103. Islamic Finance and Bitcoin with Safdar Alam

In this episode, Saifdean talks to Safdar Alam, CEO of investment firm Maydan Capital, about Islamic finance. Safdar starts by describing the basic principles of Islamic finance and the ethical justification for Islam’s prohibition on lending with interest. He and Saifedean then talk about how Islamic finance works in practice today; how it is mimicking the mainstream financial system; and the ways in which bitcoin might provide an ethical alternative to common practices often considered haram. In the Q&A Safdar answers questions about the Islamic definition of “speculation” and how this differs from “gambling”.

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Saifedean Ammous: [00:03:01] Hello, and welcome to another episode of the Bitcoin Standard podcast! Our guest today is Safdar Alam, who is Chief Executive Officer at UK based Maydan Capital and the former global head of Islamic Structuring at JP Morgan. Safdar's website safdaralam.co.uk hosts a variety of information and training courses about finance and trading, and he is known for his views that most Islamic finance today simply mimics conventional finance and that the industry is in need of radical reform. Safdar, thank you so much for joining us today! 

Safdar Alam: Thank you Saif! 

Saifedean Ammous: What I wanted to discuss with you is your view on Islamic finance, which is not a very conventional view, but I find it to be very interesting and quite compelling and then eventually leading on to Bitcoin. But before we get into all of that, [00:04:01] could you tell us a little bit about you and your own background in finance and how you got to where you are?

Safdar Alam: Okay. So when I'd finished university, and then I was 21 or so, and really my main aim at the time was just to make as much money as I possibly could, and so I moved into investment banking. Working in London and I went through various roles in investment banking, mainly working on the trading floor.

I got involved with structuring pricing derivatives, exotics on the trading floor. And my main experience at that time was with UBS. And after a few years of that, even though the money was quite good of course, but I got just a little bit bored of the whole thing. And I think also, probably I became a bit less materialistic.

I began to think more about things, I guess maybe more ethical things. And also personally, I became a bit more aware of my own religion and how I figure in the scheme of things. And then I found out that a lot of [00:05:01] what I'd been doing was not aligned with the ethics in my religion. It just classified as haram, the aspect of gambling speculation.

You're just using money and securities to make more money. And also working in a banking institution where even though my role was on the trading side, but the main work that the banks do, how they survive and make money is through lending and interest. And that act as well is prohibited and in our religion, in Islam.

So I became very aware of these things, and I wanted to move away from banking. At that time also I became aware that there was such a thing as Islamic banking. So this was in the late nineties, it was a very new thing in the UK, very niche. And I started to research it and then I decided that I thought it was opportune for me to try to keep to my specialization of money and finance, but try to move to Islamic finance, Islamic banking. 

See if I could combine the two as well, my knowledge of finance and banking and also [00:06:01] trying to work in a field that's more aligned to my values as well. It took about good two years of trying, I finally managed to get a role in Islamic banking. And then I've stayed in Islamic, working Islamic banking and Islamic finance since then. About after 12 years of working in Islamic finance, I decided to leave the industry of Islamic banking specifically.

Because I was very disillusioned by how it operates and the ethics at holds because for me, maybe I'd gone a full 180, I was very materialistic through. At the end, for whatever reason, but I felt quite driven by moral values at the end. And so interestingly, the same moral values that drove me to focus on Islamic finance, those same values led me to leave the Islamic banking industry.

And I've done a few things since then, but the main thing of focusing on the last few [00:07:01] years is with the emergence of Fintech. I think there's a very good opportunity to continue to be active in the finance world and investment world, but yet find a way that I think is more aligned to what we are told as Muslims, of what we should do with money and investments.

So it's almost like trying to calf a parallel way forward for Muslims that's different to the elephant in the room, which is the Islamic banking side of Islamic finance. 

Saifedean Ammous: Yeah. And to begin with, let's begin a little bit with a kind of broad overview of what you mean by Islamic finance.

And specifically, the actual principles of Islamic finance as you understand them and as you think they should be practiced. Not so much how they are practiced, we'll compare to that in a bit. For many people who are listening here I presume just the entire [00:08:01] idea of Islamic finance seems like an alien concept.

Why should a religion have its own financial system? Could you give us a little bit of of your idea about what is the core of Islamic finance, how it differs from the mainstream fiat finance? 

Safdar Alam: Okay. I guess one way of approaching it is to say that, in Islam we are told out approach to money and finance, it's not distinguishable to our approach in everything else. 

Which means that it must be driven by values, that we are informed, that are important. So this broadly relates to ethics. There's different classification of rules in Islam, one is our relationship with our creator, for example. How we worship.

And we're told how that should be, because we should not transgress beyond certain bounds. And also we're told how to [00:09:01] deal with people. Not all things are legal rules, but we're told not to lie with people. If you give your word, you should hold on to it.

We're told how to interact with our parents, for example. We're told how to interact with our children. And so these are all different aspects of rules and the same applies to money and finance. We are told how we should interact with money, how we should interact with people when it comes to money and how we should handle ourselves when it comes to transactions.

And so initially a lot of these rules are prescriptive. It tells us you should do this, or you should not do this. And often what's told to us, it's quite simple things, especially when it comes to finance, cause remember these rules were revealed to us for either in the Quran itself or early on at the time of the prophet, peace be upon him, which was in the seventh century.

So the way the rules presented [00:10:01] to us are consistent with that time. For example, we're not told about how to invest in financial markets, we're not told about how to deal with institutional activities that might not be socially responsible, or systems with the environment. But we're given basic principles we're told for.

And so the main principles, I think one that most people would know if they're familiar with Islamic finance, one is there's a prohibition of lending with interest. We are allowed to lend money and incur debt, but nobody's allowed to benefit from it. So you must repay only the principal.

And so lending at interest is forbidden in the strongest terms, but there are many other aspects of business that we're told to avoid or to do. And they are simple things to be honest, we're told not to lie and not to deceive each other, to be honest in our dealings. 

And interestingly, we are told about certain transactions. And when these examples are given, what's involved the commodities involved [00:11:01] often gold and silver, because this was money at the time. But also examples of given, referring to dates and wheat and were told some certain kinds of transactions are not permissible and some are. We're also told, for example, speculation is not permissible.

You shouldn't speculate with your money. We're told gambling is not permissible. And so from these very simple rules I would say, it gives us the framework to develop more complex principles. And I think that's broadly where we're coming from, is that Islam sets for us, sets down for us certain sets of principles, which should be our starting point.

And from there we can derive economic systems. 

Saifedean Ammous: Okay. So to get into a little bit more detail, what is the rationale behind forbidding lending at interest? 

Safdar Alam: Okay. In this specific scenario, that's the revelations occurred in the Quran. There was a [00:12:01] specific form of lending that occurred amongst the tribes in that part of Arabia at the time, and this was customary, it was custom.

So what used to happen was one person with capital would lend money to somebody who needs money. And the terms would be very simple, such as you will repay me after a period of time, perhaps one year, and you will repay me twice the principle. You will repay me double. And it was simple as that there was no real need for any further negotiation.

And at that time of repayment, if you're unable to settle, the lender would go fine, you have another one year now, but the amount is doubled again. And it will literally be doubled every year. And as as we can imagine, if you're not going to repay early, you're not going to be able to repay four times eight times, 16 times. 

So what would happen is very quickly, this would result in financial slavery because that's the final outcome. You and your family will be financial slaves of the lender. So this [00:13:01] was customary at the time, and this was a trigger for a revelation in the Quran to forbid this practice and the one thing that really drew me to Islamic finance and the whole idea of morals as well, was that the punishment for this activity, for this lending we are told the punishment if you do this, the punishment is God and his messenger will declare war on you. This punishment is incredibly specific and it's a punishment not given to any other sin in our religion. 

Saifedean Ammous: Yeah. I'm trying to get more at, not so much the circumstantial reasons for why this happened in as much as it is the the economic rationale.

Why is it wrong to charge an interest on a loan? If you want to lend money to somebody, they want to pay you 5%, they want to do it, you want to do it. Why should it be [00:14:01] forbidden? Could you make a case for that?

Safdar Alam: Okay. So I think if we look at two isolated parties looking to make a transaction, and one wants a loan, the other one has a capital willing to give a loan.

And if you look at the fact that they the mutually agree, then it can be argued that transaction on its own, you can argue that might not be delivering harm to anybody, especially if the repayment is within the capacity of the borrower, and he repays. Then the transaction's finished. And I agree on that isolated incident, it's difficult to evidence harm, any harm that might occur.

But we have to remember that when we humans are in situations that we don't often stick to the rules. So the point I'm making is that we have to look at the potential harm that can occur, and we also have to consider human nature. 

So for example one of the reasons that alcohol is made forbidden is that even though very small amounts of it might [00:15:01] not intoxicate, but larger amounts can. And so there's a principle that we derived from there that if there's an activity which extended use of that activity can result in harm, that's quite possible, even though single isolated activities might not result in harm. So I think this comes back to the understanding of human nature as well, that if we are permitted down the slippery slope of making a single transaction, where we can charge interest that the risk lies that this can then become systemic and become systematic.

And I think that's where we are today. And I think it's it's much easier today to evidence the harm that's created by a system that's built on lending at interest. 

