Cryptocurrency and Islamic Finance Combine in the World’s First Shari’ah-Compliant Crypto Exchange
So, cryptocurrency and Islamic finance?
In a meeting of ancient tradition and ultra-modern technology, ADAB Solutions (https://adabsolutions.com/), a financial services firm based in the United Arab Emirates, is combining cryptocurrency and Islamic finance.
By creating the first cryptocurrency exchange compatible with Shari’ah law (https://www.tahawultech.com/industry/financial-services/uae-adap-first-shariah- compliant-crypto-exchange/), it is moving to take a powerful position in two growing markets. But will that move pay off?
The Rise of Islamic Finance
Islamic finance is as old as Islam itself, but its modern form emerged in the latter half of the 20thcentury.
Islamic financial institutions follow Shari’ah – the laws of Islam.
Structurally, the biggest difference from conventional banks is that they don’t charge interest, as usury is forbidden by sharia. Instead, alternative structures of borrowing, lending, and fees are used to support the banks’ work.
In theory, the approach to profit and loss is different from in western banks, though the reality of this varies. Islamic financial institutions also refuse to invest in products and services that break Shari’ah rules, such as gambling, alcohol, and high-risk financial products.
To meet these standards, institutions set up supervisory boards of expert jurists who check that products and services match Shari’ah standards.
Islam is the second most popular religion in the world, making up 24.1% of the global population in 2015 (http://www.pewresearch.org/fact-tank/2017/04/06/why-muslims- are-the-worlds-fastest-growing-religious-group/).
Even with only a minority of that population’s resources, sharia finance was estimated to be worth around $2 trillion in 2016 and expected to rise to $3.4 trillion by the end of 2018 (https://www.islamicfinance.com/2015/05/size-islamic-finance-industry/).
Cryptocurrency Exchanges
The past decade has seen the rise of a very different form of finance – cryptocurrency. Cryptocurrencies are electronic currencies based on blockchain technology.
By removing the need for banking systems and government backing, their designers are trying to create a whole new world of finance. According to the theory, this will give people more control of their personal finances, speed up international transactions, and create greater freedom.
If it’s to last, then cryptocurrency has to tackle issues around processing power and access for the less tech-literate, but its potential has led to a huge rise in the value of cryptocurrencies.
There are a wide range of cryptocurrencies and trade between them is important to the sector.
Much of this happens through specialist exchanges where people buy and sell cryptocurrency tokens, either for other cryptocurrencies or for traditional fiat finance.
These are the hubs through which most cryptocurrency trading is made possible.
Why Combine the Two?
ADAB Solutions has become the first company to combine these two trends, establishing its First Islamic Crypto Exchange (FICE).
Like most crypto projects, FICE is seeking finance by creating its own cryptocurrency tokens.
Such tokens are usually the equivalent of shares in a company but tracked using blockchain.
They can be used to access the company’s services and as a form of currency. A sale of tokens provides the money to get the project off the ground, like in a stock market initial public offering (IPO).
There’s a lot of potential in a Shari’ah crypto exchange.
Looking at the Islamic investment market, it will let ADAB Solutions provide a new service to investors.
Cryptocurrencies get used in a huge range of ways, many of which would not meet Shari’ah standards.
But this exchange could draw the interest of many tech-oriented Islamic investors.
Viewed within the crypto market, this also provides the exchange and ADAB’s tokens with a unique selling point.
There are hundreds of cryptocurrencies vying for attention and investment.
One that promises to tap into otherwise inaccessible Islamic wealth has a stronger than average chance of standing out.
Challenges and Debates
Like any cryptocurrency startup, this exchange will face some distinct challenges. Can it raise enough funding in a crypto market that’s softened since late last year?
Will its product live up to its promise? Will the crypto market, which has only existed for a decade, continue to grow or will it falter and collapse?
But there’s also the question of Shari’ah law.
The rules of maisir and gharar ban Islamic institutions from profiting from speculation and uncertainty.
This tends to rule out investment in derivatives, options, and futures.
Given that the rise of cryptocurrency has been founded upon speculation about its future, and given the huge uncertainties involved in these currencies, might jurists decide that most or even all of the cryptocurrency market is incompatible with Shari’ah?
Traditional financial institutions have only just begun defining the standing of these currencies, creating challenges for the crypto market.
Now ADAB may provide the test case that does the same for Islamic finance. The attempt to combine cryptocurrency with Shari’ah standards is a bold one.
If it succeeds, it could place ADAB and FICE in a hugely profitable position. If it fails, it will be just one more body in the graveyard of failed crypto startups.
With the exchange’s fate dependent upon both capital markets and Islamic jurists, only time will tell how this one goes.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
