Are Stablecoins Halal? Understanding the Structures Behind the Stability

Introduction

Stablecoins have become an essential pillar of the modern crypto economy. By combining blockchain functionality with stable value, they provide a digital alternative to fiat money that enables payments, savings, and decentralized finance. However, not all stablecoins are created equal. Their underlying mechanisms vary widely—and so do their risks. For Muslims, understanding these structures is critical to assess whether a stablecoin aligns with Shariah principles or falls into impermissible territory.

What Are Stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable value — usually pegged to a national currency like the US dollar (USD), euro (EUR), or a commodity like gold. While typical cryptocurrencies like Bitcoin or Ethereum fluctuate wildly in price, stablecoins aim to offer predictability and low volatility.

Their core value proposition is simple:

“The convenience of crypto, with the stability of fiat.”

This stability makes stablecoins useful for everyday transactions, remittances, digital savings, and as a store of value during volatile market periods. They also serve as the backbone of many blockchain-based financial applications (DeFi), acting like digital cash or a reserve asset.

Stablecoins have emerged as a crucial bridge between traditional finance and the cryptocurrency ecosystem. By design, they aim to combine the technological flexibility of blockchain with the price stability of fiat currencies. This balance allows stablecoins to support a wide range of use cases, particularly for communities seeking secure, efficient, and borderless financial solutions.

Types of Stablecoins

Although stablecoins all aim to maintain a stable value—typically pegged to a fiat currency like the U.S. dollar—they do so through very different mechanisms. These mechanisms have significant implications for risk, reliability, and shariah compliance. Here are the five main types:

1. Fiat-Collateralized Stablecoins 

Fiat-collateralized stablecoins are the most widely used form of stablecoins today. These tokens are issued by centralized entities and are backed by reserves consisting of fiat currencies such as the U.S. dollar or euro. The basic idea is that for every 1 USDT, USDC, or similar token issued, there is (in theory) 1 unit of fiat currency held in reserve. These reserves are typically a mix of cash and liquid short-term assets, such as U.S. Treasury bills, commercial paper, and money market instruments.

However, it is crucial to understand that when you purchase or hold one of these tokens, you do not legally own any part of the underlying reserve. You are not buying a share of the fiat or treasury assets sitting in the issuer’s vaults. Instead, you are simply holding a digital representation of value that the issuer promises to honor on a 1:1 basis. This distinction is essential when evaluating the shariah compliance of such instruments. From a shariah point of view, the key question is whether the token holder is linked to them in any contractual or ownership sense. In most fiat-backed stablecoins, you do not have any ownership or legal claim over the underlying reserves. You are simply holding a token that mimics the value of something you do not possess. This raises an important question: if you don’t own the underlying asset and have no direct connection to how it’s managed or invested, can we consider it halal purely because you yourself are not involved in the riba-based activity that backs the token’s value?

A useful comparison here is fiat currencies that are pegged to other currencies. The peg offers stability, but the user does not gain ownership of the reserve currency. Similarly, these stablecoins mimic the value of fiat, but the holder is entirely dependent on the issuer’s solvency, transparency, and policy choices — not on real qabd (possession) or tamleek (ownership).

In reality, Muslims should refrain from holding or relying on such stablecoins, because even if the token itself is not inherently haram, one is indirectly supporting an ecosystem that profits from riba. This falls under the principle of i‘anat ‘ala al-ma‘siyah — assisting in sin — by helping sustain a financial model built upon interest-based instruments.

That said, some scholars may tolerate the use of fiat-backed stablecoins in cases of necessity, especially when no halal alternative exists and when stablecoins are needed for essential activities such as cross-border transactions, crypto-to-crypto trades, or international payments. USDT, for instance, has become so dominant in the crypto economy that avoiding it completely can be extremely difficult.

Still, the long-term goal for the Muslim community should be clear: to develop its own Shariah-compliant stablecoins, built on real assets, ethical reserves, and transparent governance. Only then can we avoid reliance on conventional structures that are incompatible with Islamic economic values.

2. Crypto-Collateralized Stablecoins

Some stablecoins are backed not by fiat currency, but by other cryptocurrencies. These are known as crypto-collateralized stablecoins. In this model, users lock up crypto assets as collateral in a smart contract and mint stablecoins against them. Because crypto assets are volatile, the system usually requires users to overcollateralize — meaning they must deposit significantly more value than the stablecoins they create, to protect the peg.

From a shariah perspective, two aspects of this model must be carefully examined. First is the nature of the collateral: if the crypto used is linked to haram activities, using it to back a stablecoin can render the structure impermissible. Second is the mechanism of issuance: how the stablecoin is created, and whether it resembles an interest-bearing loan or a permissible financial contract.

An example of this mechanism is DAI, issued by the MakerDAO protocol. Users lock up crypto assets—commonly ETH or USDC—and mint DAI against them. However, to retrieve their collateral, users must pay back the DAI along with a stability fee, which is set by the protocol and functions much like interest. This makes the issuance resemble a conventional loan with riba, which is prohibited in Shariah. 

