In today’s episode Saifedean talks to former investment banker and author of Heaven’s Bankers, Harris Irfan. They discuss Harris’ decades of experiences in Islamic finance and what sparked his interest in bitcoin as a Muslim. Harris explains why bitcoin might be the most sharia-compatible money, why the decentralized nature of bitcoin should be appealing to Muslims, and what Islamic scholars get wrong about bitcoin. We then discuss whether a hard free market money like bitcoin would make finance more equity-based than debt-based.
- Harris’ book Heaven’s Bankers: https://amzn.to/3wtxRVz
- Harris’ personal blog: https://islamicmarkets.com/pages/heavens-bankers
- Harris’ 2019 article, Cryptocurrency and the Future of the Islamic Economy: https://islamicmarkets.com/articles/cryptocurrency-and-the-future-of-the-islamic-economy-1
[00:03:39] Saifedean Ammous: Hello, and welcome to another episode of the Bitcoin standard podcast seminar and today’s seminar. We’re hosting Harris Irfan, the author of “Heaven’s Bankers”, a book on Islamic finance, and we are going to be discussing Bitcoin and Islamic finance. Harris has also written a paper on his perspective as a Muslim and as a Bitcoiner on the connection between Bitcoin and Islamic finance.
And I find this topic to be very fascinating and a very interesting one. So I’m delighted to welcome Harris to join us today. Thank you so much for joining us Harris. So I guess to begin with, could you give us a little bit of an introduction for the uninitiated about what is Islamic finance?
Harris Irfan: Sure. I think when we read about Islamic finance in the press, we tend to get a very simplistic version of it, not surprisingly, and most journalists will say, well, it’s banking without interest, but actually that’s just an outcome of some of the basic principles. So the primary basic principle is what is the nature of money? The nature [00:04:39] of money in the Islamic economic model is somewhat different to the nature of money we see in the modern global financial system.
And in the Islamic economic model money is merely a medium of exchange rather than a commodity to be traded, which is what it is today. And I think that’s the primary point at which we try to derive what Islamic finance is. The next thing I tend to say to people is Islamic finance is about the real economy.
It’s about real goods and services, real jobs, real wealth creation. So in other words, there’s a one-to-one relationship between the financial economy on the one hand and the real economy on the other. Again, I think in the modern financial system, we see this massive divergence between the financial economy on one side with there’s trillions and trillions of paper that has some kind of underlying relationship with some kind of underlying real economy asset, but sometimes it gets a bit difficult to work that out.
So there’s meant to be a one-to-one relationship between the financial economy and the real economy. It’s financing the real economy. In [00:05:39] other words, finance is a slave and not the master of the real economy. So those are the primary things I tend to say. I guess there are some other issues around that. Islamic finance is about risk sharing. There shouldn’t be an asymmetric relationship between two financial counter parties. Again, in the modern system, we tend to have banks that are clearly the stronger party in a financing transaction, financing borrowers, and the risk sharing is very asymmetric in that case.
So risk sharing is about sharing in the profits and losses of a venture. There are also other principles around Gharar for example, which is uncertainty. So it would be unjust for two parties to enter into a commercial transaction in which one or both parties are unsure about the outcome. And the classic example that is used is the sale of a pregnant cow.
You may buy the cow, but you can’t buy the unborn calf because you don’t know whether it’s going to be delivered or not. And that’s quite an important principle because then it leads on to other [00:06:39] things like speculation and gambling and so on. So that’s kind of in a nutshell, what is the Islamic economic model is about.
If I had to summarize it in two words, they would be social justice. I think it’s about social justice. So I hope that’s a sort of a very quick summary. And again, as I say, an outcome of that is that one may not make money on money and therefore it’s not possible to lend at interest.
Saifedean Ammous: I think, yeah, you make a good point, which is that the interest is the most commonly advertised property of Islamic finance, but it’s really more of an implication of the deeper way in which money is treated.
And I think the concept as you described it, which is you can’t make money on money. And that money is not a commodity traded for its own sake. Ultimately, in my mind, this is very similar to the principle of hard money. The concept of hard money means that it’s money that nobody can make out of thin air.
And if nobody can make it out of thin air, then the only way to make it is that you’re going to have to find a, and in Islam, you know, the money is gold and [00:07:39] silver. So you have to dig and try and find them. Or you have to find somebody who will sell them to you in exchange for goods and services. So, that means your only way of getting money is to serve others. Your only way of getting money is to work hard. Of course you can speculate, you can prospect for gold and prospects for silver, but that’s highly uncertain. And the key property perhaps of gold is that it makes prospecting usually ruinous.
So gold prospectors generally get wrecked, very common. And I think that’s a feature, not a bug because if mining gold was profitable, everybody would be mining gold and then nobody would be working. But if gold miners continued to get wrecked in a gold economy, then they learned their lesson and then they go and they learn to do something useful with their time.
Now a little bit about your personal background. You were involved in the establishment of the Dubai international financial center in your role at Deutsche bank. Can you tell us a little bit more about first of all, how you got there and what this taught you about Islamic finance?
[00:08:39] Harris Irfan: Yeah. So when I was in the UK, I started working for Deutsche bank in the late nineties, having moved from a small British merchant bank, and my skillset was project finance. So that was financing infrastructure projects, because I thought that was something that was a reasonably noble pursuit. Even within the financial services industry.
This is the building of roads, railways and infrastructure generally. And I was moved to Dubai to open a new office out there as a relatively junior guy in 2001. And in fact, I moved out there two days before 9/11 happened. And of course, as soon as 9/11 happened, a lot of Gulf money was repatriated back from the U S and Europe, because there was a lot of additional scrutiny on that money and many Gulf investors who were completely clean of course, felt that that additional scrutiny was not merited.
And that’s why there was a flight of money back to the Gulf. And we saw a commensurate rise in local stock markets and local real estate markets. So I happened to be there at a time when markets were rising, when I arrived [00:09:39] ostensibly to open the office and to originate new corporate finance business for the bank.
And what actually happened was a lot of clients came up to us and said, well, it’s wonderful that you were here, Deutsche bank. But now that you’re here, we’d like you to do these deals on a Sharia compliant basis. And being investment bankers we blagged our way through that and said, oh yeah, sure, we know all about that.
But actually we had to spend quite a considerable amount of time learning at the feet of the scholars. These are the theologians who are essentially lawyers. They provide legal opinions on the contractual compliance of a particular financial or commercial structure. And that’s kind of an arcane science or art.
I don’t know which one it is. And we had to learn the language, the terminology, the methodology of that art. And, you know, we, Deutsche bank became very good at that. So we founded the Islamic finance team at Deutsche bank to service these clients in the Gulf. And we discovered that the leading Islamic scholars, these theologians [00:10:39] who have certified these transactions had never previously worked with investment bankers like us.
They had worked with local and regional banks. Usually the middleman in those banks, the Sharia coordination departments, they call them who are very deferential to the scholars. Yes, sir. No, sir. Three bags full, sir. Never really questioned anything. They were told. They never really pushed the envelope and said, can we do a product like this?
Can we do a product like that? And for the first time, these young ambitious motivated investment bankers from a Western investment bank were coming along to the scholars and saying, well, Sheikh, you know, I have a great deal of respect for your knowledge on this subject, but I wonder whether it’s possible to do this transaction on this particular way.
And we were able to robustly discuss and debate with the scholars in a respectful way. And they treated us with a similar respect and it was a very fruitful and healthy relationship. And I think that was the first time this had really happened in the industry. So all of a sudden Deutsche bank were created in [00:11:39] creating brand new products in this market.
We weren’t taking market share from anyone else. We were creating a new market. We were doing things that hadn’t been done before, acquisitions, convertibles and exchangeable and structured product platforms. And multi-asset treasury management products and Islamic hedge funds and stuff nobody had dreamed of before.
And in a sense that was exciting and it was fun. But also in a sense, I think we may have spoiled that market as well because we gave birth to the types of products and structures and methodologies. We unleashed new spirits into the market and it’s not always easy to keep a lid on these spirits and investment bankers like to do dubious things.
Cause they’re greedy people. They like to make money. And so a lot of the market was spoiled and by the time the global financial crisis hit, we had to kind of bottle those spirits again. And since then the industry has moved somewhat slowly.
Saifedean Ammous: Yeah. So what are the main ways in which modern Islamic finance differs from a mainstream Fiat finance?