Saifedean Ammous: Yeah. I tend to think, when I try and think about the rationale for this being a bad thing, I think of it in terms of as we see it in the current Fiat system, when a lender has the ability to lend out at interest, they effectively have the [00:16:01] ability of increasing the money supply without actually making new gold coins or printing new paper money.

So when banks lend in the Fiat monetary system, that creates new money supply because they issue loans that are not necessarily, or that are mostly not backed by any kind of collateral on hand. So they're overextended financially. 

And I think the the way that I like to think about it is that in this kind of situation, when a person is able to lend at a fixed interest rate. Their fallback position is that they're going to take away the property of the borrower in case the borrower is unable to pay back. Now yes, you can say that if the [00:17:01] borrower and the lender agree, then why should anybody intervene?

And I understand that, but I think from the religious perspective, which looks more at the social implications of something like this, I think the case against it is that even though the two of them are able to agree, the reason they agree is that we as a society normalize the idea of the lender taking the borrowers stuff. Which effectively monetizes their collateral so that the house is basically the collateral.

But since the houses with the borrower, it's not with a lender. It's being used as a consumer good. The person is living on it and at the same time it's being used as a monetary good that the bank will liquidate if the loan cannot be paid. 

This [00:18:01] is obviously colored by my Austrian inflationist perspective, but it disagrees with the way that the Austrians think about it.

But if I were to make the case for why this is wrong, I think it's inflationary. I think that is creating new money that makes us as a society live in a situation where new money is being created by these financial institutions that can then impound the property of people who aren't able to pay.

And the case against it is that people shouldn't, people I guess the religious case is that as an individual, you don't want to be living in a society that accepts those things. What do you think of that kind of a take on it? 

Safdar Alam: I certainly do agree with that and the consequence of money creation and credit creation, but equally, if I look at it now from a religious point of view, as I understand it the concept of credit [00:19:01] creation, in fact the only currencies that were documented at the time in that region were gold and silver. And perhaps it was also recognized as some form of dates and wheat and so on could be used as currency, but there was no form of paper currency in circulation in that region at that time as I understand it, and it's not documented as such.

So when you're talking about the concept of credit creation linked to lending, I think so from our religion, it's not referring to that. I think we can extrapolate it to identify the harm from that but for us to say that harm only exists when it comes to credit creation, that would not be consistent with our religions. Our religions give that prohibition even with gold, even with solid gold.

And so I think from that angle, something that you did touch upon when two individuals do a transaction, if it's lending, now they don't begin from an equal standing. Even though the contract is mutual, but if you lending gold or physical money, for example, the key differences that one has the money and one does not.

[00:20:01] So this from the beginning, there's an automatic imbalance in the position of the parties. And this imbalance, I think is materialized in precisely how you explained. So one has a claim on the wealth of the other. 

So either that's through repayments of gold, or if that fails, then there'll be some form of collateral or route to compensation, and that will be the wealth of the borrower. It could be his house, his property but there's some claim on that property. So I think it is linked to what you said, but my response to that would be that damage, I think, is also visible even when sound's money is used for lending.

Saifedean Ammous: Yeah, I'll clarify, I'll say even in a gold standard, I think what happens is that, the way that I think about it is that, if you're doing interest based lending, let's say you're the lender. You have a certain amount of money [00:21:01] that you've handed out to the borrower and they're going to be investing it in some business let's say, and you have their house as a collateral.

In this situation you are treating the collateral, which is a consumer good that his family lives in, as an asset on your balance sheet that you can use as a liquid asset. So for me, even though no gold is being printed, effectively you've monetized the house by making it the collateral for the loan.

And that's the tricky part. And I think perhaps my case against interest, why I think, and this is still very raw in my mind, so I could be completely hallucinating nonsense here. So please correct me if that's the case. But the way that I think about it is that what determines interest rates from the Austrian perspective is time preference.

So the lower people's time preference, the more they think about the [00:22:01] future, the more they're able to delay gratification, the more they're able to save some of their resources from consumption. And that act of saving is what creates resources that are available for capital investment. Which then the more that happens, the lower the price of capital.

So the Austrian theory illustrates that it's time preference that determines the interest rate. And if we look at it historically, we see that the interest rate has been declining throughout history generally. It goes up and down in general, but I think there's still a long-term decline in interest rates that at the end of the 19th century and the turn of the 20th century, the lowest interest rate you could get was around 2%.

So Under the gold standard when saving became extremely efficient because gold was available worldwide and everybody could use the same currency, and the whole world was on the gold standard and [00:23:01] saving in gold was extremely efficient as a way of saving money into the future.

Savings increased to the point where the price of interest was only about 2% per year. And I think, perhaps a century later, if we didn't have World War I, and if we continued on the gold standard, hypothetically, imagine a world in which we just continue to have another, if we had another 110 years similar to the era between 1870 and 1914 on a gold standard, where all over the world living standards were improving and saving rates were rising and interest rates were declining.

Extrapolate that for another 110 years, if we go from 40 year golden era to 150 year golden era. And I can see that in this kind of world, what happens is that capital becomes so abundant, the interest rate declines, that at some point the idea of lending with interest on [00:24:01] its own on the market disappears. 

That it's not something that would exist on a free market if people could just save enough and accumulate enough capital. Because at that point, once the market interest rate is something like close, very close to 0%, and this doesn't apply to the current 0% interest rate regime, which is imposed by inflationary central bank. 

But imagine a 0% interest rate, or close to 0% interest rate in a world of hard money. In that kind of world people are saving a lot. There's an abundance of capital. If you're going to be lending to somebody, why would you want to take on the risk if the return is extremely. Low? And so in my mind, lending in that kind of world would tend toward equity investment instead. 

We'd have the lower interest rates go, and the more abundant capital, the more that the lenders can just [00:25:01] take equity rather than lend. Because ultimately I think the real problem here is in that when you are lending at interest, you're making a promise that you cannot keep. That you can't guarantee that you keep.

So when banks are lending to people and telling people, we're going to give you a 5% return guaranteed. There's no such thing as a guaranteed return because whatever it is that you're investing your money in, it can fail and it can go to zero. 

So I think to go back to the original point we were discussing on the problem with lending. I think this is another way of explaining it, that the only reason we can have interest rate lending is because we have the fallback option of impounding another person's property. But that disappears in a world in which, we [00:26:01] have this assymetry where where people put their money in the bank and they expect to get a 5% regardless of what the bank does.

How is the bank able to guarantee them that 5%? It's because it can engage in inflation in one way or the other. And I think this is where I go perhaps more Austrian than the Austrians, in that I think it's not just fractional reserve banking that leads to the business cycle and inflation. I think you could well argue that interest rate lending overall does something similar because it there's no way of meeting these kinds of, you're guaranteed a 5% return.

There's no way of meeting that, unless you have somebody with a money printer behind you who is able to print money, or unless you're able to impound other people's property and then leave people homeless. 

And I guess the kind of really controversial thing that I'm [00:27:01] trying to arrive at here is that there might be a case to be made that interest is a phenomenon that exists when time preference is very high. That you don't even really need a religious ban on it for it to disappear. That in a free market with enough capital accumulated you would just witness interest disappear.

Because then you're taking on the risk. If you're lending to somebody at a very low interest rate, when time preference drops and interest rate drops, you're taking on the risk of not having a return on your capital because the business could always go to zero. Anything can always go to zero. You never know what happens in this world.

There's always that fundamental risk. And so you're taking on that risk of going to zero and you're getting a fixed return. Why would you want that? If you're taking on the downside risk all the way down to zero, you want the upside risk all the way. And I think with an increase in capital and the decline in time preference, we might end up in this kind of [00:28:01] world, but who knows?

What do you think? 

Safdar Alam: It's interesting to listen how you think and your mind works. And so a few things that you said in terms of where we're starting from and where you envisage that we would end up if we had said money, I see many parallels with with how I think and what I've discovered. So in the context of religion, for example, we have this thing called Zakat, it's like a tax on wealth where roughly you pay around two and a half percent of your wealth as tax every year. 

And so we have this situation, so let's assume as Muslims are not allowed to lend money, but we have capital, we have wealth and it's being taxed every year, 2,5%.

So effectively, our capital's being reduced. If we do nothing with it, it's being reduced every year. So my interpretation of that, because I think this is how our religion works, we're told certain things, but hidden behind them are certain messages. So when we're told that our capital is being reduced two and a half percent, every year, we are being [00:29:01] told to be active with our capital, right? We're being told, if you want to keep your capital level, you've got to do something with it so you earn more than the tax that you're paying. 

So we are being told to use our capital, to use a capital and some profits. Now, if we cannot lend and earn interest, which we're not allowed to, then only way to earn profits is to be utilizing in some enterprise of venture where potentially some profits are returned.

And this ties in similarly to the conclusion that you had where we have to invest in some kind of equity type projects or equity type returns. And I think this is, I think these are the kinds of messages that Muslims are being told behind the primary layer of prohibitions and information that that we are presented with.

Saifedean Ammous: Yeah. Okay, so then these are the kind of broad strokes, as we said, no lending, no speculation and no gambling. These are the broad strokes of what Islamic finance stands for. Now what [00:30:01] does the Islamic finance industry do today and how is that different and why do you think it's basically all Fiat? To use our favorite derogatory adjective in this podcast.

