The Iranian Association of Islamic Finance held an international webinar on “Crypto-Assets Funds Through Islamic Lens”.
The Iranian Association of Islamic Finance held an international webinar on “Crypto-Assets Funds Through Islamic Lens” on 13 June, 2022.
Dr. Asad Zaman
Director: Uloom ul Umran (An Islamic Alternative to Social Science) Al-Nafi Online Educational Platform, Pakistan, Former Professor of Economics at Johns Hopkins University, USA
He started his presentation with raising different questions such as what is the role of money, within a society?
What is the role of money within a capitalist society?
How does crypto currency work within a capitalist society?
How should Muslims, living within a capitalist society, deal with crypto currencies?
What is role of money in an Islamic Society?
How would crypto work within an Islamic Society?
Then he answered Crypto currency has no role, and would not be permissible within an Islamic Society.
In a capitalist society money is necessary for survival, Competition, Greed and Labor Market requires poverty; moreover, everything is for sale. Money can buy everything and goal of life is to make money. While in an Islamic society money is to make social responsibility, cooperation, generosity; furthermore, human lives are infinitely precious and the most important things are not for sale. Money can only buy secondary goods. The goal of life is success in the Akhira (afterworld), which is achievable without money.
Dr Zaman went on to say that currently, in capitalist world, 90% or more money is created by financial sector. High Finance controls the Western world, while in the third world, financial penetration is lower. 30% of money is created by private banks.
Crypto is an attempt to break stranglehold of the financial sector, but does not deliver power to the people.
The lecturer suggested some way for the Islamic world to:
Create economic and monetary integration (like Europe)
Create common currencies, fluid borders, the “gold” dinar
Use labor backed currencies, or petroleum plus labor, or community-based currencies.
Use the idea of currency as a public resource.
As to this question who should create money? He stressed that in capitalist system, financiers create money and build massive concentration of wealth and power. On the other hand, governments should create money, on behalf of public, but the problem is governments everywhere are corrupt.
Then he offered Public-Private Partnership as an Islamic solution, in which:
Local Communities should create money, backed by public guarantees.
Money creation must be directed at productive activities.
Job Guarantee Program: Everyone enabled to contribute productively to society, and provided with sufficient money for this contribution.
Life-Loans: All babies born should be guaranteed money for health, education, and all basic needs required to become productive citizens.
Finally, Dr. Asad Zaman dealt with three steps of the Ghazali project, which are:
1- Deliverance from Doubt: Build strong faith in Quran, as the source of wisdom, far superior to Western sciences.
2- Incoherence of Western Philosophers: Exposing the false foundations on which Western social sciences have been built.
3- Revival of Religious Sciences: Rebuilding all structures of knowledge on the powerful and deep foundations provided by the Quran and Sunnah.
Dr. Adnan Aziz, Professor of Practice, College of Business
Director, Ajman University Center for Excellence in Islamic Finance (AU-CEIF)
At first the speaker mentioned that what are cryptocurrencies (or Crypto-Assets, as known by others) and Crypto Wallets? Then he answered they are:
Like regular currencies except they are entirely digital.
Like regular currency, each cryptocurrency is merely a collection of numbers and letters (without a physical bill & control of Authorities).
He stated that every physical currency in the world has a unique serial number (identification).
Central banks, other regulated banks and the govt (Authorities) have access to the info behind these numbers (e.g., where and when the currency was printed etc.)
Like regular bank accounts / cards, which we can access using pw/pin etc., we have what we call cryptocurrency wallet to serve like a bank account / card (without being physical).
We don’t need to provide personal info for a crypto wallet, so our personal information is not attached to our crypto wallet – unlike bank accounts / cards .
Any cryptocurrency held in our personal wallet is held directly by us (and not a custodian regular bank) – nobody can shut down our account or block our transaction (but losing access to wallet account means we lose our cryptocurrency as well).
When we deposit funds into our account, Authorities know our identity (through account details) and that of currency (through serial number) – when we deposit cryptos into wallet, Authorities don’t know it.
Instead of Authorities, wallet balances and transaction records are stored across all computers connected to a cryptocurrency network – these records are public and can be viewed by anyone using ‘blockchain explorer’. This is called ‘decentralization’ – a polar opposite of setup of governments and banks.