Harris Irfan: I have been struggling for most of the last [00:12:39] or 27 years as an insider to see if I can change the way Islamic finance is delivered to the end customer so that it accords with the ideals of the Islamic economic model. I think I’m reaching the conclusion that it may not be possible, but I haven’t quite reached my final verdict on that.
And I have always been trying to create product that met both spirit and letter of the law. So in other words, not only were they compliant with the contractual parameters or contractual structures of , which is the jurisprudence of commercial and financial transactions in Islamic law, but also that they met the objectives of Sharia the preservation of wealth, for example. A just transaction and equitable transaction, one that it had inherent qualities of fairness and social justice. And I haven’t been able to quite marry the two. I’ve seen many products that follow the [00:13:39] letter of the law, but not necessarily follow the spirit of the law.
So for me, the verdict is still out on whether Islamic finance has managed to achieve those objectives, but certainly every now and then I will come across a product that I think is making an attempt to marry the two, some types of home financing product. For example, that attempt to do a real risk sharing between the financier and the one who has financed.
I think Islamic finance still has a way to go. I think that as long as it tries to exist within a fiat banking environment, it will always struggle. It’s like trying to squeeze a square peg into a round hole. I remember it’s not a bank or trying to describe it as playing water polo, wearing American football gear.
Right. What you’re always on the back for. You’re always struggling. You’re always struggling against this and it’s been very, very tough to create product that met both spirit and letter of the law whilst working in the fractional reserve banking system, because it’s antithetical to the Islamic economic model.
It doesn’t make any sense. You can’t create money out of money in Islamic economic model. And [00:14:39] yet that’s what happens in the fiat system. So, you know, the two are never really going to be compatible bedfellows.
Saifedean Ammous: Yeah, no, I think I agree on, I think it’s a great metaphor on the football gear, but I think also another way of thinking of it is that the prize in getting into Fiat banking, and now that I’m writing the Fiat standard, this is becoming clearer and clearer for me because I’ve tried to study Fiat in the same way that I studied Bitcoin, just trying to figure out from first principles, how this machine works. I think the central conclusion of the book and the central motivating question of the book that shapes the entire analysis is that the equivalent of mining in Fiat, you know, in Bitcoin, we have mining and gold we have mining, it’s very straightforward. People dig a hole and they come up with gold and then they can sell it. In Bitcoin mining is a little bit complicated, admittedly. Still extremely straightforward compared to Fiat, people do a bunch of math problems and then they get rewarded with magic internet coins, very straightforward. But in Fiat it’s [00:15:39] incredible because actually the way that you mine Fiat, it’s not that there’s a printer that is actually going out there and printing all the dollars that are happening.
They’re printing some of the dollars, but it’s around 10% or so of the money supply is actually physical and the percentage may vary from country to another, but it’s around that range. The majority of money creation actually takes place through credit creation. So anytime bank is issuing a loan, new money is being created.
So new money is coming into the supply. The money supply increases every time a financial institution that is backed by a central bank issues a loan, liability denominated in the currency of that central bank. That’s how the Fiat algorithm works. And so really the prize of getting into Fiat, the grand prize for being a Fiat banker is not the money you make from your customers as revenue.
It’s the money you make by mining new Fiat, essentially it’s by printing new Fiat. In my mind, this is I think the insurmountable obstacle that Islamic finance faces in Fiat banking, which is that, let’s do [00:16:39] all of the things except the thing that makes money, let’s do all the aspects of the business model except the one that is actually generating the profit.
And this is why it’s extremely difficult to see it. And in fact, you know, I know a lot of people say that a lot of the Islamic finance models end up, as you said, maybe fitting within the letter of the Islamic law, but clearly in contradiction of, or arguably someone say in contradiction of the spirit of the law.
And I think, a lot of Islamic finance can be characterized as being like that because ultimately if you’re having to deal with Fiat money, this is not something that gets discussed by Islamic scholars. They talk about whether Bitcoin is Halal or Haram a lot, but they rarely ever mentioned whether Fiat money is Halal or Haram.
And I think there are very good political reasons for them not to do that. They work in countries where governments like those printers and they like to use them. And you’re not going to work yourself into the good graces of your local leader if you’re out [00:17:39] there telling the people that the currency that they print is Haram . I presume you agree, you would say that if you think about it, in terms of Fiat money is it’s not just contravention of Islamic law because Islamic law stipulates gold and silver as money, it’s also clearly a problem because it’s debt as money it’s Riba as money, it’s interest bearing debt as money.
Wouldn’t you say?
Harris Irfan: Absolutely right. I find it incredible that Sharia scholars, some Sharia scholars have made it impermissible to trade, hold, use Bitcoin because they argue that it doesn’t have any set rules. It doesn’t have any asset backing. It’s not based on any underlying contract, it’s used for money laundering, for financing terrorism.
I mean, they’ve just described Fiat perfectly. Right? But they obviously cannot say that fiat is impermissible because in some cases they’re employed by the governments. So I find it bizarre that they have said these things and often they’ve displayed an incredible incoherence on the [00:18:39] subject of the modern global monetary system on the subject of modern financial instruments. I think they’re doing a big disservice to Muslims generally by making it impermissible because everything that I have looked into regarding Bitcoin suggest to me that it’s the most Sharia compliant form of money that’s ever been invented.
And if we look at the underlying characteristics that a Sharia compliant form of money needs to have people think that it should be gold or silver. And traditionally it has been, we’ve had the Islamic dinar, for example, because, you know, gold has those characteristics that we all know, for example, a stock to flow ratio and its durability and so on and so on.
And we know also that Bitcoin has many of these characteristics and more, right? So, it seems bizarre to me that scholars who say that gold is permissible would tell me that Bitcoin is impermissible. That doesn’t make any sense to me. So I think there’s a huge ongoing debate within the Muslim community.
A lot of theologians I think have displayed a lot of ignorance of the subject. And I have even made an open [00:19:39] plea that they should perhaps look at this subject on a more informed technical level and understand from people who understand the technicalities of Bitcoin, what this actually means. I think previously I wrote about Bitcoin and cryptocurrency, and now I have no interest in cryptocurrency.
Generally I only have interest in Bitcoin. That’s the only one to me that seems to be compatible with Islamic notions of decentralized non manipulatable non-inflationary money. It seems to me, as I say, the closest to the Islamic economic model.
Saifedean Ammous: Because it’s not manipulable and what else? What do you find it at that makes it a fit in that model?
Harris Irfan: Well, I’m going to say something perhaps a little bit bizarre, actually, which is that when Muslims ask me, why should I look into Bitcoin? I give them the analogy of Quran and Hadith. So Quran on is the word of God in the form of a book and Hadith are the traditions that collected, recorded traditions of the Prophet, either his sayings or his [00:20:39] actions.
Now, the way in which Hadith have been transmitted is via a chain of authority. And each link in that chain is a node if you like. So every time the Prophet did or said something and it was recorded by a trusted companion, somebody who had particular impeccable credentials, that recorded action or saying will be transmitted to another trusted companion.
And so on down the chain. If there was any weak link in that chain, It would be disregarded. So you could have strong Hadith, you can have weak Hadith and you can have fabricated Hadith. And this kind of scientific process was there to preserve the recorded actions and sayings of the Prophet. The Quran, I think is an even more interesting analogy for Muslims generally, because there is no centralized version of the Quran.
There’s no glass box in Mecca that contains the original single version of the Quran from which all others are derived. So for example, during [00:21:39] the holy month of Ramadan, when Muslims are fasting, they go into the mosque in the evenings and they pray a particular prayer called Taraweeh. And in this prayer, typically in any mosque around the country, in any mosque in the world, they will recite the Quran over the course of 30 days, the whole thing. And the Imam, the guy who’s leading it will be reciting the Quran, memorized it word for word, punctuation mark for punctuation mark. And if he makes a single mistake, or if he hesitates and forgets the next bit, there’ll be at least one person and possibly several people in the front row in that one mosque amongst millions around the world who will immediately correct him because around the world, there are potentially, I don’t know, tens of millions, maybe more Muslims who have memorized this orally disseminated tradition, memorized it to every single letter and punctuation mark.
And they are the nodes. They’re effectively a decentralized ledger. And when I explain that the decentralized ledger of Bitcoin is like the decentralized ledger of [00:22:39] Quran. Of course, it’s a shocking thing to say. I mean, I don’t mean to say it in a blasphemous way. What I’m saying is the methodology is very similar and now you have a trustless and fully verified system.
