While Islamic Financial Markets are eager to learn more about blockchain technology and crypto-currencies, they have specific rules and requirements.
“We are working towards our goal of making Dubai the first blockchain-powered government in the world by 2020.”
Bitcoin, which has proven itself viable and efficient, is better adapted for Islamic Financial Markets compared to fiat money in many ways, especially in terms of monetary policies, inflation, centralization, and interests on loans. However, Bitcoin isn’t yet entirely accepted by the Islamic banking community, and there’s still no consensus around Bitcoin under Sharia laws.
Talking about Bitcoin at the World Riba Conference in 2013, Professor Dr. Ahamed Kameel Mydin Meera (Ph.D Finance), Dean of the Institute of the IIUM Islamic Banking & Finance and author of “The Islamic Gold Dinar,” said:
For a digital currency to be accepted by Islamic Finance, it needs to have a measure of value, necessarily the measure of value has to be a monetary commodity. You have to put a standard weight on paper notes or electronic currencies to be accepted, it has to be redeemable with a standard weight like gold. Elsewise, it is not fair and it is fiat money. From the first exchange it has to be just. Fiat money is only subsequent, it gives an unfair benefit to the first users.”
Many Islamic Financial Markets advisors, or philosophers like Sheikh Imran N. Hosein, share similar views:
- Bitcoin is not backed by a physical commodity, a standard weight.
- The volatility of Bitcoin is really high.
However, just as many Sharia/Islamic banking scholars are persuaded that Bitcoin is not haram – that is, not forbidden or proscribed by Islamic law – because it’s not imposed on people against their will. In my opinion, Bitcoin shares many properties with gold, the main difference being that, while the properties of gold are enforced by the laws of physics, those of Bitcoin are enforced by the laws of mathematics.
Digital money whose value is linked to a physical commodity could decrease downside risks compared to other crypto-currencies. Many Initial Coin Offering (ICO) investors have been deceived in so-called “buy, lie and sell high” or “pump and dump schemes.” A crypto-currency backed by a physical asset or a standard weight could also reduce volatility concerns and avoid allegations of Riba – usury or unfair gains condemned by Islamic law. By issuing each coin against a standard weight – one gram of physical gold – this model could protect early investors from financial siphons while, at the same time, keeping alive their enthusiasm for the future of money. In the words of Andreas Antonopoulos:
“To experience the future of money. To gain a glimpse into an exciting technology. To learn about how money could be in the future and also become aware of how limited money and banks are today.”
$1.88 trillion market
The adoption of a blockchain crypto-currency by the $1.88 trillion Islamic Financial Markets would be spectacular news. According to the Accounting and Auditing Organization for Islamic Financial Institutions, crypto-currencies remove artificial barriers caused by financial institutions, allowing for:
- True peer-to-peer payments anywhere in the world.
- Minimal transaction fees and processing time compared to traditional banking.
- Financial privacy.
- Non-reversible transactions preventing chargebacks and fraud.
While cryptocurrencies allow for unprecedented ease of use and freedom in how and where money can be used, they also present important shortcomings. Major digital currencies suffer from two major problems:
- Extreme Volatility.
- Acquisition/redemption difficulties.
Extreme volatility causes a substantial risk for crypto-currency holders. It also discourages conventional investors, institutional funds, the SEC, and Islamic Financial Markets. While it is normal for any recently introduced form of value to be unstable, different governments around the world are concerned with volatility, which is a crucial obstacle to mass adoption of any currency.
Acquisition/redemption difficulties are often caused by liquidity problems forcing wallet providers and merchant to mitigate losses with higher fees. It is still difficult to sell a high volume of digital currencies for fiat money on exchanges. The average transactional volume of Bitcoin is considerably low compared to the potential demand of “Big Money.” A digital currency with a substantial market cap backed by gold could bring confidence in the markets.
Crypto Insider’s contributor “Green Rabbit” is currently working in the Emirates Financial Towers, in the same building that hosts the Smart Dubai initiative. Blockchain and cryptocurrencies are on everyone lips. It’s only a matter of time before blockchain companies in the Emirates and the Middle East come up with a new crypto-currency backed by gold… digital money adapted for the Islamic Financial Markets!