There are other models of crypto-backed stablecoins that approach the idea differently. One example is sUSD, issued by the Synthetix protocol. Rather than assigning individual debt to each user, Synthetix operates with a shared debt pool. Users stake SNX tokens and mint sUSD, but once they do, they become jointly responsible for the platform’s total debt. If traders on the platform make profits, the overall system debt increases — and this additional liability is distributed among all stakers, whether or not they were involved in the trading. The profits paid to traders are in sUSD, and the corresponding loss is spread proportionally across all collateral providers.

This creates a system of fluctuating and collective risk. A staker’s debt can increase or decrease depending on how the platform’s traders perform, not based solely on their own actions. While this model avoids direct interest charges, it raises other concerns — particularly around fairness, transparency, and consent. The fact that your debt can grow due to someone else’s trading behavior introduces a high degree of gharar, and the risk-sharing model may not align with Islamic contract structures unless clearly disclosed and structured with safeguards.

3. Algorithmic Stablecoins

Algorithmic stablecoins aim to maintain their peg — usually to the U.S. dollar — not through fiat or crypto collateral, but through programmed rules that automatically increase or decrease the supply of the token based on market demand. These stablecoins are typically not backed by any real-world or digital asset, but rely purely on mathematical logic coded into smart contracts.

The basic idea is simple:

• If the stablecoin trades above $1, the system mints more tokens to increase supply and push the price down

• If the price falls below $1, the system reduces supply (usually by buying back or “burning” tokens) to raise the price

In theory, this is similar to central bank monetary policy — but automated, decentralized, and transparent. Since the adjustment is code-based and does not involve lending, interest, or formal debt obligations, some may argue that a purely algorithmic stablecoin could be permissible in Shariah, provided it avoids market manipulation and deception.

4. Synthetic Stablecoins (Derivatives-Backed Models)

Synthetic stablecoins represent a distinct and emerging category of digital assets that maintain price stability not through fiat reserves, crypto collateral, or algorithmic supply changes, but through financial engineering—primarily using delta-neutral trading strategies.

These models do not hold real dollars or tangible on-chain assets. Instead, they hedge exposure to crypto price movements by combining:

• A long position (e.g., holding BTC or ETH)
  

• With a short position in perpetual futures—a derivative contract that bets the same asset will fall in price
  
  

If the asset’s price rises, the long gains while the short loses; if it falls, the reverse happens. These opposing effects cancel out, keeping the synthetic stablecoin near $1.

Example: Ethena’s USDe
Ethena’s USDe is one of the most prominent synthetic stablecoins. It holds ETH or BTC in custody and simultaneously opens short positions on centralized derivatives platforms. It earns returns from the funding rates paid in perpetual futures markets, which are passed to users via its ENA governance token.

The short side of the trade is not a sale of an asset, but a contract for difference (CFD)-like derivative, settled in cash, not ownership. The token is backed by speculative positions, not real assets—and income is derived from derivative structures fundamentally linked to riba-based mechanisms.

Example: UXD Protocol
UXD, built on Solana, uses the same delta-neutral method, but executes it fully on-chain through decentralized perpetual platforms like Mango Markets. A user deposits crypto (e.g., SOL), and the protocol opens a corresponding short position. UXD’s Asset Liability Management Module (ALM) ensures that every dollar of UXD is matched with a hedged exposure.

From a shariah perspective, UXD is also problematic as it relies on perpetual futures, which involve no transfer of real ownership. What is traded and monetized are synthetic positions—not tangible goods or real economic activity.

5. Commodity-Backed Stablecoins (Gold and Other Tangible Assets)

Commodity-backed stablecoins are digital tokens whose value is linked to physical commodities—most commonly gold. Unlike fiat-backed stablecoins, which rely on bank reserves, or synthetic models based on trading strategies, commodity-backed stablecoins aim to anchor their value in something tangible and historically trusted. For each token issued, an equivalent quantity of the commodity is held in storage by a custodian. The most prominent examples include PAXG (Paxos Gold) and XAUT (Tether Gold), both of which claim that each token corresponds to a fixed weight of physical gold stored in vaults.

In theory, this model offers an attractive blend of stability, intrinsic value, and inflation resistance. Users can buy and transfer these tokens as easily as any other cryptocurrency, while retaining exposure to real-world assets. The appeal is particularly strong in Muslim markets, where gold is viewed not only as a stable store of value but also as a Shariah-permissible investment—provided certain conditions are met.

From a shariah perspective, commodity-backed stablecoins can be permissible, but only if the structure satisfies specific legal and ethical requirements. First, the gold backing must truly exist, and ownership must be clearly allocated to the token holder. If the token merely represents a claim without actual transfer of possession, it may be viewed as impermissible. Second, the transaction must allow for immediate settlement (T+0) when gold is exchanged, since gold is a ribawi item, and delayed settlement would invalidate the contract under Islamic rules. Third, redemption must be possible in theory—even if not practically exercised—so that the token does not become a purely symbolic representation.

Conclusion

While stablecoins promise utility, stability, and inclusion, they raise important questions about ownership, collateral, and financial ethics. Some models may be tolerated in cases of necessity, while others clearly conflict with Islamic finance principles. As the crypto space evolves, the Muslim community must not only scrutinize existing products but also lead the way in designing shariah-compliant alternatives that serve real needs without compromising core values.