Safdar Alam: So I would say in terms of my own familiarity with Fiat and use of Fiat, it's probably only risen in the last few years. So my analysis and understanding of Islamic banking industry developed in parallel alongside that. So then when I later on I began to understand the implications of Fiat, then I saw a very close connection, but my understanding developed without really knowing what Fiat was.

So Islamic finance as it's practiced today, it's reasonably significant. It's still niche. But the way it's practiced today is that, so if you look at the asset allocation, it's not easy to find, but there are some analysis that tell us the activities in the global Islamic finance sector. And about 75% of [00:31:01] global assets in this sector are Islamic banking assets, it's Islamic banks.

About 20% are in the Sukuk market, and Sukuk is equivalent of the debt capital markets Islamic version of bonds. So those two combine to make up 95% of all the assets and the Islamic finance sector globally, that leaves 5%. And to me, that 5% is the interesting one. So that 5% is, some of it is Islamic insurance called Takaful, and the rest of it is in funds and investments.

So the fund and investment may be 3% of our market. So the market size is very difficult to estimate, but the global market is estimated roundabout $3 trillion today. 75% of that is banking assets. As you will know, when banks have assets, these are largely loans on its balance sheet.

20% in debt capital markets, which are bonds, which are interest bearing instruments, but there are ways to make them Islamic. So my contention and my problem with Islamic finance has [00:32:01] been that the way we have chosen to implement it, we've chosen to implement it in a way that says that 95% of our activity, 95% of our assets are debt and interest related.

And for me, that's a real problem because the interesting thing I think what we should be doing is in that 5%.

Saifedean Ammous: Yeah. And I was looking at the analysis that you have on your website of a particular Malaysian bank, which you don't name, and you go through their balance sheet and you find that essentially, what was it? 97% of all their assets in 99% of their liabilities are all interest bearing products. And they bear the same interest that you find on the Malaysian capital markets that are supposedly not Islamic. It's the same interest rate that is on the market, in the non-Islamic banks. 

Safdar Alam: Yeah, because before I went into banking, my background I did qualify as a chartered accountant first.

And at that again, that was purely for monetary [00:33:01] reasons. Cause I discovered if you did a chartered accountancy first, then your role in banking will be accelerated. So I did that first. So I'm reasonably familiar with training and financial statements and so on. So I do enjoy looking at financial statements of banks.

I've looked to statements of Islamic banks in the UK, in the Middle East and in Malaysia, the three main centers and there's enormous parallels between them. So I analyze the assets and liabilities, I analyze both. Sometimes that's not easy to do because the reporting standards are a bit different.

The terminology we see on the notes and the balance sheets are quite different to what we expect. Conventionally. Obviously they cannot say interest because technically there's no interest in the transactions. So they use very many different types of Arabic contractual terms that I use. But when you drill down, and my expertise has been in understanding the contracts, understanding the products, how they're structured, and I know where interest is present within them and the pricing of them.

And yes, it's consistent. I see, 95%, 98%, [00:34:01] 99% of the assets and liabilities are consistently assets and liabilities that are priced at interest. And so for me this is like, it's a natural consequence of what they built to do. And also this tied in with over the years, I probably at the beginning, I didn't understand, but over the years of what makes a bank a bank? What's so important about a banking license.

And it's only in the last few years, I began to understand the nuances of those. That a banking license, for example, enables credit creation, right? No other institution can execute credit creation without a banking license. And I've read some interesting papers. There's a Professor Werner who writes a lot about this kind of thing.

And the last few years I've read some of his papers and he analyzes like, what if the UK, for example, what is it in the constitution or the law that gives us permission to banks through double entry bookkeeping to create credit. And he was unable to find any link to law that gives us permission, but it's [00:35:01] clear that this is the outcome.

And so this led me to understand that when we have Islamic banks, so Islamic banks operate in various countries, but they have to be issued with licenses, banking licenses. And so they have the same drivers and motivators that a normal bank does. And the main tool it has in his toolbox is his credit creation and Islamic banks have not been able to avoid that at all. 

Saifedean Ammous: Yeah. This is the key point here, which is credit creation. And this is this is what we're trying to get at in this discussion. We keep coming back to this issue, which is that the reason that Fiat is incompatible with Islamic finance is that the current global financial and monetary system is built around credit creation.

And in particular, you mentioned the idea of a banking license. So [00:36:01] for the uninitiated, basically a banking license is like a license to print money. So in a regular bank, in the current Fiat monetary system, when a bank issues a loan, when you go and you borrow to buy a house, this is really I think the most important fact people need to recognize about modern Fiat.

And it's the central fact from which the analysis of my latest book The Fiat Standard starts, when you go to buy a house from your local bank, they are not taking $1 million that they have on hand and giving them to you so that you could pay for your house. They are making those $1 million fresh.

Those $1 million didn't exist before you walked into the bank. And then when you walked out, the money supply of the entire country has gone up by about a million dollars or something close to that. The way that the Fiat monetary system functions is that money is constantly [00:37:01] being created when debt is issued, when new loans are made. And money is being destroyed when loans are being repaid or defaults happen.

So we have this enormous system where millions of financial institutions around the world, or maybe thousands, maybe not millions, thousands of financial institutions around the world are issuing loans and therefore creating new money. And then billions of people around the world are paying back those loans and then destroying some of that money.

But obviously the money creation in general goes on much faster than the money destruction, and that's why the supply is increasing. So the problem then for Islamic banks is that if they don't want to play this game, they are effectively subsidizing everybody else who's playing it.

If you decided that you wanted to hold if you decided that you didn't want to issue credit, that you didn't want to make new money, [00:38:01] that you didn't want to do interest based lending, you just wanted to hold other people's money and lend it out, according to Islamic strictures, in which, there's no interest, there's partnership.

If you were to do that, and also you were to, the two things that you could do as an Islamic bank would be investment banking and deposit banking. So people pay you money to keep their money with you safely. So if you were to do that, you're just holding people's money, and charging them a storage fee and also charging them effectively an inflation rate, because their savings are declining in value.

And you're giving up on the ability to print money. Which is basically like giving up on a money printer. It's like having a money printer and turning it down. Islamic finance in its traditional correct sense is likely doomed in this [00:39:01] kind of scenario.

And that's why I think you're correct when you say that it's essentially just interest bearing regular Fiat banking, but with added Arabic words to signify the kind of transactions, right? 

Safdar Alam: Yeah I do agree with you, certainly. But I think it depends where you're coming from in this situation.

So if you're coming from an economic angle, you're certainly right. If you're operating in a field where everyone else can create credit and you can't it's not going to work. You're not going to make it. But if you're coming from an angle, which we are, which is from our religion, from commands of your creator, saying you can't do this, then you have to think. One, we can't do it so well, what are our choices? Our choices are to replicate it, but to try to make it look like we're sticking with the rules. That's one choice. And you have the [00:40:01] choice, which is the harder choice, which is, this is what we've been commanded.

Now what it means. I don't think we'll be commanded to do things that make us second class citizens. I don't think we would be commanded to do things that make us poor. I think we're commanded to do things. And if we see, if we interpret this and say, look this means we're excluded from credit creation, poor us.

For me, this is then the driver for us is demanding us to take steps. It's demanding us to rectify. If you find yourself in this situation, don't give up. Don't do interest bearing loans. Don't do what you're told not to do. You have to fight it. 

You have to find your place in the economic world that you can survive and thrive. Because otherwise we have to accept, if we think we cannot do it, we have to accept that we're being commanded by God to make us poor, to make us second class. 

And I think that's where we have the challenge that to me, I see these restrictions on lending and interest, [00:41:01] I see it as a direct challenge to Muslims to make our way in this world. That this economic world economic system is not designed for us. It really isn't designed for us. So what do we do and how we react to it is the ultimate question. And so what I've seen is a direction of our resources because Muslims have had overall, we have had significant resources in the last few decades, right? If you look at it as a group, as a whole. 

And you look at the direction of these resources, those directions of resources have been put into capitalizing 500 or 1000 Islamic banks globally. And that direction of capital, human capital, we have tens of thousands, hundreds of thousands of Muslims working in these banks and all of their talent and skill and goodwill is being directed to credit creation and interest based activities.

So for me, it's a question of not so much competing with other people at the rules that they've set, but we should be redirecting the [00:42:01] capital and the resources and the human talent we have towards something that's more productive. And I think when we say what is more productive, it's really ultimately the quite simple thing.

It's about allocation of capital. It's about the distribution of capital to productive and enterprise means. Because we have to earn some revenue somehow, otherwise even through the mechanism of Zakat if we ignore interest that's going on the rest of the world and inflation that will erode our capital.

Even through our internal mechanism of paying two and a half percent tax on wealth, we have to compete against that through the intelligent allocation of capital. So we earn more than that two and a half percent, and it seems that w we've turned our backs on that. And we're just agreeing to be second class citizens in an interest based economy, and I find that incredibly frustrating. 

Saifedean Ammous: Yeah. So let me [00:43:01] get your ideas on what should be done. So I think we're clear on the diagnosis and I know a lot of people will probably disagree with you and I, let's take the advantage of being on the same page here. I think I agree with you.

And this is something that I've known superficially without having studied economics for a very long time. I think many religious authorities say this, that what is going on in Islamic banks is just the same thing, they offer you interest, but they call it something else.

And so the choices are, and you mentioned, there's the let's mimic it but give it some names. And the drawbacks to that is that obviously the biggest drawback for Muslims is that it is against the, you're not fooling God if you're just giving it another name, he knows what all the names mean, and he knows how this works.

