built AAOIFI's standards into its own digital asset regulations, and Saudi Arabia and the UAE are developing similar frameworks. However, six Islamic scholars, including the renowned Mufti Taqi Usmani, of Darul Ifta, the fatwa department of Jamia Darul Uloom Karachi, a leading Hanafi seminary, issued a fatwa declaring that digital assets did not qualify as maal (real wealth/property), rendering them unlawful for use as property or currency. This article aims to discuss how Islamic jurisprudence approaches digital assets, including compliance considerations beyond the threshold of what qualifies as maal, and how various regulators are responding to the growing market of digital assets.

What Digital Assets Are

Before applying Islamic jurisprudence to the concept of digital assets, it is crucial to understand what digital assets actually are. According to Prof. Koutoub Moustapha Sano, the Secretary General of the International Islamic Fiqh Academy ("IIFA"), a "digital asset" is anything that is electronically stored or transmitted and is linked to ownership or usage rights. This article shall discuss four prominent categories of "digital assets": 1) pure cryptocurrencies; 2) asset-backed or security tokens; 3) stablecoins; and 4) Central Bank Digital Currencies. There are other categories of digital assets, however, these four examples suffice to fulfil the objective of this article.

Pure Cryptocurrencies

Pure cryptocurrencies, such as Bitcoin and Ethereum, are purely digital assets with no underlying asset backing them. They do not represent a claim on any real-world asset, deposit, or reserve; their value is derived solely from market demand and network adoption.

Asset-backed or Security Tokens

Asset-backed or security tokens, by contrast, represent actual ownership in something real, such as real estate, company equity, or sukuk. They function as digital certificates of ownership, meaning the holder has a genuine legal claim to the underlying asset itself, not merely a claim against an issuer.

Stablecoins

Stablecoins are digital tokens pegged to a real-world currency, to keep their value stable. Some examples include USDT and the AE Coin, which are respectively pegged to the US dollar and the UAE dirham. The issuer maintains this peg by holding reserves, typically cash or similar assets, equal to the tokens in circulation, and by allowing holders to redeem their tokens at the fixed rate. Importantly, the holder of a stablecoin does not own the underlying reserves directly; the token merely represents a promise or claim against the issuer to maintain that fixed value, which distinguishes it from an asset-backed token, where the holder owns a share of the underlying asset itself.

Central Bank Digital Currencies ("CBDC")

Central bank digital currencies (CBDC) are digital fiat money issued directly by a state's central bank, rather than a privately issued instrument pegged to a currency it does not control. The UAE's digital dirham, given legal tender status under Federal Decree-Law No. 6 of 2025, is a leading example. The real distinction between these categories is not merely who issues each instrument, but what obligation, if any, survives after issuance. A pure cryptocurrency creates no issuer obligation at all, instead it is simply released into circulation with no one legally bound to redeem it for anything. A stablecoin and an asset-backed token both create an ongoing claim against their issuer, whether a promise to redeem for reserve currency or a right to a share of an external asset. A CBDC creates no such claim, because there is nothing further to redeem it for: it is issued by the central bank, but rather than representing a promise about money, it already is money, simply in digital form.

How Islamic Jurisprudence Approaches Classification

Islamic contract law sets out specific tests that determine whether something can be validly owned, sold, or exchanged. Applying these tests to digital assets is where the real legal debate lies, henceforth, the article shall discuss five such tests.

Test 1: Maal (property/wealth)

For an object to be a valid subject of a sale, it must first qualify as maal, i.e., property or wealth. Jurists have historically disagreed on how strictly to define it. Some scholars held that maal must have recognised value and also be tangible. Others, including the majority of Maliki, Shafi'i, and Hanbali jurists, took a more flexible view, defining maal as anything with recognised value that must be compensated for if destroyed, whether tangible or not.

Test 2: Milkiyyah (ownership and possession)

Even where something qualifies as maal, the seller must have actual or constructive ownership and possession of it at the time of sale. A well-known hadith captures this directly; the Prophet Muhammad (PBUH) told his companions:

"Do not sell what you do not possess."

