INTELLIGENT BUSINESS

Islamic crypto-assets and ADGM: an opportunity

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Markets (ADGM) has completed the launch of a new crypto- asset regulatory framework

The new framework is in line with the Abu Dhabi Economic Vision 2030, taking into perspective that the technology is in a continuous state of development within the Financial Services sector.

While ADGM’s regulatory framework for crypto-asset related activities does not address Islamic financial assets directly, the focused scope of regulations covers all relevant aspects such as technology governance, consumer protection, money laundering and financial crime to enable the ongoing debate regarding the Sharia compliance of crypto-assets. 

Historical Progression

In 2009, Bitcoin software was made available to the public for the first time and mining – the process through which new Bitcoins are created and transactions are recorded and verified on the blockchain began – a new concept to establish a non-centralized medium of exchange into the financial world. Various individual efforts have continued over the years in a fluctuating manner leading to some bi-polar reactions globally. While key institutions and individuals have embraced the concept, some negative perceptions and concerns remain. For example, in 2017 Larry Fink, CEO of BlackRock labeled Bitcoins (the world’s first cryptocurrency) as “an index to money laundering”, elaborating on the statement “Bitcoin just shows how much demand for money laundering there is in the world”.

The inception of crypto-assets popularized the creative technology of “Blockchain” at the same time. The technology serves as the distributed ledger that forms a network, which in turn creates the means for transacting and enables the transfer of information and value. An example of the technology’s rich capabilities in enhancing financial transactions could be clearly seen through HSBC’s issuance of a Letter of Credit to Dutch lender ING. This benchmark of a transaction is just a trivial demonstration of the potential carried within the innovation capable of reducing turnaround time and cutting costs.

Cryptocurrencies and Sharia Compliance

In line with the somewhat “neophobic” approach towards cryptocurrencies, some Sharia scholars have also viewed the technology with similar skepticism. One of the initial opinions by Shaikh Shawki Allam (Grand Mufti of Egypt) deemed crypto-assets to be “prohibited” while other bodies such as the Turkish Religious Authority associated cryptocurrencies with Gharar (Contractual Uncertainty) where the speculation based approach does not match the Sharia guidelines. The UK-based scholar Shaykh Dr. Haitham Al Haddad justified his own “prohibition” opinion with the lack of legal control and asset-backing of the contemporary medium of exchange.

On the other hand, several scholars view cryptocurrencies from a different perspective; going back to the fundamental definition of Mal (Property) where it meets the minimum credentials such as store of value, unit of account and medium of exchange. In addition, the presence of authority recognition, essentially translating into the absence of any legal objection is considered a crucial condition for Sharia compliance, based on opinions by leading subject matter experts such as Shaykh Dr. Mohamed Ali Elgari and on an institutional level; The Fatwa Center of South African Islamic seminary.

ADGM’s crypto-asset regulatory framework: an opportunity for Islamic Finance

At a first glance, the framework refers to the general definition of the activities under “Spot Crypto Asset Framework”, this carries a comforting value from a Sharia perspective, where the clause is comprehensive of Exchange, Custodian and Intermediation activities.  This tackles one of the initial obstacles associated with the approval of cryptocurrencies by the guiding scholars.

Another opportunity that may be discovered, is in asset-backed cryptocurrencies. The Shariyah Review Bureau of Bahrain’s analysis contrasted the similar characteristics of asset-backed crypto-assets to Sukuk (Sharia compliant certificates of ownership – equivalent to the conventional fixed income instruments in terms of structure), as both tools meeting Standard No.18 of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) pertaining to documentary constructive ownership of an underlying asset. This type of crypto-assets can be viewed as an opportunity for ADGM applicants, where hybrid business models of tangible commodities and crypto-currencies can be used to develop a Sharia Compliant offering.

Conclusion

This significant initiative by ADGM can be viewed as a platform to grow Islamic Finance through technological advancement. ADGM is a recognised top MENA Fintech Hub and the UAE is committed to developing as a global hub for Sharia Compliant Financial Services, and through this step, endless opportunities can be capitalized on, leading to overall prosperity of this role model of an economy in the UAE as well as more widely globally.

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