And the two are very, very analogous. And at that moment they say: oh, I get it now. I totally understand what this technology is behind Bitcoin. Okay. I need to look into this more. That sounds really interesting. So that’s the analogy I use to get them interested in an economic system, which is very compatible with their own values.
Saifedean Ammous: That’s a very smart way of putting it because, ultimately, the Quran continues to survive and nobody’s relied upon as an authority to determine what’s right and wrong. It’s a very good way of explaining it, but I think, in terms of the monetary properties, the way that I see it, I think it’s similar to you is that the reason there’s nothing Haram in Bitcoin is that once you step away from the fact that it’s not physical, and you just accept the fact that when we’ve built a digital world, then there will be economic goods that are non-physical.
And, I think domain names are a great example. [00:23:39] Www.amazon.com is not a physical thing. You can’t kick it, you can’t drop it on your toes. And yet you can’t just own amazon.com. It’s a good luck trying to buy it. It’s gonna cost, well, I mean, I can imagine probably Bezos would charge a trillion dollars probably before he sells this domain name.
And it’s nothing physical, he’s not gonna lose a single physical thing from his house or from all of his company, but he could sell the rights to that domain. So I think perhaps with a lot of Muslims, what the sticking point is, is that they conflate the non-physical nature of Bitcoin with the Riba of the Fiat money.
In other words, they get that there’s something fishy about dollars and about the fact that central banks create dollars. And so they’re receptive to that idea that, yeah, we should be on gold. We should be on silver because it’s what the Quran says. And there’s clearly something wrong here.
Most Muslims will entertain that, but in their mind, Bitcoin comes in the tank of Riba because it’s [00:24:39] unlike gold and silver, it’s not physical. And like Fiat money it’s just an entry on a database. And so therefore there must be somebody out there who can control it. But I think you hit on something very profound, which is that the fact that it’s not manipulable, nobody can just control the supply, is what takes it from the bucket of Fiat and puts it in the bucket of gold in my opinion, even though it’s not physical. And so then the question becomes, well, why are people using it? It’s the same reason they’d use physical things and other nonphysical things, which is that it has a value for you. And a lot of people have valued a Bitcoin. And so you can use it as a money because you buy it, other people buy it and you can sell it on. And then I think the compelling aspect of it is that it’s hard. There’s no authority anywhere that has ever been able to make Bitcoin at a discount. There’s nobody who has a printer that can make Bitcoin at a discount. Nobody will ever do that. Well, you know, never, ever big words, but the more you study in Bitcoin, the more you realize how difficult it would be for somebody to try and enforce [00:25:39] a change on the money supply or a way to corrupt it.
And that I think is the key to the appeal. And I think, when you start thinking about the implications for a monetary system built on Bitcoin, that’s when the connections with Islamic finance begin to really shine. And it’s something that I’ve thought about for quite a while. And then I saw, I hadn’t written about it yet, but I am writing a little bit about it in the Fiat standard.
I think with a hard monetary system, I don’t really see how with something like Bitcoin, where Bitcoin has, first of all, it’s hard, so nobody can print it. And secondly, it’s also highly saleable across the space, so you can move it around very easily and very cheaply. You can transfer it halfway around the world for a few dollars and a few hours.
And so the more honest the money and the better the money in terms of it’s salability across time and across space, the better it’s going to be at performing the function of money. And I think Bitcoin finance will naturally end up looking more like Islamic finance, not through any kind of religious edict, [00:26:39] it’s not because Muslims are going to embrace Bitcoin and force it to become Islamic.
I think the nature of Bitcoin is only going to lend itself to the kind of finance that will emerge. The kind of finance that is compatible with the spirit of Sharia law, I would say, regardless of whether it’s compatible would the letter of the law, wouldn’t you say?
Harris Irfan: Yeah, it’s always been strange to me that Muslims will argue that just because it’s not physical, it can’t be money.
I mean, there’s nowhere in Islamic jurisprudence that says that money has to be asset backed or physical or have utility other than as money. There’s no way that says that.
Saifedean Ammous: Wouldn’t you say that it’s specifically specifies gold and silver?
Harris Irfan: There are six categories of commodities, including gold and silver and wheat and barley, and I think dates and I think salt, and these are things that may be used as currency.
In other words, we may use other [00:27:39] things if we have social concurrence that we may use them as a form of currency, say that they have to have utility as something there’s nowhere that it says that. So when Muslims say that, I questioned, I say, well, show me exactly where in the original theological texts does it actually say you need to have real physical asset backing. It doesn’t. Besides, the money in your bank account is just digits in a computer somewhere.
You think they actually hold 10 pound notes or 10 pounds worth of gold in their vaults relating to the 10 pounds that you have in your bank account? No. So, I mean, I think this is a fallacy and Muslims would do well to research this and realize it’s social concurrence is more important than a real asset backing.
Saifedean Ammous: Yeah, absolutely. One thing struck me in your article, which I think is a scary and profound is just the way that a lot of these fatwas are going on Bitcoin, we could be seeing a replay of the printing press of people saying, well, the printing press was Haram and that knocked [00:28:39] literacy back for centuries in Islamic countries.
And because a lot of people thought that it was Haram because you could print bad things on paper. So clearly we should ban printing. And this is very similar to the logic of nocoiners today who say, well, you can do bad things with Bitcoin, therefore Bitcoin is bad. But yeah, I think it could be tragic if the next 10, 20 years as Bitcoin continues to grow, as I think and I expect it will be, if the majority of the Muslim world is frozen out because their muftis are telling them that this is Haram, they’re just going to end up eventually… bitcoin’s not going to go away, I think. And if it continues to impose itself, the only effect of these fatwas will be that Muslims will buy five, 10, 15, 20 years later than they otherwise would have.
Harris Irfan: Yeah. I read a very interesting thing within the last one, maybe two weeks, mufti Taqi Usmani who is one of the leading scholars in the Islamic world on the subject of Islamic finance, who has historically been very forward-thinking on a lot of new products in the Islamic finance [00:29:39] space, but he recently indirectly issued a fatwa on this, which I found very disappointing because he essentially, quoted the usual very strange things that people, scholars in particular say about Bitcoin, which is that it’s speculative and therefore it’s not compatible with our values.
It’s an international under plot was the words that are used, which I, again, I find a little bit bizarre, it’s not asset backed, which again, as I’ve explained, there’s nowhere in Sharia that it says it has to be asset backed. The thing that disturbed me most of all was the fact that he said he would revisit this in future, this fatwa, this legal opinion of his, maybe it could happen in the future.
Maybe it could be Sharia compliant in the future. And I’m thinking, yeah, but when, when we’re all poor and everybody else is rich and we can not climb out of that social injustice that we’re in now? I mean, why tell me that in 20 years time when Bitcoin has been mined and it’s whatever, a million dollars per coin? Don’t tell me that in 20 years time, tell me that now. That doesn’t make any sense to me.
So I was disappointed by that. I have huge respect for many of these scholars [00:30:39] in particular, mufti Taqi Usmani as a hero and mentor of mine. But there comes a point at which, even my dear father and my dear father-in-law, I love them and respect them a great deal. But at some point I had to take the car keys away from them. And I think that’s what’s happening right now.
I think we need to take away some of that authority from some of these scholars, because this is too specialized a subject, and it needs individuals who are really well-versed in the technicalities of that, who really deeply understand it. I am seeing that happening by the way, a lot of young scholars coming forward with extremely good credentials. They are very networked in the finance space. They understand modern finance and modern monetary system. They have come up with their own papers, their own research on Bitcoin. And I’m pleased to say that many of them are beginning to come around to it and saying, actually, Hey, there’s something here, guys.
This really could be a monetary system that is very compatible with our faith, for the reasons that it’s not inflationary and it’s decentralized. It’s not manipulatable, it’s divisible. It has social acceptance, et cetera, et cetera. There’s all the characteristics of a sound money. [00:31:39] So we should really look at it carefully.
They haven’t dismissed this out of hand and I’m very pleased to see that.
Saifedean Ammous: Yeah, I certainly hope so. I think strangely enough, there were, maybe this is just my impression, but I think a few years ago there were probably a few more positive rulings on this, but now I think that the tide is turning toward a more negative rulings on this.
And I think it’s a, yeah. It’s as you said, what they’re missing in this picture is that what I like to call Bitcoins is number go up technology. And I think the way to communicate the way I try and communicate it to people is that, you hear about Facebook or Amazon or Google or Netflix coming up and taking over the world and you might not be convinced of that.
