Is Crypto Arbitrage Halal?

This article will explore crypto arbitrage, perspectives on its halal status, how SBF of FTX made millions before being corrupted, and what Islamic scholars and religious bodies have ruled about arb trading.


What is Crypto Arbitrage?

Cryptocurrency arbitrage involves exploiting price differences across exchanges to make low-risk profits. For example, Bitcoin may be trading at $35,000 on Exchange A and $35,500 on Exchange B. An arbitrageur will buy Bitcoin on Exchange A and immediately sell it on Exchange B to pocket the $500 difference.

Some common crypto arbitrage strategies include:

  • Inter-exchange arbitrage – buying and selling between spot exchanges like Coinbase and Binance
  • Triangular arbitrage – exploiting price differences across three paired currencies
  • Future arbitrage – profiting from the price gap between spot and futures markets

Arbitrage opportunities exist due to inefficiencies between fragmented crypto markets and delays in price synchronization across platforms. Traders use bots and algorithms to profit from these temporary price discrepancies.


How SBF of FTX Made Millions Using Arbs

Sam Bankman-Fried, yes, we all hate the guy now, but before managing billions through (the now collapsed) FTX and Alameda Research, he made a huge amount of money from Arb Trading. His success can be attributed to several factors:

  1. Kimchi Premium: Bankman-Fried capitalized on the Kimchi Premium, which was a price difference between Bitcoin prices in South Korea and the rest of the world[4]. By buying Bitcoin at a lower price outside of South Korea and selling it at a higher price within the country, he was able to profit from the price discrepancy.

  2. Japanese Yen Premium: After the Kimchi Premium opportunity diminished, Bankman-Fried found a similar opportunity in Japan. He bought Bitcoin for $10,000 in the US, sent it to a Japanese exchange, sold it for $11,500 worth of Japanese yen, and then converted the amount back to dollars. This process involved global transactions and wire transfers, taking up to a day to complete, but it was still profitable.

  3. Scalability: Bankman-Fried’s success in arbitrage was also due to his ability to facilitate large-scale trades. He managed to find the right platform to buy Bitcoin at scale, get approval to use Japanese exchanges and accounts, and navigate the challenges of transferring millions of dollars between countries.

  4. Timing: Bankman-Fried’s entry into the crypto market was well-timed, as he started trading cryptocurrencies when the market was still relatively new and ripe with opportunities for arbitrage.

Overall, Sam Bankman-Fried’s success in arbitrage can be attributed to his ability to identify and capitalize on market inefficiencies, his experience in trading, and his ability to execute large-scale transactions. 



Is Traditional Arbitrage Trading Halal?

The halal investment principles in Islamic finance emphasize fairness, prohibiting interest (riba), excessive risk (gharar), and gambling (maysir). Investments and trading strategies must align with Islamic ethics.

Most Islamic scholars consider traditional arbitrage, like stock arbitrage, to be halal. This is because arbitrage aims to profit from market inefficiencies without taking on undue risk or interest-based speculation. As long as no deception, manipulation, or other unethical means are used, legitimate arbitrage is widely accepted under Shari’ah law.

Some key reasons why traditional arbitrage is deemed permissible:

  • It does not involve interest (riba)
  • There is minimal uncertainty or speculation (gharar)
  • The buying and selling of assets is involved
  • It aligns with the goal of achieving profit through ethical business activities

However, the emergence of cryptocurrencies has raised new questions on whether the same logic can be applied to crypto arbitrage.

For a deeper understanding of such ethical financial practices, one might consider exploring Sharia-Compliant Tax-Free Savings Accounts.

What Do Islamic Finance Experts Say About Crypto Arbitrage?

Given the complex considerations around cryptocurrencies, leading Islamic finance scholars differ in their assessments of whether crypto arbitrage is halal. Some of the major viewpoints include:

Permissible – Scholars like Mufti Faraz Adam argue that arbitraging between cryptocurrency exchanges is just as permissible as traditional commodity arbitrage. As long as ethical trading practices are followed, it aligns with Islamic principles.