He said there are thousands of cryptocurrencies, like hundreds of regular currencies.
Two main types of cryptocurrencies are:
Coins (only a few dozen) which are hard to make and are earned by joining a network of computers that process crypto transactions and keep a track / record of related transactions (playing the role of Authorities in a regular currency system).
And Tokens (tens of thousands) which are easy to make and usually can be created in matter of minutes.
Non-Fungible Tokens (NFTs) are the most commonly known types. For example;
USD Coin (USDC) is digital dollars for internet payments & commerce Token – fully backed by redeemable real USD.
PAX Gold (PAXG) is a safe and digital way of owning gold – each PAXG Token is backed by one troy ounce of gold kept in a vault in London (full redeemable).
USDC and PAXG are two of the few examples of fully regulated and audited Token, ensuring secured reliance – most NFTs, however, are just scams (as they are so easy to create).
Dr. Adnan said more common types of crypto assets are:
Cryptocurrency which is specifically designed to be used as a medium of exchange.
Utility Tokens which offer access to benefits, discounts, or services on a blockchain platform – derives the value from usefulness or benefit attached to it.
Security Tokens which entitle particular ownership interests to their holders in an underlying business or an asset.
Governance Token which give their holder the rights to manage and vote on the governance of its respective blockchain platform or project.
Non-Fungible Tokens which are unique and cannot be substituted, subdivided, or interchanged and
Hybrid Tokens which are the most crypto assets.
Regarding investing in crypto the speaker remarked that they are very risky as these are very volatile because nobody knows real worth of these technologies and also leverage trading is even more risky.
Which crypto to invest in depends on time line and risk tolerance.
There are more than 800 funds globally, investing in crypto and blockchain and over 200 new funds have been launched only in last 12 months.
Most of the funds are structured as VCs, followed by HFs – a handful as PE as well. Gibraltar has emerged as one of the friendliest regulator in the world for crypto funds.
Crypto-Assets and Funds Market in UAE
Dr. Aziz mentioned the UAE has built confidence in its jurisdiction through investment in an agile, robust, comprehensive, reliable, and predictable regulatory ecosystem for crypto assets and crypto asset service providers. This is not surprising given UAE’s current chairmanship of the Agile Nations Network (ANN).
The UAE has five regulators for crypto asset activities:
The Central Bank (CBUAE);
The Securities and Commodities Authority (SCA);
The Dubai Virtual Asset Regulatory Authority;
The ADGM Financial Services Regulatory Authority (FSRA);
And the DIFC Dubai Financial Services Authority (DFSA).
Complementing this framework are several MOUs between the SCA and other commercial free zones such as the DMCC and DWTC. These MOUs permit these authorities to license certain crypto asset activities in partnership with the SCA as the regulator.
Crypto-Assets and Funds Market in UAE
The speaker stressed that on February 28, 2022, the Emirate of Dubai enacted Law No. 4 of 2022 on the Regulation of Virtual Assets (“VAL”) and established the Dubai Virtual Assets Regulatory Authority (“VARA”).
By establishing a legal framework for businesses related to virtual assets, including crypto assets and non-fungible tokens (NFTs), this landmark law reflects Dubai’s vision to become one of the leading jurisdictions for entrepreneurs and investors of blockchain technology.
(1) “virtual asset” as a “digital representation of value which can be digitally traded or transferred or used as an exchange or payment tool or for investment purposes” and
(2) “virtual token” as a “digital representation of a group of rights which can be issued and traded digitally through a virtual asset platform (a platform operated by a virtual asset provider licensed by VARA)”.
VAL became effective on March 11, 2022, upon its publication in Dubai’s Official Legal Gazette.
UAE has launched a comprehensive Blockchain Strategy in 2021.
According to the formal figures 50% of government transactions has been conducted through blockchain, since 2021.
Abu Dhabi's Mubadala started investing in crypto ecosystem, as of 2021. A couple of Hedge Funds from UAE (Alphabit Fund and PECUNIO Cryptocurrency Fund, both from Dubai) started investing in crypto assets as early as 2017.