So the biggest drawback for Muslims is that it's against your religion. But I think [00:44:01] there's even another drawback here, which is that the way that it operates, it almost operates and this is not another nice thing to say, and I hope people who work in Islamic banking don't take it personally.

 I don't think they mean it to be this way, but I think that there is an element of it looking a little bit like an affinity scam in that you put up these Islamic verses and words and sayings, and you call your products with Islamic names, and then that gets you into the Islamic community.

And then that allows those people to people you know to bring in their friends and family, it almost functions like just a way to affinity market, or maybe I shouldn't have said affinity scam. I should just say affinity marketing. That it's a way of packaging regular Fiat interest loans to Muslims.

And I think [00:45:01] the net effect is probably that you just end up paying a little bit extra if you're into Islamic finance. Like if you just go to your regular non Islamic bank and compare the rates you're basically paying an Islamic premium. So there's a tiny little bit of premium that goes into making the regulatory and all the extra steps that they need to take in order to make it look like it's halal.

So this doesn't seem like it is a very sustainable option and we have problems with it. But my question to you is, do you think it's better to just go and use regular banks? If you're a Muslim, you just go and use regular banks and not put on with all of the facade, or? Tell us, what are your thoughts on using regular banks?

Do you think it makes sense and obviously I know you shouldn't be giving fatwas, but [00:46:01] just your opinions. If we're saying that the Islamic finance is basically riba then why not just use the regular riba? 

Safdar Alam: Okay. So my position is that Islamic bank, Islamic banks are built on interest.

They have to be, and it's a choice. They've made that choice. So you raise a very interesting point is how do we square this with the fact that the vast majority of Muslims who have an interaction with an Islamic bank, these Muslims are genuine people, and they want to abide by their religion and they're sincere people.

So whether you work in Islamic bank or you're a customer and Islamic bank, you do it because as far as you believe you're abiding with the requirements of our religion and the vast majority of people are sincere Muslims. So it's become a very difficult thing to reconcile. You have institutions that are built in interest.

And so the reason I can say this, I remember for [00:47:01] example years ago, when I first moved across from conventional banking to Islamic banking, my first role was to execute deals in the international money markets for Islamic banks. And so I would be in the middle of cash flows, going all around the world between the Islamic banks and conventional banks, but this was, these were money market flows and all kinds of currencies.

And I was involved in pricing and executing them. And the pricing was of course interest, but it was structured within the transaction so that it's not interest, it's a margin on the sale. And so later on, when I began to look back and to understand how banks are constructed and created and looking at the cash flows of banks.

So these kinds of cash flows in the money markets, it's like the engine of the bank, and these are built around interest. And later on when I understood about credit creation, then I understand why it has to be built on interest, such that every branch that grows from it, it has to be lending at interest. But most Muslims are not exposed to this, most Muslims don't know how banks run, how credit creation [00:48:01] works and how interbank money markets work.

So for most Muslims, our interaction with Islamic banking is that it's been something that's been deemed to be halal and permissible. So we have pronouncements from scholars. And I think this involvement of scholars has made this whole Islamic banking concept into something incredibly difficult to understand for people. So no longer do we just have commercial entities.

So you could have an Islamic bank putting forward its platform and saying, this is what we do. Now use us if you want to, and if you don't want to, you don't use us, but they have aligned themselves with scholars. The scholars have to give approval on the activities. When you do this has a massive psychological impact on Muslims that this is halal.

I don't understand how banks operate, but this is halal. The savings account is halal, this whole financing is permissible. So really what's the problem? And so when I've approached this with Muslims I find that there's a [00:49:01] very high hurdle to overcome with Muslims, that they cannot understand that something they are continuously told is permissible by specific scholars and fatwas for instance, they cannot even understand how could this involve something inpermissible like lending at interest. It's a hurdle that most Muslims cannot clear. And my personal view is that I think is very unethical, I think we're in an area where you're combining religion and money.

And in Islam we do because, as I mentioned at the beginning, our approach to finance and money is driven by our religion. We're told what to do and what not to do. But beyond that, beyond you can't lend and you can't gamble beyond that, everything is permissible to us. All enterprise is permissible, as long as we're not doing things that are specifically haram, everything is permissible.

So when you combine the act of banking and interest based activities on the one hand and their scholars on the other hand, it puts Muslims in a very difficult position. And for me, I'm a big opponent of that because I [00:50:01] feel Muslims goodwill is being utilized and taken advantage of. 

Saifedean Ammous: Yeah, I think that is a very good point.

And I think there is the perhaps all right, maybe we need to use this in order to not become poor, but then once you start putting all of these fatwas and labels saying this is great, this is perfect. Then it goes far beyond what you need to do in order to just avoid to be poor.

And then you end up with people just overdoing it in terms of risk and gambling and speculation and interest in all of those things. 

Safdar Alam: Yeah. I think if there was a position, which is my position, that if banks were to be honest and say, look, we've chosen to be active in the banking sector. Because again, that's a choice we've chosen this while perhaps our intention is in time to develop something better. But [00:51:01] while we're here, we find ourselves in a credit creation sector and a system. So the things we have to do really have to look like precisely what our competitors are doing.

And they could say, we do this reluctantly, we do this because we know it's not ideal, but we have an aim, next steps to move forward. If that was the stance, that's something that I could understand, but that the stance continues to be, if any observation is made that Islamic banks are doing interest based activities, the reaction is is intensely confrontational.

It will be absolutely rejected. We do not do this. We're not allowed to do this. Also we have A, B, C to prove that we do not do it. And to me, it's that step to me that then drives me from being a Muslim who just wants to see a halal version of economics, and finance to develop and to support Islamic banks.

It moves me from there to saying, actually [00:52:01] I think once you take this step and remember I mentioned Islamic banks are still absorbing capital, they're absorbing huge human talent, if you want to work at Islamic finance, you're generally going to work for an Islamic bank. So when you combine that with the confrontational attitude of Islamic banks, to me then I think we reached a stage where we're doing damage. 

To me, I think Islamic banking as it is, it's actually doing damage. So often, one thing I say that some people don't quite understand is I say that Islamic banks, as they are today, they do more damage to Muslim, then if they did not exist. It's worse than not existing because at least if you did not exist, Muslims have like a clear playing ground to start from.

Saifedean Ammous: Yeah. I guess, the counter argument here would be, I'm sympathetic to the idea, but I think the counter argument here would be that, imagine if you're a Muslim living in a society where there's inflation and you're trying to save up for a house, it's really difficult.

And if you end up getting a housing loan [00:53:01] and you do it with the intention of getting an Islamic loan, you end up with a house and you end up being able to afford a house, which you probably wouldn't have been able to do with an inflationary currency. Unless you basically become Warren Buffet level expert in allocating investments so that you could beat inflation reliably with your savings, but that of course means you can't have any other jobs.

So then effectively all Muslims have to be investors. And I think this is a broader problem with the Fiat system in that everybody needs to be an investor in this kind of system because initially under the Fiat system the idea was you just put your money in the bank and you get an interest rate that is higher than inflation.

And that was fine. If we have an inflationary money, there'll be more economic production taking place because of the magic of inflation. And then [00:54:01] magically that means your bank is more profitable and your bank can pay you a higher interest rate. But of course, this was just another way of doing Keynesian borrowing from the future to pay our bills today.

And that didn't last. And so people had to go from the saving account to the bond market in order to save, and then that's not working out much anymore. And now you have to basically be in stocks, and now you have to study balance sheets and equities and figure out how to allocate your money into stocks, just to beat inflation.

So in a sense, the world is joining in this problem that Muslims have had for a much longer time that as the world is having it now, you need to be figuring out how to invest in order to just keep the money that you've earned. But yeah we'ce painted ourselves into a corner with this discussion and basically, what do you choose?

Do you take the poison that's branded poison, or do you take the poison that's [00:55:01] branded honey? Thankfully like with everything on planet Earth, Bitcoin fixes this and Bitcoin is the solution for everything obviously. 

But this one as well, I think I've been fascinated by this idea over the past year or so by just how how Bitcoin really is the perfect piece to solve this puzzle of Islamic finance. How do Muslims carry out finance in the modern world? Because I guess one way we could answer the question of how do Muslims act is Muslims should just built their gold backed businesses and banks, and then have a gold-based banking system.

And have it built around a currency that's not inflationary and Islamic countries [00:56:01] should adopt gold instead of inflationary Fiat. If you've followed events over the 20th century, that's not exactly an item that is on the menu of options available for any bank or nation state in the world. You just don't do gold back banking anymore because the governments of the world, the powerful governments of the world don't let you. And my book, The Fiat Standard as discussed this at lenght.

There's no real banking being built on gold anywhere in the world, and it's no coincidence. It's not because nobody has thought about it. Obviously the whole world had a banking system based on gold, up until 1914, but gold banking has been criminalized. You can just set up a bank and accept gold deposits and give people gold receipts.

It's not legal for you to do that. If you want to be a bank, you have to be licensed by your local central bank. And your local central bank would only allow you [00:57:01] to be a bank, if you engage in the same fractional reserve banking that they do themselves, and then your central bank is only going to be allowed to be a central bank, it can only join the IMF if it uses Fiat currencies to settle with the rest of the world. 