Controversial – Authorities like the Islamic Fiqh Academy take the view that crypto arbitrage falls into a grey area. While arbitrage itself is normally compliant, the speculative nature of cryptocurrencies makes the activity too risky.

Prohibited – Influential muftis including Nizam Yaquby have declared crypto arbitrage haram due to the extreme uncertainty, anonymity, and speculation involved.

Case-by-case – Some experts like Mohammed Abubakar opt for a more nuanced perspective, arguing arbitrage may be permissible on a case-by-case basis depending on the cryptos, platforms, and strategies used.

Need for more analysis – Most experts agree that further in-depth study and consultation is required before definitive rulings can be made on such a complex modern issue.

For further insights into Islamic scholars’ positions on cryptocurrency, the article Is Cryptocurrency Halal? What Do Islamic Scholars Say is a valuable resource.

Fatwas and Rulings from Prominent Scholars

There are currently no major Islamic religious bodies that have issued definitive fatwas on the permissibility of cryptocurrency arbitrage.

Some minor fatwas from individual clerics and regional groups have attempted to address the issue:

  • Permissible – Fatwas from less influential muftis like Mufti Muhammad Abu Bakar in Singapore

  • Haram – Regional rulings from clerical bodies in Turkey and Palestine

However, the world’s leading Islamic finance authorities like the Fiqh Council of North America and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) have yet to release any official position.

This reflects the reality that there is no clear consensus and crypto arbitrage remains in a gray area requiring further scholarly analysis from a Shari’ah perspective.


Risks of Gharar from Cryptocurrencies Arbs

Crypto arbitrage can be a low-gharar strategy, but there are several risks associated with it from an Islamic finance perspective, including:

Challenges Description
Technical issues Crypto arbitrage requires real-time monitoring of multiple exchanges and execution of trades. Technical issues such as slow execution times or system failures can result in missed opportunities, resulting in potential riba losses.
Security risks Cryptocurrency exchanges are often targets for cyber attacks, which can result in the loss of digital asset funds. Traders need to ensure they use reputable exchanges and follow proper security measures to avoid excessive risk (gharar).
Price slippage In fast-moving volatile markets, slippage can lead to differences in the actual execution price and the expected price due to the time it takes to execute trades, potentially harming halal profits.
Trading fees Arbitrage trading involves multiple trades, resulting in high trading fees that can eat into profits, reducing adherence to Islamic banking principles.
Unforeseen shocks Crypto price movements can be unpredictable, and unforeseen shocks can lead to losses in arbitrage trading, introducing gharar.
Liquidity risk Arbitrage trading relies on the ability to buy and sell assets quickly. If an exchange lacks liquidity, it may be not easy to execute trades at the desired prices, which scholars warn against.
Regulatory risk The cryptocurrency market lacks clear regulation and is subject to potential government crackdowns, which can impact arbitrage opportunities and trading strategies, raising permissibility questions.
High costs Using arbitrage bots can be expensive, as they often require upfront purchases and ongoing maintenance costs, reducing profitable returns.
Technical complexity Crypto arbitrage bots can be complex to set up and manage per Islamic regulations, requiring technical expertise and constant monitoring to ensure they are functioning correctly.


While crypto arbitrage trading can offer low-gharar opportunities, Muslim traders must be aware of the associated risks, consult scholars on permissibility, and manage risk effectively to maximize halal profits.


Conclusion: The Verdict is Still Out

In summary, while traditional arbitrage is considered permissible under Islamic law, the emergence of cryptocurrencies has cast uncertainty over arbitrage activities in the crypto space. There are good faith arguments on both sides of the debate from credible experts. With cryptocurrencies still relatively new, and a lack of definitive guidance from major Shari’ah councils, the halal status of crypto arbitrage remains unresolved.

Muslim investors should conduct thorough research, consult knowledgeable scholars, and make their own informed determination on participating in crypto arbitrage. As the crypto industry evolves, we can expect more detailed guidance from Islamic authorities on the permissibility of cutting-edge finance and investment tools.

For a more comprehensive understanding of halal investment strategies, exploring Halal Investment Criteria could be beneficial.

Related Articles