And so you think, well Facebook, this thing sounds silly or Google sounds silly, and so you don’t join, but then, you know, five years later you decide, all right, well, this thing isn’t going away, all my friends are there and all they’re all using it and they can’t shut up about it. So I’m guessing I’m going to set up myself up an account with this service, whether it’s Facebook or Google, five years later, 10 years later, you start your Facebook, Google, Amazon account.
It functions every bit as well as [00:32:39] the person who’s been there for 10, 15 years. You still get the same search results, well, you still some get the same algorithms to manipulate your search result and his, and you still get the same shows on Netflix. You still get the same goods available on Amazon.
There’s not much of a change in the consumer experience depending on when you join. But Bitcoin, your experience with Bitcoin is highly highly correlated with your time of joining. I mean, the earlier you join, the more Satoshis you get. And it’s very straightforward. This is the part that I don’t like about number go up technology, because when you’re trying to say this, you sound like you’re trying to sell people on a Ponzi scheme, but the reality of it is that there’s only 21 million and that’s it.
And you may not like that fact, you may think it’s not fair, but that’s how it goes. And I think really getting Bitcoin, putting aside the technical aspects of it, but getting the importance of Bitcoin for you [00:33:39] is in that one moment when you realize, okay, all of my big braining and all of my reasons and all of my ideas, all that they’re doing is they’re just raising my buy-in price.
If I change my mind one day, they’re not going to go and say, all right, well, he’s changed his mind. Let’s start all over again and redistribute the Bitcoin so that everybody has their fair share based on how much money they had earlier. This is the reallocation of wealth that is happening by replacing an entire monetary system with a new one.
And this is the new real estate. Think about it as if they’re going to shut down the Suez canal and dig a new Suez canal. And we know where the real estate for the new Suez canal is going to be. And it’s happening. You can see that the thing is happening. And I think if you have a business that is reliant on the Suez canal, the sooner you buy up the real estate around the new Suez canal, the better off you’re going to be. Trying to delay it and waiting and saying, well, it’s not going to happen, it’s not going to happen, it’s not gonna happen, you are only missing out on it yourself. You’re [00:34:39] not hurting anyone, but yourself. That’s the really sad part about it, I think.
On the question of interest I’m of the view that I think in a Bitcoin only economy, you would not get interest lending. And as I was saying earlier, it would look like an Islamic Sharia compliant economy, because I can’t see there would be interest lending.
What are your views on this? And what do you think?
Harris Irfan: Yeah, I think I used to think that, and then I’ve seen some chatter on social media about how to create an interest bearing banking type system off of the back of Bitcoin and other cryptocurrencies. And although, of course we can’t magic money out of thin air.
If we have a finite decentralized cryptocurrency, like Bitcoin, It just in the same way, we can’t magic gold out of thin air. We have to mine it first. The reality is that once we have an economy that’s functioning on Bitcoin, they’ll be some enterprising individual who will come along and work out how to lend that interest against that.
I think [00:35:39] it makes it much harder because you can’t have a fractional reserve banking system if the economic model is only based on Bitcoin and not on fiat, you can’t print more of it. You can’t take in a dollar of deposit and lend out $10 of deposit because you’d have to create those nine extra dollars.
Right? You’d have to mine those nine extra dollars or nine extra units or Satoshis or whatever, a Bitcoin. So I used to think that if we had a Bitcoin only economy, you could never have Riba. You can never have interest in the economy, but I think we will find that many organizations will come forward and be able to move away from the idea of a bank as a custodial service only, towards a bank as a lender at interest, it would be much, much harder.
Therefore you would be able to de-leverage the economy in a way that’s not possible today, but I think it will happen. I don’t think we’ll be able to prevent that. So I think there are many characteristics of Bitcoin that means we will move towards a more socially adjusted economic model, but I don’t think we’ll be able to completely erase what [00:36:39] I think is the curse of interest.
Saifedean Ammous: I think obviously eliminating it completely is arguably impossible. There will always be people who want to engage in it. But I think as a financial system overall, I don’t see how it can continue to play a main role. And I think there are a couple of reasons to think about it.
On the one hand, you’ve got the problem of fractional reserve banking and rehypothecation is essentially only workable, only stable with a lender of last resort. I think this is what the 20th century has shown us. Basically the reason that the gold standard continued to have crises all the time was because banks would engage in fractional reserve banking and then discover, oh no, we don’t have a gold printer.
So we can’t meet all of our gold obligations and effectively going off the gold standard was done in order to help banks avoid the reckoning of the fractional reserve banking. So when banks would engage in credit expansion, and the credit expansion would increase across the US economy. It would always [00:37:39] lead to corrections.
And when there was no central bank, those corrections were generally smaller because if there was no central bank to print the money you get found out and then your bank is out of business. And then your employees and capital gets redistributed to other banks who are more prudent. Until they stopped being prudent and then they get wiped out.
So it wasn’t perfect, but it had that control mechanism of eventually there could be a bankruptcy. And so the only way that this was prevented and the only way that they were able to prevent us from bringing down banks repeatedly was to set up central banks. And so the role of the central bank would be that it would hold the gold and it would allow people to use papers.
And so then when there’s a liquidity shortage, it’s easy for the central bank to create money in order to solve that liquidity shortage when the money is paper. And so I’m summarizing of course, a lot, but basically the transformation of the [00:38:39] monetary system in the 20th century was one where we created the lender of last resort to rescue banks in order to allow them to engage in fractional reserve banking.
And as a result that ended up opening the flood gates of inflation. Because if you can devalue the currency for rescuing banks, then you can also devalue it for war and you can devalue it for all kinds of election slogans that become popular. And then basically people start voting essentially for Christmas wishlist of anything because the government has a printer. So all of it ultimately comes down to the fact that there is a lender of last resort. You remove the lender of last resort, and then you have financial institutions that have a very strict limit on how much liabilities they can issue because they issue liabilities more than the assets they hold, they can be subject to a bank run. And I think in Bitcoin economy, this is much more likely to happen then in a gold economy because there are significant costs to moving gold around. There are very strong monopolies for gold clearance that were tied into government back in the [00:39:39] 19th century.
So it wasn’t very easy for somebody to just go and set up a gold bank and it’s not easy to set it up and just for logistical reasons. So, the gold business lends itself, or golds spatial salability limitations, the high cost of moving gold around lends itself for giving the banker an edge and an advantage over their client, because all right, you can go to the bank and withdraw your gold if you think they are engaging in fraud, but then what are you going to do with your gold? Your gold without the bank rails is pretty useless. You can only use it to buy things from the store next door. And as the world economy became more and more sophisticated, you needed to buy things from more people and your business have to import and export things.
And so your gold coin without the bank’s rails is pretty useless. And this is where I think Bitcoin really makes a difference because Bitcoin’s spatial salability is much higher than gold. The cost of organizing a bank run essentially on your bank is much lower. It’s just one transaction fee to demand that the bank pays you [00:40:39] out.
You don’t have to stand in line and you don’t have to wait until the opening hours and they can’t play the same tricks that banks usually play, which is make people wait and delay them and stall them in an order and hope that they go away before they run out of money.
So it makes things more transparent of course, because the blockchain is publicly available and transparent. You can keep good tabs on your financial institutions holdings. And obviously there’s still room for fraud, always, but with traceability of funds available on the blockchain, you can keep very good eye on what they’re doing.
And I think with time, I see a convincing reason for why gold banks could get away with inflation. And printing 10% more paper than they have, or 20% I can see how they can get away with it. Because if you think about it, as in the value that they provide to their customers are so large that the customers having gold on the banking platform essentially has a 10, 20% premium over having [00:41:39] gold in your pocket because you can send the gold in their platform and much faster.
So people are essentially willing to put up, even if they’re not consciously willing to put up just the economics of it ended up making sense that even when the bankers messing around it still makes economic sense for you to keep your money there and take on the risk because that’s how you can continue to operate your business.
Otherwise you go out of business. So I can see the case for why you can get these margins and banks can have the ability to mess around when they’re limited with a money that has salability across space like that of gold. But I can’t see that happening in Bitcoin. In fact, I think if you do end up doing something like this, you engage in fractional reserve banking.