The IMF prohibits all of its members from backing their currencies with gold and the U. S. is not very keen about countries using gold reserves. The analog solution for Muslims is to do gold banking as it's discussed in Islam.

But that's not a possibility today because of all of the political reasons that I mentioned. And herein lies the wonder of Bitcoin. Because Bitcoin is just basically gold with wings. I'm sure many people are going to be upset with this description, it's more than that, but as far as I'm concerned, the most powerful thing about Bitcoin is that it's gold with wings.

It can fly, it can cross borders. You can send it halfway around the world for [00:58:01] pennies or dollars. Even if transaction fees rise enormously, they're still enormously cheap compared to sending gold. Sending a billion dollars worth of gold across the Atlantic is going to cost somewhere in the range of 1% of the total value of the gold. 

So it's extremely expensive and to send it across the Atlantic and to make sure that you've received the actual gold, rather than just somebody swapping it out with their tungsten field bars, you need to verify it.

And the only way to verify a gold bar is to melt it down and recast it again. So this is really the impediment for Islamic gold banking developing. It's that it's extremely expensive to move gold around. And the only way that you can move it around, if you want to build infrastructure for countries to settle with one another, you need the permission of your local government and [00:59:01] local governments of course are living off of the Fiat spigot, so they're not keen to it. 

And that's where Bitcoin comes in. Bitcoin is like gold, it's an asset that is not debt-based. Fiat money is debt based as I was explaining earlier, the entire thing is made out of debt. The money itself is generated when debt is generated, but that's not true for gold, and that's not true for Bitcoin. But with Bitcoin, global banking around Bitcoin is basically unstoppable.

And that's really why I find it to be a very compelling case for Muslims. I think there's a very strong, compelling case for why you should stay away from regular interest and the regular riba banks. And I think you make a compelling case for why stay away from Islamic banks.

And if those are the two options, like if you're a Muslim and you care about your religion and you [01:00:01] care about doing what is asked of you, you can't tell me that engaging in Islamic based riba is an better option than just using Bitcoin. What do you think? 

Safdar Alam: Of course there's many points that you made. So first of all I would say, in terms of Bitcoin, I'm quite new to the game. I probably found out in a meaningful way about Bitcoin no more than three years ago. And so since then, it's been very interesting for me to learn about it. 

Actually, one of the first people introduced me to Bitcoin, I was hearing this for a while from people who were saying, safdar your view on credit creation and Islamic banks is consistent with something like Bitcoin, but I never really made the connection, so I was introduced to it. Actually, somebody sent me your book about two years ago and this is somebody who I know on Twitter and I've never met them.

[01:01:01] And she was very kind. And so she asked me my address, of course she lives abroad and I've got a book in the post. Nowadays we hardly send anything to anybody in the post, unless it's like clothes for Christmas or something. So it was quite touching to get a physical book in the post from somebody I've never met.

And it was actually, it was your book. Cause that's the first time I'd heard of you. And I just heard that Bitcoin a little bit, but not that much. So I'm quite new to the game in Bitcoin. And I would say I'm generally supportive of it, but my support is not unconditional. Because you don't know how things are going to turn up, but the more I found out about Bitcoin, the more I do like the premise it's built on. 

And it's quite pleasing to see the impact it's having and the uptake it has, it seems to be growing. And so for me, that's positive. But I'm not an unconditional supporter of Bitcoin, but I do like the kinds of things that Bitcoin stands for. So for example, when we talk about gold and silver. So often, when we have hadith narrations from the early times about religion, [01:02:01] when they talk about money, it's always gold and silver, because this is what was used.

And so in modern times, when Muslims talk about an economic system and maybe getting away from the Fiat system, we talk about gold and silver. And I think there have been some movements. I don't know if any, have been meaningful. There have been some movements, probably not government led.

I'm talking about private movements to try to establish something like a currency system based on gold or silver, but I've not seen any takeoff. I've not seen any come to any meaningful size. So this remains almost like, I'm not sure what the right word, almost like the ideal solution that Muslims think about. They think about going back to gold.

Because they specifically mentioned in our classic literature and I can understand that because gold is, I guess it's the original sound money. But in modern terms it's not clear to me if we can reproduce the complexity of a modern economy with something like gold, it's just not clear to me because at heart I'm not an economist, I'm more [01:03:01] of a banker. 

And the one thing I would say in terms of how Muslims fit into this conversation, what I would like, I would hope that more Muslims, first of all, understand about Fiat money and credit creation. Then I would hope that Muslims understand more about Bitcoin. And you see the issue I have is when I speak to Muslims about Bitcoin, there's actually an interesting layer of Muslims who already get it. 

And they've got it before I did. And they're very much into Bitcoin and they know about Fiat credit creation and that's fantastic. And it's interesting, for example, when I speak to people who are into Bitcoin, It's like, I don't need to speak to them about credit creation and Fiat and banking.

They all know, it's all just understood. But when I speak to normal Muslims who are like normal people, when I talk about Bitcoin for example, I think for most people it's difficult to differentiate Bitcoin and crypto. Then people ask me about crypto, and I said when I talk about crypto, I don't like talking about crypto, but I'll talk [01:04:01] about Bitcoin. 

Cause in my mind, they're two different things. But I think in most people's minds, they're probably not two different things. And so I think there's a big, outside of the people who just know and get it, I think amongst normal people, I think there's quite a long way to go to understand potentially what Bitcoin is.

So when I speak to Muslims, I do like to point them towards Bitcoin. Not to buy it or support it to go crazy, but just I say look at Bitcoin, look why it was established and what it does. And for me, I think one of the tipping points for me when I discovered a bit about Bitcoin was the, in the genesis block, the reference to the banks being bailed out by the chancellor.

That headline, to me when I saw that, that really hits home to me that look, whoever it was, who created Bitcoin whoever it was, that part of his motivation was to oppose banking and oppose the impact that banks have on us. Because then at that time we were looking at the second bailout for banks and we're looking at [01:05:01] austerity, long-term impact.

So to me, this told me this is somebody who really understands banking and he's trying to do something to oppose it. So for me, I would say that the value I attach to something like Bitcoin is that I see it as a direct opponent to banking and lending. And this fits in with my world view because as a Muslim, I am told to detest lending and banking at interest.

So for me, it all fits quite nicely. 

Saifedean Ammous: Yeah. I think it fits really well. I think the most brief kind of case that you can make to it is that currently the vast majority of the world's wealth that is saved, is saved in bonds. If you want to have money that you don't want to take a lot of risk with you put it in bonds, you put it in a high grade corporate bond and then government bonds and so on.

And that's what pretty much everybody does as part of their investment portfolio. [01:06:01] Not everybody. There's about $140 trillion of money invested in bonds around the world. That's a lot of money. That's more than there is in checking accounts. That's more than the money supply of the world.

So this kind of use case of saving, and the people who are buying bonds are not buying bonds to get rich. They're buying bonds in order to not get poor. The idea is that bonds will protect you from inflation. So you get a small little interest rate that prevents you from losing value over inflation.

But if you're a Muslim and you do that, you are engaging in riba and Bitcoin is the only other way, it's the only other institutional grade asset that you could use as a form of saving, as a form of cash in the role of bonds. And it's the only hard asset that you could use that you could also send around the world, that [01:07:01] you can also trade with.

And this is really the key thing. Instead of holding bonds, you could hold gold and over the last decade it hasn't done well, even compared to bonds. But still historically it has protected people from inflation, it's still doing that job today.

Gold is flat against the dollar, but it's massively up against the majority of national currencies that are constantly devaluing against the dollar. So you can do that. Gold, you can have a little bit of gold, that'll protect you from inflation, but good luck settling your company's bills with gold.

When your central bank goes belly up and their capital controls and your business needs to pay its suppliers, but the central bank won't let you pay your suppliers, you can't pay them with gold. It's not convenient. You can't [01:08:01] send large quantities of it, but with Bitcoin you can.

So at a very simple level, I think that the case is extremely convincing. There's no riba involved in the creation of Bitcoin. There is riba involved in creation of bonds. Rather than holding bonds and bonds of course are used to finance governments that do all kinds of horrific things with their money.

So rather than financing all of these governments and engaging in riba, just hold Bitcoin. And the performance of Bitcoin, it's just not even comparable to the performance of bonds. Bonds, you take on risk and so that you can now pay them in interest, there's negative rates on some of these bonds.

So you're taking on risk and you're paying for the pleasure of taking on risk, you're paying for the pleasure of taking on credit risk. Whereas Bitcoin has no credit risk, has no counterparty risk. You can hold it yourself. It's a real commodity that you can hold. And it doesn't offer you interest, but it appreciates significantly [01:09:01] because it's supply is fixed and nobody can manipulate it.

Safdar Alam: But this gets me back to thinking that, for me, when I first found out about Bitcoin, it was very logical. I understood why it was created, how it works and I'm fascinated by the mathematics behind it as well. Of course, I don't understand most of it, but to me it's very fascinating.

But if you look at the average person, for example, if you speak to the average person about why Bitcoin is cited, if you speak about banking and credit creation and Fiat money, maybe it's difficult for the average person to understand that. So for example credit creation, I think the first time I saw it officially explained was it the bank of England bulletin in 2014. 

