Author: Dark Side of the Moon, PANews
Recently, Islamic Coin, a blockchain project that complies with Islamic law, announced that it has received a high investment of US$200 million. Combined with the US$200 million in financing it received in 2022, its total financing amount has reached a record high of US$400 million. The project has also been actively promoted to Islamic regions such as the UAE, and a large number of advertisements have been placed to Twitter users. According to the official website, the project's consultants include several royal family members of Abu Dhabi and Dubai, as well as Islamic finance experts.
Islamic Coin is built on the Haqq blockchain, and due to its adherence to Islamic financial principles, it cannot use conventional means such as interest, but will invest 10% of the token issuance into Evergreen DAO to support Islamic charities. Although the Haqq blockchain does not require halal projects to be used, it must comply with Islamic guidelines and be voted by the community to obtain the certification mark.
What are the Islamic financial laws emphasized by Islamic Coin, and how are they different from contemporary financial laws? This article will briefly introduce some knowledge related to Islamic finance to help readers and entrepreneurs explore the possibility of following Islamic laws in the field of cryptocurrency.
Prohibit interest, allow investment and profit sharing
Before entering into the definition and discussion of Islamic finance, we first lay the foundation for the relevant knowledge of Islam and Islamic law, and finally go into Islamic finance. Islam is widely distributed throughout the world. As of 2020, there are about 1.9 billion Muslims (Muslim believers) in the world, accounting for 25% of the world's population.
There are two major Muslim sects. The most mainstream is Sunni, which accounts for 70%-80% of the total, represented by countries such as Saudi Arabia, while the smaller number is called Shia, which accounts for 10%-15% of the total, represented by Iran. In addition to these two major sects, there are some smaller religions, such as the Ibadism represented by Oman, which is currently the third largest sect. But in fact, there are many small sects, and even within Sunni and Shia, more refined sects can be divided. For example, Saudi Arabia actually believes in the Wahhabi sect of Sunni, which is the mandatory belief of all royal family members and is also the state religion of Saudi Arabia.
In addition to following the Koran, these sects do not actually agree on specific religious laws. For example, Islamic Coin claims to be in compliance with Islamic law. In fact, Islamic law can also be understood as Sharia, which is closer to what we call "law" rather than more specific sub-concepts such as criminal law and civil law.
Since there is no complete consistency between Islam and so-called Islamic law, major Islamic countries around the world will engage in some degree of consultation to determine a financial standard that can be used universally within Islam.
Islamic finance, in a narrow sense, refers to banks as the main body, and its main feature is to operate in accordance with Islamic law. Muslim countries have both Islamic banks and modern banks in Europe and the United States. For example, Dubai has Dubai Islamic Bank and HSBC.
In addition, Islamic bonds, Islamic insurance and Islamic funds are also developing, but their scale is obviously smaller than Islamic banks. It should be noted here that the sovereign wealth funds of oil-rich countries in the Middle East are completely Western in operation and cannot be included in the Islamic financial system just because of their large scale.
According to Shariah principles, all Islamic finance products have the following similarities:
Interest is absolutely prohibited. Even if you deposit money in an Islamic bank, you cannot earn any income in the name of interest.
Profit-sharing mechanism. Unlike its aversion to interest, Islamic finance allows for the earning of income through investment.
Mainly physical assets. Financial products need to be based on physical assets, so gold is the most popular investment product.
Speculation is strictly prohibited. This mainly targets gambling, options, derivatives, etc.
Sharia law is the basic principle. However, in reality, since Sharia law itself lacks consensus and standards, it needs to be established in practice.
The current situation of Islamic financial market, Crypto begins to penetrate
In practice, gold trading has formed a broad consensus and standard, which is also the hottest target for Muslim investment around the world. The AAOIFI Shariah Gold Standard was issued in 2016 and was jointly formulated by the World Gold Council and AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions). The standard has the following five most important principles:
Gold must be traded in spot (hand-to-hand) transactions;
Gold holdings may be in physical or constructive form;
In the case of constructive holding, the gold must be fully distributed;
Allocations can be made via T+0 settlement or receipt of a certificate/confirmation of ownership of a specified bar;
Joint ownership is permitted, meaning each partner has an undivided beneficial interest in the trust.
And the standard has been recognized by the Islamic Fiqh Council, a body composed of 20 scholars from various countries around the world, which indicates that the standard has a fairly high level in theory.
In addition to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) mentioned above, other international standard-setting organizations for Islamic finance include the Islamic Financial Services Board (IFSB) and the International Institute for Islamic Financial Markets (IIFM).
Current Islamic financial practices are highly concentrated in the banking industry, and it is difficult to say that there are truly successful products in the practice of cryptocurrency. However, like other financial products, as long as they comply with Islamic law, it means that the market is huge.
From the perspective of sub-sector classification, Islamic finance can be divided into Islamic banking, Islamic insurance, Islamic bonds, Islamic funds and other Islamic financial institutions (OIFIs), such as cryptocurrencies.
In terms of market value and scale, there are two imbalances. The first is that Islamic finance is mainly concentrated in the banking industry, with a total value of about 2 trillion, accounting for nearly 70%, while other parts account for a very small proportion; the second is that Islamic banking only accounts for about 6% of the global banking market share.
This is mainly because Islamic banks cannot attract depositors' assets with high interest rates, nor can they engage in speculative activities or enter the derivatives market. Although this limits their importance in the global banking industry, it also brings extremely high security. The main investment targets of the Islamic banking industry are tangible assets such as real estate and leases, and they have strong pressure-bearing capacity.
And geographically, due to the oil wealth effect of the Gulf countries, the six GCC countries (GCC, Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman, and Bahrain) are also the region with the largest share of assets, but their population accounts for a low proportion in the Islamic world, and the scale of 35 million is basically contracted by Saudi Arabia.
As of 2019, GCC Islamic finance assets reached US$1,253 billion, accounting for 44% of total assets, followed by the rest of the Middle East and North Africa (MENA) with a total of US$755 billion, accounting for 26.3%, Southeast Asia with 24% (Malaysia and Indonesia), and Europe, Asia, America and Africa with very small proportions.
Outside of traditional Islamic finance, various new fintech products, including cryptocurrencies, are also gradually penetrating into the Muslim world. In principle, most of these innovations belong to other Islamic financial institutions (OIFIs), while currencies or behaviors such as Bitcoin and cryptocurrency trading have been thriving amid crackdowns.
If it goes smoothly, Islamic Coin will be the first cryptocurrency issued in compliance with Islamic law. As a blockchain that claims to have raised $400 million, its price is completely determined by the market to comply with Islamic law and can be used by Muslims around the world. This is also good for the cryptocurrency market, which is currently in urgent need of expanding its user base.
It should be noted that blockchain projects do not have to fully comply with Sharia to operate in the Islamic world. Taking Ripple as an example, the Saudi Arabian Monetary Authority (SAMA) is also actively connecting with it, and commercial banks in the country are also participating in the Ripple enterprise network to explore use scenarios in cross-border remittances.
In addition, Dubai is also actively attracting various cryptocurrency companies to settle in. For example, Binance has already opened an office in Dubai.
Conclusion
Islamic Coin attracts market attention with its dual selling points of high financing and compliance with Islamic law. Taking this opportunity, this article is dedicated to introducing relevant knowledge of Islamic finance to Chinese readers. At least as far as the wealthy countries in the Middle East are concerned, their attitude towards blockchain is not completely closed and prohibited. They are more examining the opportunities therein. Even if it is not fully compliant with Islamic law, they can also look for cooperation points in other areas.