If you engage in interest rate lending, effectively what you’re doing is you are creating liabilities on yourself for Bitcoins that you don’t have, and your liabilities in a Bitcoin economy will trade on the market and we’ll be exchangeable to Bitcoin. And so if you’re a financial institution and you issue [00:42:39] say accounts backed by Bitcoin and you give them to people so that they can use these accounts, there’s going to develop a premium or there will be a discount on your Bitcoin if you increase the supply of your Bitcoin. And people don’t even need to know that you are engaging in fractional reserve banking, these things will emerge very quickly on the market, just because if you’re printing more of these, then there will be more people selling them for real Bitcoin. And then there will be differential in the price and that premium, that reflects the fact that your Bitcoin liabilities or your Bitcoin IOUs are not as scarce as the Bitcoin backing them.
There’s a little bit of a discrepancy between the number of IOUs that you have and the number of coins that you have. And so in that case, I think if it does emerge, it will be at a far smaller scale and I don’t see it being sustainable. And this is one argument I have. I’m curious as to what you think?
Harris Irfan: I think we’ll see the alternative mechanisms arising, because I mean, I think hopefully we agree that credit is a socially useful function. I mean, there is a need for credit in [00:43:39] society, and we probably also agree that if there is a Bitcoin standard and if the global monetary system works on this basis, then we’re likely to see a overall de-leveraging and a removal of interest in many cases from society. That said, I think there are a number of financing mechanisms that are good risk sharing mechanisms, real economy financing mechanisms that we’re trying to employ in the Islamic finance industry today.
And to a degree, some of them are synthetic versions of what’s already available in the Fiat’s banking systems. And therefore maybe not as pure as they should be in relation to the ultimate economic model. But others are a bit more risk sharing. And I think we’ll see the emergence of those mechanisms, profit and loss sharing mechanisms in the same manner as we once saw merchant capitalism in the early days of Islam.
So, the Prophet himself, for example, was a manager of other people’s money. He was a merchant who took that capital and traded it with goods and services. And that returned to a purer form of profit and loss [00:44:39] sharing as a form of credit mechanism that I think is a useful one and socially useful to society.
Saifedean Ammous: I agree. And this was the second point that I was going to make, which is that when you think that there’s no lender of last resort who can print Bitcoin and there’s no monetary authority that can force you to accept its liabilities as being equivalent on face value to Bitcoin. Well, then I think the model for financing is going to switch more towards an equity model rather than a credit model.
And I think it’s for the reasons that you mentioned, and it’s because the risk sharing is unfair in the case of Riba. Think of it this way, if there’s no central bank that can print money, then your bank offering you say a promise of a return of 5% at the end of the year it’s not a promise.
They can’t keep that promise. They don’t have an FDIC that can come and print them dollars in order to match all their liabilities as long as they’re abiding by the law. And so risk is always present in human affairs [00:45:39] and there’s always going to be real risk, and there’s always going to be risk of complete wipe out, you can get completely wiped out.
So it’s not just that they can’t guarantee you the 5% return. They can’t guarantee you the 100% principle that you put in that you could get wiped out entirely. The company could get wiped out in a storm or an earthquake or a pandemic or whatever. And the company goes out of business, the bank can’t get your principal back and they can’t pay you the interest.
So where are they going to get the $105 to pay you back at the end of the year for the $100 that you gave them? If we move toward an economy with no central bank people who will eventually learn that lesson, whether they learn it the easy way or the hard way, then eventually find out that when you’re taking a loan for 5%, you’re basically a sucker in that economy because you’re taking on 100% of the risk.
Because if there is a wipe out of the company, you are going to get wiped out and the bank is going to get wiped out. So you’re taking on 100% of the risk. You’re taking all 100% of the downside and you’re getting a very limited upside, no matter how well the company does, [00:46:39] you can only get 5%. And I don’t see the value from that.
I can see that people would stick to a fixed return as long as it was guaranteed. So your saving account is guaranteed by the FDIC and therefore it makes sense for you to put money, from an economic perspective, even if you might not agree with it from a Sharia perspective, it makes sense to have your money in a savings account that pays an interest rate that is higher than inflation, or at least higher than holding cash under your mattress, which is going to be destroyed by inflation over time.
At least if you get some interest on saving account, you’ll slow down decay of value, but in a system when there’s no FDIC because there’s no magic FED printer to make more money, then taking on a fixed interest loan just means that you’re limiting your upside while taking on all the downside. And I don’t see how that business model survives very long.
Harris Irfan: Yeah. So now imagine that you’re in a fully equity financing economy where capital is directed to those projects, which have the most real economy impact. Now [00:47:39] you’re not financing zombie companies, which is what’s happening today, right? And this is a really key point. And I think that this shift towards an equity financing economy is entirely compatible with the risk-sharing economic model of Islamic finance.
I think there’s also some kind of philosophical background to this as well. And again, I find it interesting, the parallels between Islamic philosophy and Bitcoin philosophy, things like low time preference, delayed gratification, these are actually in a sense part of the core values of the best people considered in Islamic thought. The best people have patience, they are forbearing, they’re steadfast. And that implies an individual who is patient, who is self-disciplined. I mean, it’s a bit like fasting, isn’t it? When you fast, you are disciplining your body, you’re disciplining your mind, your inculcating values of delayed gratification. You are against consumerism.
Okay. I think since consumerism is [00:48:39] incentivized by inflationary in a money creation and we’d be moving away from that. So actually for philosophically, this risk-sharing equity based economy under a Bitcoin standard is very close to Islamic thought. And also social justice. The reduction in wealth inequality, the reduction in conflict between people.
You talk a lot about this in your book about how we’ve had stable periods of history, where there’s been a gold standard, where there’s been technological and scientific and artistic advancement, when there has been a gold standard. And again, that’s very compatible with Islamic thought. When you have a stable sound currency, you have periods of development of human civilization because we are more predisposed towards delayed gratification.
I think that is entirely compatible between Islam and Bitcoin.
Saifedean Ammous: Absolutely. I saw a piece couple of weeks ago about somebody writing about fasting and Bitcoin and fasting and hodling and how the two essentially drawn on the same muscle inside you, which is your [00:49:39] willpower, your ability to actualize what you want and your ability to do what you want rather than what temptation wants you to do.
I definitely see that. And I think my own thinking on time preference is heavily influenced by a lot of these things that I’ve learned about the Islamic version of living the good life. For sure. One other point, I’d like to add in terms of the way in which I see finance. The business model in Fiat is to print money by lending it, you see why there’s an enormous incentive for everybody to borrow for everything, for your car, for your business, for your house, your municipality, and your local government, then your national government. And every single multinational corporation, everybody’s in debt.
There’s nobody who’s not in debt. I mean, not nobody, but basically, the richer you are, the more debt you take on. The world’s richest people are also the world’s biggest borrowers because they take on a lot of financing. In Fiat this is a freak of nature that is a result of the fact that we’ve run a monetary system where the money is depreciating and the money is printed by borrowing. And so the optimal strategy in the Fiat world is to try and make your balance of the Fiat [00:50:39] token itself, as negative as possible. And the trick to do that is to hold a lot of hard assets so you can borrow against them so that you can continue to borrow more Fiat.
Like you win in Fiat if you owe a lot of Fiat and if you hold a lot of hard assets, this really became clear to me, thanks to Michael Saylor. And of the few interviews we’ve had in this podcast, which I highly recommend everybody listen to. It’s absolutely mind blowing the way he explains it. And it dovetails perfectly with the way that I think about Fiat.
It’s just, the borrowing is essentially a tax on the rest of society and a subsidy to you. And so if you’re not borrowing, if you’re a Muslim living in a fiat based society and you refuse to take part of borrowing, you’re effectively subsidizing everybody else. You’re losing your loser. Yeah. Yeah, you’re paying to subsidize everybody else.
And that’s why, in a sense, you can be a little finicky about, oh, well the Islamic finance is not exactly real Islamic finance, but you can also, the technological reality of the money that is available for people today. If you want it to use a bank, if you want it to transfer money from your country to [00:51:39] another country, the reality is you have to play with this stupid broken casino system.
And, it’s almost like the only way that you live in a town where the only way that you can eat is that at the end of the day, you take your wages and you have to take them to the casino and spend an hour gambling. You may come out with money after you go to the casino, you may win, you may lose, but if you don’t go to the casino, you don’t get to eat most, or you, you get to just, give your money or most of your money to people who are going to go gamble with it anyway, and you’re not going to gamble with it.
So it’s a really tough pickle. It’s amazing how Bitcoin fixes this because it fixes it in a very technological way, not in a religious way, which is that it stops the monetization of debt. And so I think the potential for Muslims to like Bitcoin, if they just get this point, which is that, it’s how we get rid of Riba.