They were explicit, they say economics teaches this, but it's not true. There's no fractional reserve banking. There's no intermediation by banks, it's credit creation. And also credit creation was explained in a book by the federal reserve, in 1968, I think. So the idea of credit [01:10:01] creation, it's been around, but it's not very public and not very well known. My my angle in this is specifically for Muslims because it's the arena that I'm in. Muslims and money and finance, and Bitcoin has found its way in there. 

So when you want to speak to Muslims, and this is something I think about a lot, about education of people, because most people are not finance people. Most people are not bankers and not economists, the average person. So if I speak to them about something like Bitcoin, so first of all, and this is the psychology of Muslims and maybe it's replicated amongst psychology of people in general, then you have to consider about the source of the authority. 

Authority for Muslims often in our everyday lives, it's the government first of all. And the second thing, when it comes to money, a lot of Muslim countries have Islamic banking. In the UK, we don't. We have only one or two banks which have never taken off, but in many Muslim countries there's Islamic banks and as I explained, they're heavily integrated with a religious side. They have scholars and they have [01:11:01] approvals and fatwas. 

So when you're talking about something like Bitcoin, you're challenging people's understanding of these kinds of things. And when Muslims are look to authority, they'll first look to the government, like what's a government saying, and second, they look to the banks, what are the banks saying?

So in both of these, as you will know, when it comes to Bitcoin, these are not the people that you should be going to for opinions. So for me psychologically, the makeup of people is fascinating for me. The kind of hurdles that we need to overcome to help the average person that understands the value of something, if not Bitcoin, but something like Bitcoin.

Saifedean Ammous: Yeah, I agree. And I've made the same observation. I think in general I have on average more trouble with explaining Bitcoin to Muslims and Arabs, I think because of this deferring to authority. There's just this [01:12:01] idea that well, it doesn't matter what I think about it, there are experts who know those things, and if this is really the better money, they'll tell me and until they do you're just another weird guy on the internet with a crazy idea. 

Obviously this is the default for the majority of people everywhere in the world, but I think probably in Islamic societies, it might be overrepresented compared to the west.

And I think it's an impediment to the rise of Bitcoin. But of course, another big impediment other than just the banks and the governments of course, are religious authorities. Now interestingly here, religious authorities that are in Islamic countries today will very rarely ever, or will never basically, the approved official religious authorities will never tell you that your national currency is riba.

Which is I think indisputable by Islamic standards. And [01:13:01] then whatever your currency is, it's created when your central bank lends your government, it's created when the government issued treasury bonds, it's created when banks issue loans. So the money itself is riba. If you're holding the piece of paper, it's not like a piece of gold. Because it's not a commodity that is bought and sold on the market with its own value.

It's a piece of paper that's somebody's debt. Somebody got into riba, in order for this to happen. So this, I would think is a pretty significant detail, but of course official religious authorities don't bring this up because they are generally approved by the governments that benefit from these money printers.

Yet, somehow they find a lot of fault with Bitcoin. So a lot of religious scholars are constantly going on about why Bitcoin is bad in Bitcoin is wrong. What do you [01:14:01] think of this debate? What do you think are the best arguments you've found for why Bitcoin is haram and what are the best that you find for why it's halal? For those who don't understand the terminology, haram means that it is forbidden and halal means that it is allowed. 

Safdar Alam: Okay. So from my position first of all, yeah it's interesting to see how people approach money first. How they approach Fiat to money first, and then how they approach Bitcoin. Because to me, the two were intricately linked. If you understand Fiat to money and what it is, and its connection with riba, so you're right in the UK, there's a local organization called positive money, which I'm really supportive of. 

So it's not Muslims at all, but they're just after justice. And so they do very good information on the UK specifically. So they have data that says in the UK, the money supply, so only 3% of our money supply is physical. 80% is bank credit creation. And 70% is central bank reserves. [01:15:01] So up to 97% is created through interest, through riba. And so of course all the money that I'm, I get paid a salary and when I spend in shops, it's all electronic. So everything I use is created by interest.

And this is something I think Muslims don't understand. And I think it's an understanding that's not encouraged as well, because again as we said, we would go back to the source of authority, it's governments and banking especially. So this is something that they could never really admit to, the connection between money supply and interest, because I think once you do accept that, then I think it's a very natural conversation to look at something like Bitcoin.

But to the extent that you don't accept that, so that's not accepted. Then when you look at Bitcoin, I would say personally for me, so when I analyze Bitcoin from a religious point of view, this is just me as an individual, I don't give rulings, but I couldn't find anything problematic with it at all. I do have a little bit of understanding of Islamic law.

I do teach Islamic law at university, but it's a very superficial understanding. But personally for me, I didn't find a [01:16:01] problem with it. The only thing on an individual level that I guess I regret, I understand but I regret, I guess I dislike the aspect that the volatility in price can attract players who are not in it for the same reason.

Just intellectually, I guess I just don't like that. It makes it a bit seedy. But I do understand the causes for that in terms of the evolution of Bitcoin. With this quick capital to be made, you get influx of certain capital cause of arbitrage and speculation.

So what I would say is that, especially for Muslims who are not very knowledgeable, like most people, when they see a chance to make a load of money, I guess in any crypto they can, but in Bitcoin as well, I do regret that a lot of people are attracted to this to try to make money, and a lot of people will lose money.

So I would say that's one thing that I just wish was not there as part of the landscape [01:17:01] with Bitcoin in terms of how Muslims interact with it and scholars especially. Interestingly I do see some opinions recently either saying the neutral about Bitcoin or one or two have actually said there's nothing haram about Bitcoin.

They actually say it's okay. So interestingly, how I see it dealt with, when I see pronouncements in general, so governments don't make pronouncements, but bodies of scholars. So when I see these pronouncements often, they don't talk about Bitcoin itself. They talk about crypto in general.

And when you talk about crypto as a whole, it's a bit of a nonsense, right? And you're grouping up every, the next shitcoin that's come out, 10,000 shit coins with Bitcoin. And they give a uniform pronouncement, then it's difficult to to attach too much value to it.

Because of the place that Bitcoin has and the opposition it has to banking, and the place that Islamic banks have linked to governments and authority, I think we're in a very interesting place that I don't think we're going to get very clear answers because those who are [01:18:01] providing opinions if they're incentivized at all, they're generally incentivized by those who oppose Bitcoin. 

Saifedean Ammous: Yeah, that's very true. And I think the argument that you make about the volatility is probably the strongest one that they have against Bitcoin. Because if you look at how Bitcoin operates, yes it's digital, but it operates no different from any kind of market commodity.

It gets mined. Nobody can make it for free. Nobody has the ability to produce it and foist it to the world for free, everybody has to work for it. And the cost of producing it is roughly equal to the cost of its price on the market, because it's a competitive production and there's a difficulty adjustment.

And it's just any other market commodity, like all others. It's inconceivable for me how you [01:19:01] could find a religious objection to this. But then when you look at the volatility and that it does 20% in a day up or down, and then obviously that attracts a lot of speculation, it looks like gambling.

It looks like another Ponzi scheme and it looks like just another silly investment, and of course we've had a lot of crazy schemes over the past decades of Fiat. Everybody has a lesson, their uncle and their grandfather told them about the one time where everybody thought they were going to get rich and then didn't work out.

So everybody's been burned by Fiat adventures in the last century. So they're naturally going to be very skeptical. And when they see this volatility, it rings off all the alarm bells. But I think the volatility is, and the fact that there is speculation, is true for many other commodities.

If this [01:20:01] was your criteria, then you would also say that gold is haram, wheat is haram, oil is haram there are people who trade and make money and do leverage trading on all of these things and their price can be volatile. And that's the same case with Bitcoin. However, the deeper problem with all of this volatility in the markets and the reason so many people are able to not have real jobs and instead just spend their day gambling on movements in the price of oil or gold or Bitcoin or anything is the fact that we don't have a sound monetary system.

And so everything is up in the air. Money is being printed all the time and money is circulating across different sectors in different ways. And so therefore you get these massive bubbles and these massive crashes. And work becomes an insignificant detail compared to being able to speculate correctly.

So this is really a [01:21:01] symptom of Fiat which Bitcoin fixes. If you did have a monetary system built around Bitcoin, it would be similar to gold. And there was a lot less empty speculation under gold. There was a lot more conscious investing. I think it's unfortunate these kinds of objections continue to get a lot of prominence.

What do you think are ways in which we could subvert this kind of anti Bitcoin propaganda in the Islamic world? How do we orange pill more Muslims? 

Safdar Alam: Okay. So to be clear, maybe because to be honest, I don't know the nature of people that you typically get on this podcast, for example. So for me, I just want to reiterate, I like Bitcoin because how I understand it stands against banking and credit creation and interest. 

I have [01:22:01] no idea if Bitcoin is going to work or not, because I'm not intelligent enough to understand that, but if Bitcoin doesn't work, then I would like to think something like Bitcoin would work.

So in terms of how to orange pill Muslims, so for me, I think it goes back to the origins, right? The origin of money, credit creation, the banking system and looking at the implications of that. I think without that it's difficult to differentiate Bitcoin from many of the cryptos. I think if you don't have the understanding, then Bitcoin looks like a dozen other cryptos.

Okay. And I think once you have that understanding, and for me having that understanding, and also, some anecdotal evidence like the code in the genesis block. Those were the triggers for me, and then everything just fell together. And it was just as clear as day to me that Bitcoin is something that opposes riba.