This principle underlies the broader prohibition on selling debts, receivables, or claims against a third party (bay' al-dayn) in many classical rulings, since a mere claim is treated differently from direct possession of a thing itself.

Test 3: Gharar (uncertainty)

A valid contract requires that its subject matter, price, and terms be clear and free of excessive ambiguity. Gharar is not a single, uniform concept. It can attach to different features of a transaction, including whether the subject matter exists or will materialise, uncertainty about its quality or characteristics, and transactions involving excessive risk or speculation as to outcome.

Test 4: Riba (interest)

Any unjust or exploitative increase in a financial exchange, most commonly, interest charged on a loan or delayed payment, is prohibited, regardless of how it is structured or labelled.

Test 5: Maysir (gambling/speculation)

Transactions resembling gambling, where gain for one party depends purely on chance or speculation rather than genuine economic activity, are prohibited.

Applying the Tests to the Above Categories of Digital Assets

Pure cryptocurrencies: They struggle hardest against Test 1. With no underlying asset, tangible form, or usufruct value, they sit closest to failing the maal threshold outright, though they may satisfy the broader definition of maal if a sufficient segment of the market comes to recognise them as valuable. Independently of this, they fail Test 3: their price is driven almost entirely by speculation with no fundamental anchor, making outcomes for buyers and sellers highly unpredictable. This volatility, and the absence of any real economic activity behind it, also raises concerns under Test 5.

Stablecoins: They pass Test 1 more plausibly, since real reserves exist behind them, however, Test 2 is where they are weaker. The holder does not own the reserves directly, instead they hold a redemption claim against the issuer, which is conceptually closer to a debt or receivable than direct possession of a thing. However, it can be counter-argued that, rather than the reserves, the stablecoin token itself may be treated as the maal under the broader definition, provided a sufficient section of society recognises it as valuable in its own right. On this reading, mere possession of the token, not a claim on the reserves behind it, is what satisfies Test 2. Moreover, Test 4 is also central here; if the issuer earns interest on reserves and passes on yield, that is a straightforward riba problem. Test 3 is genuinely contested for this category; the peg mechanism is designed to eliminate price uncertainty, but the holder cannot verify with certainty that the issuer's reserves are sufficient or that redemption will function as promised, meaning that gharar may still apply. Overall, the permissibility of using stablecoins as property or currency depends on various factors and the specific type of stablecoins, which explains why some regulators or religious bodies have authorised their use, while others are yet to accommodate them.

Asset-backed and security tokens: They have the strongest claim across nearly all the tests. The underlying asset, i.e., real estate, equity or sukuk, independently satisfies Test 1, and because the token evidences a genuine ownership rather than a mere claim against an issuer, Test 2 is also more easily satisfied. Test 3 is least of a concern here, since the underlying asset is identifiable, specific, and valued through normal market mechanisms. Test 4 is generally less of a concern here provided the underlying asset itself generates returns through profit-sharing or lease income rather than interest, and Test 5 is not engaged given the token's value is tied to an identifiable asset rather than speculation.

Central bank digital currencies: They also present little difficulty under any of the five tests. Because a CBDC is not a claim against an issuer but simply money in digital form, it satisfies Test 1 via the broader definition of maal and Test 2 is not meaningfully engaged. A CBDC carries no interest obligation of its own under Test 4, and, since its value is fixed by the state rather than subject to speculative trading, it raises no real concern under Tests 3 or 5 either.

Difference of Opinion and Subjectivity

It is imperative to note that the schools of Islamic jurisprudence hold differing opinions on the tests outlined above. While the Hanafi school is the most widely followed, meaningful differences exist even within it, and the tests themselves are open to differing degrees of strictness in application. On maal, for instance, some Hanafi scholars, such as Al-Haskafi and Zarqa, require tangibility, while other Hanafi scholars, including Mufti Taqi Usmani, are of the opinion that intangible rights and benefits can qualify as maal where custom (urf) recognises them as valuable. The urf test itself is a source of subjectivity. Custom is not fixed or objectively measurable, but varies by time and place, and ultimately depends on the jurist's own assessment of what has become customarily recognised as valuable. Another example is of gharar lacking a fixed, objective threshold. Jurists distinguish between gharar fahish (excessive, invalidating uncertainty) and gharar yasir (minor, tolerated uncertainty), but there is no universally agreed formula to establish their boundaries, as assessments are inherently contextual. Nonetheless, regulators have tried to provide a fixed framework to accommodate the use of digital assets.