It’s how we unwind Riba. If you do that, I don’t see that there would be such a strong incentive for people to borrow. Like I think if you want [00:52:39] exposure to somebody else, if you want to earn money, it’s just going to make more sense for you and for them with a hard money, proper monetary system, it’s going to make more sense for you and them to get into an equity deal.
And so you both share the upside and you both share the downside. And I think the reason that people don’t see this right now the reason everybody is a borrower and the lender, everybody lends money and borrows money is that there’s an enormous incentive for being a borrower and a lender in this system.
But I think an honest money takes that away.
Harris Irfan: Yeah, a hundred percent agree and also worth adding. I think that again, in the Islamic philosophy to die with a debt on your shoulders that has not been repaid is a sin and it needs to be repaid. And yet we live in a world in which we are encouraged to take on debt and to own hard assets.
The direct consequence of that is wealth inequality. If you are able to borrow, if you’re able to hold these hard assets, which are then inflated, inflated, inflated, you get richer, but those at the bottom of the pyramid [00:53:39] have no chance.
Saifedean Ammous: Absolutely. When Michael Saylor was explaining it, he was saying the goal is to die with as much debt as you possibly can get.
And that’s really the way to win in the Fiat system and the way he explains it, as, you know, if you have a hard asset, you borrow against it. And because it’s constantly getting inflated, if the asset is appreciating more than the inflation is eating up and its value, then you basically never have to pay off the loan because you can borrow increasing quantities.
And the value of your loan is constantly devaluing. And so basically you can just live off of rolling over your debt, spending the money and paying off ever smaller fractions of the loan that you took on in real terms. And so as time goes by, you just continue to amass more negative Fiat points, basically. With every monetary system, people try and get as many tokens of the monetary system as they can, except with Fiat. With Fiat, you want to have as much debt as you can.
So when you [00:54:39] think about it people who follow the Saylor strategy and up increasing their wealth massively, end up dying with a lot of hard assets and a lot of debt, and ultimately they are being subsidized by the rest of society and people who subsidize them the most are the people who don’t borrow at all.
And that’s in many cases the Muslims. Agree. Yep. All right. Zaher, you had a question?
Attendee: Yes. I think Harris has already discussed part of what I was about to ask. It’s related to some misconceptions that the Muslims have about how is the financial system is working like people do not understand that the concept of interest or Riba is Haram does not apply fully under a fiat system, because like, if no one is inflatable then physically you are losing money.
And if you stay on that system and try to fix it or try to do an Islamic financial liquidation, like, I don’t know, Islamic finance. I don’t really understand how you can generate any sort of [00:55:39] benefit for someone participating in that economy. If that base layer is a fiat money. So maybe it could be better just to tell people that if you stay on that system you are not complying to the Sharia laws that you think you are complying to, you are not doing yourself any benefit.
And then the next thing is that they will suggest you harder asset like gold or silver. And then you will tell them exactly that this is bad because it was at some point, the case was we are on a gold standard and the state managed to confiscate it out of our banks. And then yeah, the next solution is something like that Bitcoin standard, and this kind of stands in the face of the sheikhs.
They’ll try to say that Bitcoin is speculative or not Halal or something. So why not tell them? Yeah, but fiat is not Halal. And you are not saying anything like fiat is not Halal, and an interest on fiat is not Halal and the reproduction or the production of new fiat tokens is not Halal. But yeah. [00:56:39] Interestingly, I have never heard a sheikh in any Islamic countries, especially in Arab countries who just says they’re dealing with fiat currency is Haram. So thank you. I know it is not a question. It’s just my opinion, but I would like to hear what, Harris and Saif think about it. Thank you.
Harris Irfan: Yeah, thank you very much. So, as I heard very good points there. I think there’s two fundamental questions. The first is that I think Muslims in general have struggled to understand the value proposition that is Islamic finance versus conventional traditional finance.
And the second is they have struggled to understand an even more fundamental question, which is what is the nature of money and therefore, what is the difference between Fiat money and hard money like Bitcoin? So I think the fact that they’ve been unable to answer the first question for themselves is partly a function of the kind of institutions that they’d been served by.
And certainly when I look in my own home country of the UK and I look at the leadership of UK Islamic banks. [00:57:39] Honestly, it’s extremely disappointing. These are mainly individuals, not mainly, there’s a hundred percent individuals who do not represent, who do not look like, act like, have the same values of as the people that they serve.
So it’s no wonder that Muslims have not got comfortable with Islamic banking as a service to them. It’s no wonder that in the UK, that penetration rate is only 2% of Muslim households have an account with an Islamic retail bank. It is because they don’t identify with the people who are serving them.
They can’t understand the value proposition and the people who are running these organizations are unable to articulate that value proposition in accordance with the Islamic economic model. So that’s been a failure. And the second even more fundamental question is what is the nature of money. There’s no way an Islamic banker can answer that question.
They simply haven’t thought about it. They’re so used to operating in the fractional reserve banking system that as far as they’re concerned, it’s done at banking as a merely a synthetic replication of the conventional financial system. It’s impossible [00:58:39] for them to get their heads around anything else.
So I think Muslims have been very badly served by the financial services industry. I’m seeing some very interesting developments taking place right now in FinTech specifically. I hope some of them come to fruition because I think that closer to a just economic model and hopefully some of them will flourish even more under a Bitcoin standard.
Attendee: Hi everyone. I’m from Libya and I go on long debates about Bitcoin with people in Clubhouse. There is a view that every type of money that should be considered Islamic has to be exchanged hand in hand. Do you know anything about this? Like where does this come from?
Harris Irfan: Yeah, there’s a very simple answer to that Nasser. That’s a very famous Hadith in which the Prophet says that there are six categories of commodity that must be exchanged hand to hand gold, silver, wheat, dates, and a couple of others think it was barley and salt if I’m not mistaken. And the reason why he said this is because [00:59:39] he disallowed the trading of one of these for a greater amount in return. In other words, if I give you a hundred grams of gold, you must give me a hundred grams of gold back. That’s what’s meant by hand to hand, it doesn’t literally mean physically we have to pass a bag of gold between each other. What it means is that I cannot ask for more in return, which is Riba literally an excess or a surplus. That is interest. That’s what that means. So when people say, oh, Bitcoin is not physical, I can’t pass a Bitcoin to you. That’s not at all the intent of that Hadith it’s nothing related to it.
Saifedean Ammous: Refers back to what I was saying earlier, which is that people conflate the non physicality of Bitcoin with the non physicality of Fiat. And then assume that it’s must be Riba because it’s not a hand to hand, but you can make Bitcoin physical. You can make Open Dimes and you can make paper wallets, and you can make hardware wallets.
And you can trade these things hand to hand and I think really perhaps just [01:00:39] getting people to understand that yeah, you could have the Bitcoin on the Open Dime, and then you can put the money on the Open Dime, then you can give it to somebody else and that’s it.
And they’ve taken it. I think this might be a good way of just getting the point across to people that you’re not dealing with Fiat financial institutions databases, where money is just essentially an opinion of the people in charge. You’re dealing with a hard asset and it’s only digital because that’s the most effective way of making an asset hard that we found.
All right. Daniel, you have a question.
Daniel Prince: Yes, I do. Harris, thank you. This has been truly interesting and Saif as always, most of us listening to this, it just kind of, I’ve been reading a book, it’s called Thank God for Bitcoin. And it’s written by eight people, two of which Robert Breedlove and Jimmy song, huge Bitcoiners.
I didn’t think this would be the kind of book that I enjoy, but they go through it. The way it’s set out is they take quotes from the Bible and then put that into a relevant day and spin it [01:01:39] into Bitcoin. So, I mean, I’ve not read your book Harris, I’m going to have to get that one and dig into that, but I’m not sure, just having a quick look around on Amazon, whether you talked about Bitcoin in that book.
So I guess my question to you is, are you going to step up and write the equivalent book for those people that you might be able to orange pill, the whole Muslim community and use the Quran to guide you.
Harris Irfan: I’ve been thinking about my journey into this it’s almost like a religious journey. I say that in the most respectful way, because I’m myself a pretty conservative Muslim and Orthodox in my views. And I take my faith very seriously. And you know, Bitcoin is a little bit like being a Muslim, being a Bitcoiner is a bit like being a Muslim because when you’re on the inside, everything makes sense.