It's not just [01:23:01] designed as a counterbalance to riba. In my view, it's a direct challenge and a call-out to riba, it's not just coincidental. And so something like that to me was incredibly powerful. And I think to Muslims, that woukd be incredibly powerful if they understood it, if they understood that this was the reason behind the creation.

And then I think if you go into some of the technical sites about a stable supply, distributed ledger, blockchain, the mathematics behind it, I think that can then support the initial approach. But I think really it's a lack of knowledge about Fiat money that's holding Muslims back in terms of the understanding of Bitcoin.

Saifedean Ammous: Yeah. I think even more impressive than the fact that it is a challenge to Fiat and to riba, is the fact that it is a working alternative. This is I think the slap in the face. Like everybody who really puts some time into thinking about it, particularly Muslims who are in finance, [01:24:01] they'll come to the conclusion that yeah, there's just no way around having to play the game in the modern world and it eats them up inside, but they still justify it. 

Well with Bitcoin, all right okay, yes, granted it does look like it's a Ponzi scheme, it is volatile. It does have all of these image problems going against it. But if you can peel beyond the surface and look under, you'll see that it's a system that works and allows you to get out of riba in a much better way, instead of holding debt, instead of basically doing what everybody in Fiat does, which is you hold bonds which are riba, and then you borrow in order to finance your own expenditures. 

Bitcoin allows you to hold your savings in form of money that appreciates and then buy money with the savings. It's becomes possible to actually [01:25:01] do it because look at how Bitcoin performs and how it performs compared to Fiat over time.

And then yeah, it becomes possible to actually just save up for a house if you buy Bitcoin, and you can finish college work for a few years and then buy a house in cash if you hold Bitcoin. That saves you from having to hold bonds, that saves you from having to take out a mortgage.

I think this is, maybe I'm being too optimistic, but I think once it begins to click for some people that this is the case, and then some religious authorities begin to understand the implications of this, I think is going to, we just need to get to that kind of tipping point and then I think it'll catch on like wildfire. 

Safdar Alam: But when you say catching on like wildfire, for example, so how would that manifest itself? What would be the consequence of that? What's the benefit of all of that of Bitcoin catching on? 

Saifedean Ammous: Yeah. I think what would happen is that a lot of Muslims who currently have a [01:26:01] problem with where to store their wealth, they have gold which they can't move around and they can't send, and they have to use the Islamic finance bank, or they have to also sometimes use the regular bank because they need specific products for their business.

All of these people could just then substitute away from that by holding Bitcoin. And I think the implication would be that number go up cause that's the underlying technology behind Bitcoin. So it's great because the wealth of people who hold it would go up over time. So I think once we get to this realization where there's the self-interest aspect of this is increasing in value and you can help yourself and make yourself better off by using it.

But also, you're actually freeing yourself from getting into riba and you're getting out of the riba monster and being able to live [01:27:01] in better accordance with your religious values. This is why I think there might come a point where it catches on in a very powerful way.

I think the vast majority of Muslims haven't thought about it this way yet, but if we get to a point where they have, and I think it's a matter of time, because the way that I see it going, assuming this happens, that Bitcoin continues to work, Bitcoin continues to increase in value, and it just doesn't go away.

And then all of the people that said that it's a stupid scam and up looking foolish, and then they started revisiting. There's just no escaping it. There's no running away from this realization I think. And eventually perhaps, I don't know, somebody mentioned this on Twitter, perhaps there is more potential for this adoption because there's a fertile ground of people who don't like riba and don't like Fiat.

And if you just can market it to them, that this is the [01:28:01] way out. If they get that connection, then that's a much more powerful incentive for adoption than in societies that don't have it, think about in the west. All right, it's very difficult to get people to understand what the problem is with Fiat.

You said it's difficult to get Muslims to understand it, for sure. But I think simply having that starting stone of riba as a problem, as a starting spot gets you pretty far ahead, so who knows. 

Safdar Alam: Yeah, I think right at the end you raised a point that I think resonates mostly with me, which is riba. That Muslims, when you look at solutions to riba or challenges to riba, that we are seeing something like Bitcoin and there's some of the movements, not coins, but social movements that speak out against debt and riba.

And they do it from a, I guess a point of view of justice and equality and oppression. Now when it comes to [01:29:01] Muslims, even if we don't understand the consequent impact on oppression and justice and equality, we are demanded by a religion to take a stance against riba and we don't.

But I think if you do educate Muslims on this point, on the riba alone, then I think we have an impulsion, a compulsion that other people don't because our religion demands it. So I think if we can get over that hurdle with Muslims, there's like an automatic demand to oppose credit creation and Fiat.

Not just an ideological demand, it's a religious demand to oppose it. And I think that will be interesting for me, if we can just get Muslims over that hurdle. 

Saifedean Ammous: Yeah, very much so, and I think If you look at it, the way that Fiat operates, the way that it's operated over the last century, you can think about it as a systematic tax against Muslims.

[01:30:01] Because they're not the ones that are benefiting from inflation, they engaged in debt a lot less, Islamic finance gets them in the game a little bit. It reduces the amount of wealth that is siphoned off, but generally as individuals and as governments and institutions and corporations in the Islamic world, they would have been far more likely to hold cash and far less likely to get into debt over the last 100 years, all over the world. 

The average Muslim individual or a company or government will have done this. And that just means you're paying for it with inflation. That means just means that inflation is devaluing your cash, and that the people who are getting into the most debt are the ones who are benefiting because, and that's a central idea in my book The Fiat Standard, people discuss the Cantillion effect wherein it describes how if you have a money printer, the [01:31:01] people who get the money straight out of the printer benefit the most. Because they got it when the prices were not rising yet and they got it straight from the printer.

And then when they go spend that money, they buy things at the original prices, but then after they spend it, that money leads to an increase in prices. So the next people who get the money, they get it when only a small amount of prices have gone up. So they still benefit a little bit.

So the further away you are from the printer, the less you benefit until you get to a point where you're hurt. So the people closest to the printer benefit the most and the people furthest away from the printer are hurt the most. And generally, of course it's the richest are the ones closest to the printer.

It's the biggest corporations and their biggest banks that are the ones that are the ones that get the money printing, and as the poorest who are not. In the Fiat system, you don't have a physical money printer, but you have a debt printer. And so the banks and the financial [01:32:01] institutions that are able to issue debt and the governments of course, that are able to issue the biggest amounts of debt at the lowest interest rates are the ones that are benefiting from the inflationary credit creation.

Whereas the people who will hold savings and the people who aren't able to borrow a lot are the ones who are basically paying. So I think over the past century, you play this out and you see yeah, savings, people who held savings got dispossessed effectively, and people who got into debt had their debts effectively alleviated or reduced in value over time because the currency was always inflating and reducing in value. 

I think the powerful idea that Muslims might like here is that there's another world out there in which this giant inflation the credit inflation tax does not exist. And in that [01:33:01] case I think Muslims are far better off. Because in a world in which the entire world economy runs on Bitcoin you hold your money in Bitcoin, nobody creating debt reduces the value of your savings.

Safdar Alam: Yeah. I think you make some really good points about how Muslims interact with debt. And I think at every angle, when we interact with debts and riba we get the worst deal out of everybody on the planet. I think you're right. First of all, if you want to borrow money to buy a house, even if you go to an Islamic bank we do it reluctantly. 

We don't like interest and also Islamic bank rates high. Like we pay more than everybody else. And we still have 25 year 30 claim on our working lives. And also because we don't like debt in general and riba, we're much less likely to take the leverage route when it comes to to enterprise and investments like buying property through leverage.

And then cycling that through, a lot of people who make a lot of money property, it's through leverage for [01:34:01] example. That's for businesses as well, you get leveraged buyouts, high leverage, high acceleration of your rate of accumulating profit. 

Muslims who are moral don't have this route to creating wealth, but still they're forced to go down the route of acquiring debt and riba. We get the worst of both worlds, you're quite right about that. That's the thing, the thing that drives me and I'm fascinated by all of this is that to me is clear to me that our religion drives us to consider these things.

And it drives us to challenge these things and it drives us to find a solution to them. And that's how I see my religion, because I think that's incredibly powerful. I don't think my religion tells me to be a victim, my religion is telling me to educate myself, find out how the world works, then find a solution.

It's like stop complaining but find a solution. And this is where I really hope Muslims will get to. [01:35:01] And again with Fiat money as well, even if you explained Fiat to a lot of people they will just say what can we do? What can I do? And when we've explained this to Muslims what can we do? How can we fight riba?

You just have to find a way, but everybody has their own impetus. I believe that our impetus comes from our religion, which should be, you know how Muslims think when it comes to our religion where normally we think quite strongly, right? So that impetus should be stronger than any impetus that non Muslims have, right?

Because none of us, no Muslims have an impetus based on morals and values. But ours should be higher. And that's why it's fascinating to me when I see movements that are effective against Fiat money and riba, and these kinds of things. Generally, these movements are not from Muslims.

They're from non Muslims who just see what's wrong. And so I really, I want to find a way to get Muslims just over that final hump because we should be [01:36:01] greater opponents of the things that Bitcoin opposes. 

Saifedean Ammous: Absolutely. All right. Does anybody have any questions for Safdar or Safdar, do you have any questions that you'd like to ask me or anybody from the attendance? All right. Peter has a question. 