How Are Regulators Responding

Regulators across Muslim-majority countries are moving ahead with digital asset rules, but the type of digital asset they've actually authorised varies significantly, and this matters given the taxonomy set out in Section 2.

Bahrain: Unlike other Gulf countries, its regulatory engagement extends to pure cryptocurrencies, not just stablecoins or asset-backed tokens. The Central Bank of Bahrain operated an early sandbox licensing programme that gave formal regulatory approval to cryptocurrency exchanges trading assets such as Bitcoin, making Bahrain the first jurisdiction in the Arab world to do so. Separately, Bahrain has also built a stablecoin-specific framework; its Stablecoin Issuance and Offering Module allows issuers to obtain Islamic-compliant status, but only if they generate returns through fee-sharing or profit participation rather than interest.

UAE: Has authorised three distinct categories. First, its central-bank-issued digital dirham, a CBDC, was given legal tender status under Federal Decree-Law No. 6 of 2025, and the Central Bank of the UAE officially launched a Digital Dirham pilot in November 2025, executing the country's first blockchain-based central bank transaction. Second, private stablecoins such as AE Coin have been separately licensed under the Central Bank's Payment Token Services Regulation. Third, the UAE Securities and Commodities Authority has created a distinct framework for security tokens and tokenised sukuk. Pure cryptocurrencies such as Bitcoin are not given legal status under any of these frameworks.

Saudi Arabia: Has authorised, or is actively developing, three of the four categories from Section 2, but not pure cryptocurrencies. It is preparing a national stablecoin initiative, and separately, the Saudi Central Bank (SAMA) has been developing a wholesale CBDC through Project Aber, a joint initiative with the UAE Central Bank evaluating a blockchain-based digital currency for cross-border settlement between the two countries' banking sectors, explicitly tied to its Vision 2030 innovation strategy.

Qatar: Has taken an asset-backed approach through the Qatar Financial Centre's tokenisation regime, covering legal recognition of property rights in tokens and their underlying assets, custody arrangements, and smart contracts. Separately, the Qatar Central Bank had, as of 2022, described its own CBDC as being at the foundation stage, still evaluating the appropriate technology and platform.

Pakistan: Unlike the Gulf jurisdictions above, Pakistan's Virtual Assets Act 2026 is considerably broader in scope. Passed by Parliament in March 2026, it establishes the Pakistan Virtual Assets Regulatory Authority (PVARA) as a permanent federal regulator with authority to license and supervise exchanges, custodians, and token issuers dealing in digital assets generally, including pure cryptocurrencies such as Bitcoin. Pakistan's crypto market, previously unregulated, has been estimated at approximately USD 300 billion according to Chainalysis. This is the sharpest contradiction identified in this article, i.e., the same jurisdiction as the Darul Uloom Karachi fatwa now licenses and regulates the exact category of asset, pure cryptocurrency, that the fatwa most clearly rejects.

Turkey: Also regulates pure cryptocurrencies broadly, rather than confining itself to stablecoins, CBDCs, or asset-backed tokens. Turkey's Capital Markets Board licenses crypto asset service providers generally, following amendments to the Capital Markets Law in 2024. This sits in direct tension with the position of the Diyanet, Turkey's state Directorate of Religious Affairs, which has declared cryptocurrency trading impermissible, a position academic research has linked to structural parallels between crypto trading and gambling.