It’s logical. You think about things carefully, you’ve analyzed it carefully [01:02:39] and you say this makes total sense, right? From the outside people think you’re insane. Right? So if you’re a non Muslim, I mean, I know many non-Muslims will see me and saying I thought you were a reasonably intelligent. I mean you believe in an unseen God, you believe in heaven and hell you have these ideas that don’t make any rational sense.
They’re not proven by science. And I say, I understand where you’re coming from that point of view. I personally see no incompatibilities between science and my faith at all. That’s the reason why I studied physics at university to understand my faith even more deeply. And if anything, it reinforced my faith.
So on the inside, I am told that as a Muslim, and this is what the Quran teaches me is that Islam is a religion for those who think. That’s a very, very important injunction for those who think on the inside. I see Islam as a deeply logical religion. One that’s governed by social justice. And I think Bitcoin is a very similar actually, because on the inside they see a huge amount of social justice [01:03:39] and the logic on the inside.
And yet on the outside, people are saying, oh, you’re gambling. There’s a speculative. This doesn’t make any sense. It’s not real. It’s not backed by anything. It’s like a big plot. It’s a Ponzi scheme, et cetera, et cetera. And we know being Bitcoiners that that’s just nonsense. Whenever we read a newspaper journalist talking about the climate effect or the energy usage of Bitcoin, it’s just garbage it’s based on some vague understanding of a very tiny subsection sub subject within the subject of Bitcoin.
And they’re conflated it to mean something else. So actually philosophically I see many similarities between the Bitcoin community and faith-based communities. And I think that my journey within Bitcoin has been something quite interesting, almost a religious experience. So I was delivering a lecture about, I guess, four years ago, where a member of the audience was my usual lecture.
I usually give it a provocative title. Like, capitalism is broken or the banking system must die or something like that. And somebody in the audience asked [01:04:39] me a question, what do you think about Bitcoin? And I said, I didn’t really know anything about Bitcoin. Maybe you can describe it to me. And this guy said, well, you know, it has characteristics like gold because it’s, you know, it’s like this, it’s like, this is like this, and it’s better than gold because you know, it’s got these other characteristics as well.
And I sat back for a second. I said, oh, wow. I mean, Ugh, that’s something amazing. I’m going to have to go away and research this. But what you’ve just described to me is almost the perfect Sharia compliant form of money, and therefore entirely compatible with the purest form of Islamic economic model, which is based on social justice.
So that’s kind of almost a religious moment for me. And from that point onwards, I’ve kind of, and I’m no expert on the subject of Bitcoin. My subject is Islamic finance, but I’m seeing so much compatibility with the pure form of the Islamic economic model, which by the way, is based on universal ideas of social justice, which are equivalent across many great religions.
So, I think Bitcoin is a very unifying phenomenon, a concept that [01:05:39] can bring many different people from many different cultures and faiths together. And I think that’s a beautiful thing and I’m tempted to write more about that.
Saifedean Ammous: Yeah, I think that would be a great idea.
And I think in the Bitcoin standard and the Fiat standard, I discuss how a fiat is basically built to optimize for conflict. It relies on conflict and authority and power in order to function because ultimately you have to rely on the word of somebody about how the ledger works, and then that requires somebody to impose their will.
And then there’s going to be fights about that. Both domestic politics, everybody wants to be in charge of the money printer and that makes politics a much higher stakes game. And then internationally, everybody wants to be in charge of the global reserve currency and that makes international politics such a high stakes game.
And it’s just naturally going to pit people against each other, people in the same country, as well as people across the world. It’s because it is a negative sum game. It’s a negative sum game. And so everybody’s trying to protect themselves in order to get ahead from the destruction of capital and destruction of wealth that is happening.
And so you see [01:06:39] it in societies that witnessed hyperinflation people walking in the street just want to get into fights with one another. Everybody is angry at everybody else. Everybody’s just felt robbed. And when you feel robbed, you feel wrong, then you want to take it out and you want to, you want to take revenge and you want restitution.
And when your money is collapsed, there’s no thief there for you to shoot or punch. And particularly if you haven’t studied inflation, you haven’t studied money quite well. And you are not very familiar with Austrian economics. You’re not quite sure how this thing happened and you just need a scapegoat.
And in moments like this, you’re going to find your escape goat. And of course, in many cases, you’re going to find a much easier to scapegoat people who are different from you. And so ethnic minorities get scapegoated in these episodes always, particularly if the ethnic minority happens to do better because of their connections to some industry or because they can trade abroad or they have ex-pats or whatever.
So it’s a way of really putting people at each other’s throat. It’s a way of preventing the natural order [01:07:39] of society from functioning because in the natural order, everybody can work, save, accumulate capital and savings that grow in value over time. And therefore you don’t need to start a fight with everybody. You can have what you want. You can live the life that you want if you just work hard to save for yourself, but when that’s taken away, you’re constantly being robbed. And therefore you’re constantly in conflict with the people around you. And I think it’s astonishing, you know, people of course, nocoiners and Fiat idiots, like to say all kinds of nasty things about Bitcoiners and Bitcoiners are closed minded.
And Bitcoiners are… It’s a closed minded cult. And yet, for a cult of closed-minded people, it’s a remarkably, remarkably diverse group of people from all over the world. It’s absolutely astonishing. I think there’s absolutely nothing like it. Perhaps, maybe football is the only thing that’s more universal than Bitcoin so far, but I think eventually Bitcoin would likely overtake football in this. But people all over the world just on Twitter, you’ll see Bitcoiners are from every walk of [01:08:39] life and from every culture, every race, every religion, it makes sense to people from all over the world.
And it makes sense for them. Once you see it, you see the value of cooperating with others and you enter into this world where you can think constructively of the future, you lower your time preference. And I think that there’s an enormous potential for Bitcoin in the future, in terms of reducing the extent of global conflict, both as wars, as well as just hostility and aggressiveness and hatred between people all over the world.
Peter, you have a question?
Peter Young: Yeah. This kind of shifts the topic a little bit, but I’m really keen to get Harris’s view on this while we’ve got him on the podcast, it relates to something that you referred to in your book Harris about the role that you played in Dubai’s international financial center from the year 2000, when you moved there and Deutsche bank, you referred to it at the beginning of this conversation.
One of the things you said in your book was that the way in which Dubai’s financial center was designed, drew a lot of inspiration from Hong Kong and Singapore. And I wondered if you could just share [01:09:39] what it is that those legal systems have in common, because one of the things we’re quite interested in on this podcast and I have a personal interest in is different models of governance and how we might be able to move towards free models that encourage financial innovation and encourage better protections of private property rights in the future.
I guess this is not so much from an Islamic perspective, but more from a sort of looking at the common legal structure that these different cultural entities have had and kind of what you think it is that’s made them successful. If you do indeed think that this is a model that other places should advocate.
Harris Irfan: Yeah, thanks, Peter. The main drivers for DIFC the Dubai international financial center, commercially to model themselves on centers like Hong Kong and Singapore, where the usual reasons why offshore financial centers exist, which is to collect a lot of assets under management in one small [01:10:39] place, attract them because you can attract talent, which has access to modern facilities and entertainment and amenities and schools and hospitals and so on. So make it attractive from the point of view of expert specialists to come. Make it attractive from the point of view of tax, make it attractive from the point of view of robustness of the legal system.
So for example, in the DFC, the DFC courts exist and very closely based on English law. English law, by the way, as the most prevalent jurisdiction governing jurisdiction for Islamic financial contracts, there is a lot of compatibility between English law and Sharia, believe it or not. And therefore it’s perhaps the most suitable for Islamic finance contracts to be structured.
And that’s entirely helpful to DIFC being a center for Islamic finance, as well as conventional finance. So this adoption of DIFC courts, the attraction for ex-pats, the immunities, the low tax environment, the robustness, [01:11:39] the geographical hub that Dubai represents as a trading port for many neighboring countries.
That makes it very attractive as well. All this throughput of traffic. Emirates airline, for example, there’s also an airline with a very much a hub model. And in all of these factors meant that Dubai was an entirely natural choice to become a center for the Islamic finance world, as well as for international finance generally.
And I think that’s why it modeled itself on Hong Kong, Singapore and elsewhere.
Peter Young: Okay. Thank you. And just, I guess, so you mentioned the English common law being something that those systems have in common. Are there any other factors that you think have been particularly important in the other countries can, for example, copy so we can copy the English common law system.
