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IFN Correspondent Report: Islamic Fintech
This article was first published in IFN Volume 18 Issue 13 dated 31st March 2021
The surge in the value of bitcoin over US$50,000 and high-profile investors such as Elon Musk acquiring US$1.5 billion in Bitcoin has pushed the cryptocurrencies back to front page news. Cryptocurrencies are a sub-set of digital currencies, which are money or money like assets stored and exchanged on a digital system.
Whilst bitcoin is most likely the most well know cryptocurrency it is not the only one available in the market for investors. Cryptocurrencies such as bitcoin, altcoin or litecoin are examples of decentralized digital currencies and the value of these currencies will fluctuate depending on supply and demand or the cost of mining more tokens.
On the other hand, stablecoins such as Tether and Paxos Standard are cryptocurrencies whose value is pegged either to a government backed currency or to commodities. Since stablecoins are asset backed, their values fluctuate less than decentralized cryptocurrencies, so long as the underlying asset is safe and is not itself subject to speculation.
Whether bitcoin or other cryptocurrencies are Halal or haram has been hotly debated by various scholars. There is no common consensus amongst scholars on the Shariah compliance of cryptocurrencies. Blossom Finance, an Islamic finance fintech launched in Indonesia is the first fintech platform that allows Muslims who hold assets in cryptocurrencies like bitcoin to pay their annual Zakat using cryptocurrencies.
As investment in cryptocurrencies becomes more mainstream, I expect that in the future there will be other Islamic finance fintechs that will provide a similar service to Blossom Finance. One issue with making Zakat payments using cryptocurrencies is that the recipient must have the technology and know how to convert the cryptocurrency payment into real life money.
A solution to this issue would be if the digital currency was fully convertible to real money and supported by national central banks. Central Bank Digital Currency (CBDC) is electronic money issued by a state and has legal tender status. As of mid-July 2020, according to the Bank of International Settlements, at least 36 central banks have published retail or wholesale CBDC work. Momentum to develop a CBDC is gaining traction in the GCC as well, as the Central Bank of the UAE has joined Project Inthanon-LionRock, a multilateral CBDC initiative alongside the central banks of China, Thailand and the Hong Kong Monetary Authority.
The attraction of CBDC is that it can be held in electronic wallets outside of the traditional banking system since it is akin to cash. It offers an alternative method of payment to the recipient and, unlike cryptocurrencies, the recipient does not need to have the software in place to convert the payment into real money.
Financial inclusion is one of the key drivers behind the development of CBDCs. Now that more of the population is likely to have a smartphone than a bank account, a retail CBDC provides the relatively large share of the global population without a bank account (of which Muslims represent a not insignificant number) an alternative option to making secure cash-like payments. It also opens up another secure avenue for them to make Zakat payments to their intended recipients.
Lingxi Wang is the senior associate at Foot Anstey. He can be contacted at [email protected].