In March 2022, Venture capital firm Cypher Capital announced the launch of one of the region’s biggest seed funds - The $100 million seed fund will focus on investments in blockchain, crypto and other digital asset projects who have genuine value propositions.
According to the latest 2022 YouGov report, two in three UAE residents are interested in investing into cryptocurrencies within the next five years.
The UAE tops global markets in terms of trust in cryptocurrencies, with approximately 40 percent of consumers stating that they trust this digital asset.
Somewhere else in his speech, the lecturer said the Crypto Oasis is a Middle East which focused on Blockchain Ecosystem supported by initiators of Crypto Valley Switzerland – formed in 2021.
Crypto Oasis’ vision is to be one of the leading Blockchain Ecosystems in the world.
Today it is the fastest growing, with more than 1,000 organizations identified in the UAE alone. The forecast is to identify over 1,500 established organizations across the region by the end of 2022.
The organizations that are active in the Blockchain space can be broken down into two different kinds.
Native Blockchain organizations, that have Blockchain technology as their primary focus and reason of origin, and
Non-native Blockchain organizations which offer services or products related to Blockchain but do not have Blockchain as their primary focus. Native organizations account for 53% of the total number and non-native organizations that have adopted Blockchain are 47%.
Islamic View on Crypto-Assets
Since April 2022, Fasset (a digital-asset gateway co-founded by a former adviser to the UAE Prime Minister’s office) has been planning a major expansion in some areas of the Islamic world, as it seeks to boost the adoption of cryptocurrencies in places where it is still viewed with suspicion.
Fasset plans to launch services in Indonesia and Pakistan soon.
There are other serious players looking at it from Shariah perspective too. Whether cryptos are indeed permissible in Shariah, however, continue to be a matter of debate.
“Cryptocurrencies as commodities or digital assets are unlawful for trading because they have elements of uncertainty, wagering and harm,” Asrorun Niam Sholeh, head of religious decrees for the Indonesian council of Islamic scholars, told reporters in November 2021 after issuing a fatwa against using crypto. “It’s like a gambling bet.”
“The Shariah Advisory Council of Malaysia’s Securities Commission (the Council) has advised that it is permissible, in principle, to invest and trade cryptocurrencies on registered exchanges, including Luno.”
Islamic View on Crypto-Assets Funds
In Shariah, anything which can function as measure of value and medium of exchange is money – matter like gold, silver, wheat etc or cryptocurrency (like Bitcoin).
Question is of efficiency which is what Crypto seem to be offering. Moving to a medium of exchange that is less expensive to store and not perishable. Moving to a medium of exchange that has limited supply (price stability) and minimal value in use (value in exchange will be value of what is it being exchanged with).
Shariah does not tell what medium of exchange should be used – it is left to peoples’ acceptance and trust.
Only relevant Sharia questions are:
(1) Can we to own and invest in crypto?
Yes if crypto can qualify as Maal / property which is if
(i) It has use?
(ii) Its use is halal?
(iii) Can be stored and owned?
Since crypto is fungible, all rules of Riba will apply – exchange in equal quantity (spot or deferred)
(2) Can we adopt it as a legal tender as decentralized?
If Govt adopts, then view is easy and that of acceptance, but if Govt does not, then an element of excessive speculation may lead to gambling. Permissibility is questionable in that case.
Islamic View on Crypto-Assets
Finally she said every crypto project or token warrants a separate shariah analysis because they are not the same. They differ in their objectives, features, technology, underlying projects/assets/utilities, issuance, usage, distribution, burning mechanisms, etc.
Shariah has strict guidelines for a currency in terms of its issuance and exchange. If cryptos do not fit in the shariah framework of currency or those guidelines are not properly followed, it is difficult for the scholars to declare them shariah compliant.
Hence, one should look at each crypto asset on its own to determine its Shariah legitimacy:
System Design: Blockchain protocols could be have impermissible elements (like excessive uncertainty and interest)
Main Legal Contracts: contracts forming transactional framework can have Shariah issues
Underlying: underlying reference asset (business, commodity, service etc.) needs to be compliant
Other: There may be other issues of concern specific to every crypto asset type
Investing in Crypto-Assets Funds is subject to stated Shariah guidelines for underlying crypto-assets and usual guidelines on how to structure the VC/HF/PE Funds itself.