We can maybe copy the lower taxes model. Is there anything else that you would highlight that makes these financial centers successful?
Harris Irfan: I mean, I can talk from, with a specific viewpoint of Islamic finance. I think I’m better qualified to comment on that. And if [01:12:39] I wanted to set up an investment banking structuring team or an asset manager in a particular financial center that specifically dealt with Sharia compliant products, then I’d want to make sure that I was near to not only a client base, a customer base who bought the product.
But also ancillary service providers who could help me structure it, sell it, audit it, write legal contracts and so on. So I need to be near international law firms with that capability. I’d need to be near accounting and consulting firms with that capability. I’d need to be near all sorts of different types of talent and ancillary services who could help my industry become successful for Islamic finance. That’s quite a niche area. And if you need to have some very high quality lawyers, for example, you need to attract that kind of person. Dubai was unique in a sense, because for many, many years, for a few decades, in fact already had a culture of transient population from the Indian sub-continent, for example.
So it was not a huge stretch to have, for example, [01:13:39] British Muslims of Pakistani and Indian heritage coming to DIFC to become specialists in Islamic finance, culturally, they were very comfortable. They had access to aspects of their Western upbringing, as well as the Eastern upbringing, all in one place.
That’s why I think Dubai was very successful in that respect.
Attendee: Hi Harris. Thank you, the conversation a bit really lightning. The question is: do any of the rules on Islamic finance differ depending on the denomination of Islam or is it pretty consistent across?
Harris Irfan: Yeah, that’s a good question. There’s often I think a misconception in the popular financial press that there are many different rulings on Islamic finance, depending on which scholar you go to. Actually, the reality is very different in the vast majority of cases, most types of financial product have universal agreement [01:14:39] amongst scholars from different regions of different schools of thought and different attitudes.
There are only minor differences at the periphery. So there are some products which some scholars will say that’s okay. Others will say that’s okay providing the following caveats apply. And some scholars will say, that’s not okay at all. There are very, very few of those disputes in the Islamic finance space.
I think that has been an area that has been exaggerated by the nonspecialist press and by some individuals in the industry who don’t really understand the technicalities of the products and how they’re structured and surprise surprise, many of them are in leadership positions. So I think we have this false narrative in the industry that there are many different interpretations.
Yes, Sharia is a very organic body of law. It’s not dogmatic at all. It’s actually evolving. And it’s been codified over a period of time, which is why you’ve seen the development of four Sunni schools and one Shia school and each of these will have a slightly marginally different interpretation of different [01:15:39] types of contractual and commercial structures, but really on the big picture, they all tend to agree.
And I think that the differences have been, as I say, exaggerated.
Saifedean Ammous: Would you say the Ottoman empire had a massive disadvantage in world war one because they could not use reserve banking system to leverage the whole country’s output into the war effort?
Harris Irfan: I’m going to pass as somebody who really doesn’t have enough knowledge to answer that question, but I will say one general observation.
And that is that the reason why the 20th century has been the most bloody century in history is because governments have been able to exhaust the wealth of their citizens in mechanizing warfare. And they’ve been able to do that by printing. And prior to 1914, if the world lived on a gold standard, governments would have to exhaust their own treasury chests in order to fight a war.
Now they’re able to exhaust the wealth of all of their citizens. And it’s no wonder that we kill people on a mass scale now. So that’s the only comment I will make in relation to that. And Saifedean I defer to you on the ultimate question.
Saifedean Ammous: Yeah, I’m [01:16:39] gonna actually do the answer. Just occurred to me right now.
This is I think a very profound point that I came across while writing Bitcoin standard, which is people think that you win wars by inflating the money supply, and they bring up world war one as an example. But I think it’s a great counterexample to that because the countries that lost the war were the ones that inflated their currencies the most, and the countries that won the war were the ones who inflated the least.
And specifically that’s the U S in particular. The U S was on the gold standard up until 1917 or 1918, I think. So it was the last country to go off the gold standard. Well, there were still Sweden and Switzerland that were to remain until the 1930s, I think from the countries that took part in the war the U S was the last to go off the gold standard. And it was the first to go back to the gold standard. The US reinstated the gold standard in 1921 or 22. I discussed this in the Fiat’s standard. The reason that they won the war, there are many factors why they won the war, but I think the monetary explanation, it helps us understand why the war went [01:17:39] on for longer, but I don’t think it alters the calculation of who would have won the war because they all engaged in inflation up to some extent or engaged in taxation. And ultimately what won the war was the monetary discipline that allowed the economy to remain strong in the U S and in fact, not only did it win the U S the war.
In fact, it won the U S the global leadership of the financial system after world war one, because everybody who had money in Europe started sending their money to the U S at the start of the war, because the U S was still on the gold standard. And so that perhaps more than anything was the effect of it.
So staying on the gold standard was what made the U S stronger. Well, it was what attracted an enormous amount of gold from Europe to the U S because the U S was a safer place to have it. And that allowed US to be the kingmaker of the world after world war one, on the other hand, Germany and Austria, they were experiencing inflation quite quickly during the war.
And if you look at the, and I have this chart in the Bitcoin standard, you look at the [01:18:39] exchange rates of the main currencies against the Swiss Franc, cause the Swiss Franc was neutral, you’ll see that the biggest inflationary pressure had happened to Austria and Germany. They were the ones who, whose currencies were getting destroyed whereas the U S and Britain had the least destruction. Now, I’m not sure to be fair I’m not sure how much that has to do with inflationary, monetary policy and how much it has to do with simply Austria and Germany proximity to Switzerland. I mentioned this in the Bitcoin standard in the footnote, and I haven’t heard anybody discuss it, but I think it might really be that world war one may have been settled by the fact that Germans and Austrians could dump their national shitcoin quite easily for Swiss francs. Whereas Americans and Brits were stuck with their national shit coins and that protected the value of these coins further. Ultimately, however, I think it’s very short-sighted to think that inflation will win your war. Inflation will destroy your currency and destroy your economy.
And if it’ll [01:19:39] win you a war, it will win you a war against arguably a country that is more inflationary than you. If you look at countries that have succeeded and profited and become very powerful, they did so by holding on to hard money. And England rose to become the world superpower because it had the hardest money and the best money that everybody was using all over the world.
They weren’t colonizing the world because they were inflating money. On the contrary, they were colonizing the world because the world wanted, well, not because of that, but their colonization was helped by the fact that they had a hard money that everybody wanted to use. Because you had that the bank of England in the 19th century was basically Bitcoin.
It was the best thing. The closest thing they have to Bitcoin, you could walk into a bank in Bombay and send money to London, which is magic. That’s why everybody wanted to be on the Sterling standard effectively. So I don’t think that this is really the decisive factor. And I think the ultimate empire.
I’m not sure about the history of banking and inflation over there, but I do know that the empire was in enormous amounts of debt toward its [01:20:39] final stages. It was already in a lot of debt and it was already behind technologically behind the European powers. It had a lot of land and have a lot of soldiers, but in terms of technology, it was way behind other governments.
And so it was much harder for it to compete. I’m not sure inflation would have helped. I think if they’d had inflation, they would have probably lost earlier.
Attendee: Any comments on Islamic governments turning to Bitcoin?
Harris Irfan: That’s a real hot potato and I need to be very careful how I answer it because I do need to travel from time to time to middle Eastern countries.
They’re going to be no different from the U S and the UK in this regard, Bitcoin is a challenge to their monetary supremacy. The Middle east is essentially dollar dollar-based. The UAE currency for example, is pegged to the U S dollar. And they have made some accommodation for cryptocurrency in general, some interesting initiatives, some [01:21:39] FinTech accelerators in their financial centers.
Many of the underlying companies and those accelerators are cryptocurrency related in some way. There’s been a lot of talk about Sharia compliant cryptocurrency, there’ve been gold backed cryptos. I don’t believe in any of these, by the way, they don’t make any sense to me. I don’t see why you have to have gold backing to be a Sharia compliant cryptocurrency.
I think that’s all part of this kind of marketing effort to make non Bitcoin crypto seem attractive. I maintain that Bitcoin is the most Sharia compliant form of money. And I think Middle east governments and Islamic nations around the world would do well to recognize that sooner rather than later.
Saifedean Ammous: Well, thank you everybody for joining. This has been an enormously fun conversation and very informative. Thank you so much, Harris, and I wish you all the best of luck on your work and efforts to continue to raise awareness of this question all the best.
Harris Irfan: Thank you.