Peter Young: Hi Safdar, thanks for sharing all your insights today. This has been a really interesting discussion. I wanted to ask a question about one of the core principles of Islamic finance that you raised during your introduction, which is the opposition to speculation.

One of the principles of the Austrian school of economics, which we're very focused on in this podcast and Saifedean teaches is that speculation is an unavoidable part of human action. Whenever someone undertakes an economic transaction, they're to a greater or lesser extent speculating on the outcome because outcomes are inherently uncertain.

So what I wanted to ask you is within the framework that you're [01:37:01] using for Islamic banking, what is your definition of a speculation? Is there a way that we can come up with a definite cutoff point for what's a normal market transaction and what's a speculation?

Safdar Alam: Okay. If I begin, first of all, just very briefly in terms of the context in which speculation or gambling is prohibited. So in our religion, as I mentioned, the rules we are given are in the context of 1500 years ago. So we are told that for example gambling, we're using bones and knuckles, the dice. Gambling using those, throwing those and then paying money and outcome is forbidden also.

For example, pulling sticks and paying money on who's got the shortest stick, these kinds of things are forbidden. So then when we look at at the world of finance and investment, I agree that it's in many ways you get circumstances where you put your capital somewhere and it's entirely uncertain what's going to be the outcome of that result. 

So for example, if you're going into a [01:38:01] startup you raise money from investors and these investors have no idea if they're going to get their money back or times 10 or zero. So that kind of speculation is acceptable because it's financial and it's there's full transparency and you're relying effectively on the skill of the founders and their ability to earn profits for you.

Now, that kind of speculation, in my view, it is permissible because it's financed and it's transparent. As long as you understand the risks, as long as you are not misrepresenting to someone and committing fraud. So there is a whole line in the middle. So for example, if you speak to most Muslims, we will say going to a casino with something like roulette is not permissible or poker, but even then poker is, can be argued, is a game of skill. 

Whereas roulette is a game of chance. Lottery tickets for example, which are very popular everywhere, especially in the UK, so generally most Muslims would say lottery tickets are not allowed. So I remember a couple of [01:39:01] decades ago when we first had it in the UK lottery.

One of the first winners in the UK was a Muslim guy. I think from Blackburn and he won a lot It was a rollover, he won quite a few million pounds and there was some backlash because he was Muslim. His local community told him you can't keep it, so he had to give the money back. So when it comes to financial markets, with volatile price, I agree, it's not always easy to draw the distinction between the gambling side of speculation and legitimate financial speculation, because sometimes it's not clear.

Peter Young: So in the original definition of prohibitions or the list of prohibitions you gave, you made a distinction between gambling and speculation. The reason that I asked the question about speculation is because to me, the definition of gambling is clearer. It's a system where you have a set of rules and the odds for winning or losing are understood in advance.

This kind of exists within casinos, like spinning roulette wheels or playing the lottery. [01:40:01] But this kind of system very rarely exists within the real world. So I guess the question would be when it comes to investment, we would not call betting on a roulette wheel an investment, we call that gambling, but virtually any other kind of economic activity has to have some kind of element of speculation to it.

So I was just wondering whether you could provide us with like a simple one to two sentence definition of just that term speculation and how that differs from the term gambling. 

Safdar Alam: Okay. So maybe if I could provide an example. So let's say we have shares in whatever, in company X, and you're a legitimate investor and you want to buy those shares because you think for whatever reason, the price is going to go up.

Okay. So you buy those shares in the proper transaction. You're the legal and registered owner of those shares. You have full risk as the price goes up or down. Now, let's say on those shares, they are investors who want leverage exposure, who wants to write options on those shares or contracts with [01:41:01] difference on those shares.

Now that activity of writing those options and buying those options, instead of the shares, that's probably where most Islamic jurists would draw the line. They would say buying those shares is okay because you're buying assets which represent ownership of the assets in the company, and you have full ownership and you take full risk of it going up or down.

But if you're buying a derivative on those shares where there's an option or a future, for example, you're only buying an exposure to the price movement of that asset. You're not buying that asset. And of course, with options or futures, you can take highly leveraged exposure, but not have any economic connection with activity of the company and its outcome only with the share price.

So that will be one indication where speculating on the prices of an equity through an option, purely with the aim to make profit or not, will be seen slightly differently in Islamic law as to being a legitimate [01:42:01] shareholder in the assets of that company. 

Saifedean Ammous: Isn't the distinction, I could be wrong here, but isn't the distinction that when you buy something, you take custody of it.

And whereas if you're buying something with debt or buying something without taking custody of it, then that's what counts as speculation? 

Safdar Alam: So it also depends what you're taking custody of. Cause you can take custody of financial security. So for example, you could take custody of options and swaps and derivatives. 

Saifedean Ammous: But you can't take custody of the underlying. 

Safdar Alam: Yes,

Saifedean Ammous: The difference between buying oil and buying an option which says you buy oil or sell oil that you don't own, and you're engaging in all of these basically paper transactions where you're not going to actually take any oil.

Safdar Alam: Yeah. Okay. So [01:43:01] I think there's a couple of points. I think one is I think you're right. The further you get away from direct ownership, I think the closer you're probably going to go to a speculation. And in terms of direct ownership it's normally recommended and it's often a part of the contract of sale, but in some assets you can't always take a direct ownership if you buy property abroad, for example. But as much as possible Islamic law encourages physical ownership. It says, if you can at all take physical ownership, you probably should. Because then that also helps to distinguish between a genuine transaction and a non genuine transaction.

That if you buy an asset, That you never intend to taking delivery of whether it's possible or not to then that can create a question as to whether you really want to own the asset or whether you're just owning it for short-term speculation. 

Saifedean Ammous: Yeah. I don't think the physical custody is the important thing, I think is just the ownership. Having unencumbered ownership. Like this is my oil, I know it, I [01:44:01] own it. If you buy the oil and you store it or you think that oil prices are going to go up next year, so you buy the oil and you store it in your warehouse and then you sell it next year. That's trading.

That's no different than anybody buying or selling something. You expect that the price is going to be higher. But if you're just buying options, you're not the owner of the oil. 

Safdar Alam: Yeah. I think you're right. And it ties into, if you're the owner of an asset, you must take full risk of ownership.

If it gets stolen, you're the guy who loses, you're the guy who's got to pay insurance on it. Because if you take exposure on the price, but you don't have the obligation of an owner, then you're not really the owner of the asset. 

Saifedean Ammous: Exactly. You're putting in the carry cost of the oil over the year, which would then make it a legitimate business activity that next year you're going to sell the oil, are you going to cover your costs or not? [01:45:01] 

Safdar Alam: And this has an impact, when you write derivatives, for example, in the banking scene at the last financial crisis. 2008 or a couple of years, if you look at some of the instruments in the shadow banking sector, so for example we had direct loans between two counterparties in the investment banking space.

And we had CDOs and CDSs is written off those loads. Which were instruments that were priced off the primary market. Now the volume of those notionals in the shadow banking were up to 10, 20 and 30 times higher than the notional of the original contracts. So if you follow what you were saying as well, if you write a derivative on an asset, you create a whole separate market that's really nothing to do with the underlying asset. 

And when something negative happens, not only the owner suffers, but you get 50 people waiting in line who traded on the shadow markets that they hurt even more than the original owner. So for me, this is part of the [01:46:01] wisdom in the prohibition of the speculation side of the market.

Saifedean Ammous: Yeah, I think that's correct. And I think Peter's question is very astute because it's a big problem in economics as well as I guess in Islamic finance, which is how to distinguish between people who think speculation is a bad idea. And it's also related to the, how do you distinguish between people making money being bad, versus people making money being good?

What is it that makes one kind of money-making good. And one of the other kinds of money-making bad. And I think in the Austrian sense of speculation, when Austrians say speculation, they don't mean it in the way that, I think overall the concept can be applied in the way that is forbidden in Islam.

But I think in general, what they're referring to in essence is a natural market activity that would take place in an Islamic economy and [01:47:01] any economy, which is any action you take is a speculation. If you decide that you are going to cook at home today, that's a speculation that your meal is going to be better than the alternative, which is go to the restaurant.

Safdar Alam: Yeah. And I think part of this difficulty in understanding and for me as well, because even though I understand some Arabic term as well, I'm not a native Arabic speaker. So the Arabic term for this is maysir, right? Saif, for you as an Arabic speaker, you might have a deep understanding of this than me.

So when I come across these terms, I largely have to rely on English translation. And then this translation is often speculation, which is a bit of an imprecise translation of the original Arabic word we use. 

Saifedean Ammous: Yeah, absolutely. The words don't map exactly, for sure. 

Safdar Alam: Yeah. 

Saifedean Ammous: All right. This has been absolutely fascinating Safdar. Thank you so much for joining us and thank you for all of your comments [01:48:01] and I would recommend for listeners also, we've also had another episode discussing this topic, well similar concepts and topics to this, but I don't think there's a lot of repetition with the two. But with Harris Irfan on on the podcast that you can find, it's episode 59.

So if you enjoyed this one, do check that one out listeners and thank you Safdar, and thank you for everybody who joined. 

Safdar Alam: Thank you for very much Saif and thank you for all your team for helping in the background too, to make sure it works smoothly. 

Saifedean Ammous: Cheers. Thanks a lot.[01:49:01]