Dr. Ziyaad Mahomed, Assistant Professor, INCEIF University, International Shariah Advisor
In the beginning of his lecture he talked about Shari’ah approach to transactions and technology, mentioning it is based on Preventing Harm & Doing Good that is removal of corruption (dar´ al-mafasid) and acquisition of good (jalb al-masalih) is the premise of the Shariah.
General Permissibility In transactions that is everything is permissible unless specifically prohibited.
Public Benefit (Maslaha) that is all concerns that promote the subsistence of human life, the completion of man's livelihood and the acquisition of all his physical and intellectual qualities which are required for him.
Shari’ah, Algorithms & Dynamism: Islamic Jurisprudence is multi-layered, with static and dynamic aspects.
Permissibility on contemporary issues are determined using an algorithmic decision-making process Shari’ah works with civil law and regulations, as long as there is no clear contradiction and judgment is based on the proper knowledge and understanding of the issue.
Then he talked about Shari’ah analysis on the technology, going on to say that Preventing Harm & Doing Good in this area means to reduces potential for corruption and ensure funds are disbursed for what they were intended for.
Generally Permissible means do not violate any of the prohibitions (riba, gharar, maysir, etc)
Maslahah approach here means Blockchain enhances transparency & protects privacy at the same time and also enhances efficiency and potentially reduces transactional costs. One the other hand this technology can be used by unscrupulous individuals for evasion and money laundering.
Shariah Considerations in this approach means technology may be beneficial or destructive, based on the objectives of the user and it can block the means to something that easily leads to evil.
Regarding the classification of cryptocurrencies based on their purposes, Dr. Mohamed mentioned they are as follows:
Payment Coins: Value is based on community acceptance: Bitcoin
Utility Coins: Future utility, access to services based on blockchain
Capital Market Coins: For Capital market purposes, raising equity, pre-financing, share in future earnings
Stablecoins: Backed or indexed by fiat currency, oil, gold, etc.
CBDCs: Central Bank Digital Coins
Then he raised this question; what is the Islamic perspective on Crypto Assets?
There are 3 dimensions that most Shariah verdicts have considered:
The nature of the underlying instrument: Is Cryptocurrency Maal (wealth)
Asset, Security, Commodity, Currency .
Passing the Shari’ah filter of permissibility
The view of the Maqasid al Shariah (objectives of the Shariah)
To define its nature as maal, it would need to fulfil the following attributes:
Having commercial value
Capable of being owned and possessed;
Ownership must be transferrable;
Capable of being stored;
Beneficial/valuable in the Shariah.
The lecturer as to the opinion of the shariah scholars in Indonesia said cryptocurrency ruled unlawful by Indonesian Ulama Council and digital assets are prohibited for trading. They are allowed in case of sil’ah that is (tradable commodity) with underlying assets that have identifiable benefits.
Malaysia’s view regarding cryptocurrencies is an illegal tender due to high cyber-security risks, volatility.
Shariah Advisory Council of Securities Commission Malaysia has approved Tokenize Technology as Shariah Compliant. The digital coin of the Central Bank of Malaysia is under test in the name of Dunbar project.
On the whole, RM21 billion in digital assets trade took place in Malaysia in 2021.
Somewhere else he touched upon some issues in crypto assets, dealing with them as follows:
Preventing harm from abuse of technology: Can be used for both good and bad.
Intrinsic Value: It is much debated, but it is shown to be based on istilah (social concurrence) rather than intrinsic value.
Underlying Asset: If it isn’t currency, then it should have an underlying commodity. Stablecoins are linked, but this is a single category.
Gharar (Uncertainty, and excessive Speculation): Uncertain value and trade is based on sentiment, risk and danger.
Impact on Maqasid: Potential for economic instability.
Finally Dr. Ziyaad Mohamed recommended an approach to Shariah analysis of crypto as follows:
Generally permissible: If they do not violate any of the prohibitions (riba,)
Classification: They should be based on legal underpinnings, not blanket fatwa.
Econometric analysis: Data analytics should be integrated to determine riskiness of these assets based on their unique profile.