Indonesia: Follows the same broad approach as Pakistan and Turkey. Pure cryptocurrencies, including Bitcoin and Ethereum, were licensed as tradeable commodities by Indonesia's regulator, Bappebti, from 2019, before regulatory authority transitioned to the Financial Services Authority (OJK) in January 2025, which now regulates crypto assets as financial instruments rather than commodities. Throughout this period, the country's top Islamic body, the Ulema Council (MUI), has maintained its 2021 ruling declaring cryptocurrency haram, citing the gharar and maysir concerns discussed in Sections 3 and 4. Separately, Nahdlatul Ulama, Indonesia's largest Islamic organisation with over 120 million members, is pursuing asset-backed tokenisation instead, through a Letter of Intent with GreenX, targeting the category this article's Section 4 identifies as doctrinally strongest.

Malaysia: Malaysia's Shariah Advisory Council sits within its central bank, and by statute, its rulings on Islamic finance matters are binding on the civil courts. Rather than authorising pure cryptocurrencies as their own category, Malaysia's Securities Commission has treated certain digital currencies and tokens, including Bitcoin, as securities since 2019, licensing several Digital Asset Exchanges to trade approved digital assets under this framework. This does not change the underlying nature of the asset; it simply brings Bitcoin within existing securities law for market-conduct and licensing purposes, rather than creating a bespoke framework. It resolves a market-regulation question, not the doctrinal question this article is concerned with, namely, whether Bitcoin qualifies as maal under Shariah. Malaysia has also backed this position with concrete investment, including a proposed stake by its largest public pension fund in an Islamic digital bank, and a government pledge of RM100 million toward Islamic finance innovation.

Recommendations for the Future

Three recommendations follow from the analysis above:

1. There is a need for a Shariah-compliant digital asset framework that applies broadly across jurisdictions and schools of thought, rather than the current patchwork of national regulation, institutional standards, and individual scholarly rulings developed largely on their own. Such a framework should be built around the asset categories set out in Section 2 and the five tests set out in Section 3, addressing pure cryptocurrencies, stablecoins, asset-backed or security tokens, and CBDCs separately, rather than issuing a single ruling on "digital assets" as one undifferentiated category;
2. Until that convergence happens, practitioners should treat Shariah certification as specific to each jurisdiction and investor base, rather than something that can simply be carried over from one market to another. A single opinion, however carefully obtained, should not be assumed sufficient where a product will be marketed to or held by investors in jurisdictions where a national religious authority has taken a stricter position, as in Pakistan, Turkey, or Indonesia. Offering documents should disclose this fragmentation openly, rather than presenting Shariah compliance as a settled, yes-or-no feature of the product; and
3. Lastly, regulators and standard-setters should engage directly with the sources of subjectivity identified in Section 5, particularly how contextual and changeable 'urf is, rather than treating it as fixed. As digital assets become more embedded in the everyday financial practice of Muslim-majority countries themselves, shown by the scale of licensed trading in Pakistan, Turkey, and Indonesia, and by the CBDC and stablecoin initiatives underway across the Gulf, the urf underlying the maal test may itself be shifting. Any future framework should be built to account for that possibility, rather than lock in today's unsettled position.

Conclusion

The disagreement between the Darul Uloom Karachi fatwa and the frameworks now operating across the UAE, Bahrain, Saudi Arabia, Qatar, Pakistan, Turkey, Indonesia, and Malaysia is not a minor dispute at the margins of Islamic finance. It reflects real, unresolved subjectivity within the classical tests themselves: in how urf is judged, in where the line between gharar fahish and gharar yasir falls, and in how strictly maal is defined even within a single school of jurisprudence. Applied to an asset class that regulators across Muslim-majority countries are now actively licensing, taxing, and in some cases issuing themselves, that subjectivity turns directly into legal risk and inconsistency for practitioners and investors alike. The regulatory pattern this article has traced, cautious approval of stablecoins, asset-backed tokens, and CBDCs in the Gulf, against broader licensing of pure cryptocurrency in Pakistan, Turkey, and Indonesia, suggests that regulators, whether by design or not, are already moving toward something close to the category-specific analysis this article's five tests would produce. Formalising that convergence, rather than leaving it to happen by accident through separate national policy choices, remains the central task facing the Islamic finance community. Without that work, the growth story that opened this article, a USD 5.4 trillion market expanding at 11% a year, risks becoming, for tokenised products specifically, a source of structuring and reputational risk rather than opportunity.