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This article was first published in IFN Volume 19 Issue 5 dated 2 February 2022.
Happy New Year! In my first article of 2022, I would like to share two fintech products that I believe will play an important role in Islamic fintech in this upcoming year: non-fungible tokens (NFTs) and peer-to-peer (P2P) investment.
An NFT is data that is stored on a blockchain that records ownership and authenticity, which may be traded or sold by their owners. The fundamental difference between an NFT and cryptocurrency is that an NFT is unique and not interchangeable. An NFT can be associated with an underlying asset that can be either physical or digital.
The most common NFTs currently being created and traded are artworks or collectibles. An NFT does not contain the underlying asset to which it is associated. Rather, it is merely a data entry which includes, among other information, a description of the asset, the name of the NFT and the contact details of the owner.
Ownership of an NFT does not automatically confer full rights to an asset onto the purchaser. Using the example of digital artwork, the owner of an NFT is not entitled to the intellectual property rights in the image to which their NFT is associated.
Any third party can copy or view the artwork digitally. The artist who created the original artwork is not prohibited from creating more versions of the underlying artwork and trading them.
The Islamic NFT industry is still nascent but growing in the UK and the UAE. It has the potential to provide an alternative marketplace for investment in Islamic art and cultural collectibles. Given that this is still an emerging industry, the Shariah considerations are still being discussed by scholars. Topics of particular interest concern those of ownership, which I have touched on above, and whether NFTs are generating digital scarcity.
P2P investment platforms are a well-established part of the fintech landscape. