IFN Correspondent Report: Islamic fintechs focusing on investments into crypto assets
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Islamic financial institutions have long-recognized the concept of a value-based financial market. There has indeed been much debate amongst scholars as to whether cryptocurrencies comply with the tenets of Shariah, centring largely on the risk and volatility of holding such assets. As both Islamic and conventional financial services companies begin to face increasing pressure from stakeholders and investors to satisfy their environmental, social and governance (ESG) goals, however, environmental considerations are likely to be brought into sharper focus. This means that until more sustainable methods of mining crypto assets are adopted, the true potential of cryptocurrency to act as security or a mainstream payment option will be stifled.
Central bank digital currencies (CBDCs) offer an alternative to cryptocurrencies. Unlike cryptocurrencies, CBDCs are centralized and issued by a central bank. The value of a CBDC is backed by a country’s monetary reserves, therefore reducing price volatility. CBDCs do not require 'proof of work' to be established, thereby dispensing with the mining process entirely. This creates an opportunity for governments to structure CBDCs in a way which is more sustainable than even a cash system, which itself is criticized for producing high levels of CO2.
CBDCs also offer a spectrum of other benefits, such as more efficient cross-border payments. One of the projects to explore this has been Project Aber, an effort by the central banks of Saudi Arabia and the UAE to test the viability of introducing a single dual-issued digital currency which can be used for settlement between the two countries as well as domestically.
The Project confirmed the viability of introducing a cross-border dual issued CBDC, concluding that such a currency could overcome the inefficiencies of interbank payment approaches. Provided that there is sufficient appetite, the currency could be replicated in other Gulf nations to form a common e-currency that is used across the region for c2c and b2b payments across borders.
The future of digital currency innovation, however, looks promising. Last month, IFN reported that crypto-focused start up Fasset Exchange secured US$22 million in Series A funding.
It would be hard to argue that increased levels of interest in Islamic fintech start-ups from both Islamic and conventional investors does not reflect the growing demand to ensure that ESG considerations are taken into account. The values on which Islamic fintech companies base themselves provide the motivation to innovate and develop technologies which provide solutions to the problems restricting widespread adoption of both cryptocurrencies and CBDCs.
Value-based Islamic fintech companies are therefore well placed to position themselves as key drivers behind what is becoming a digital currency revolution.
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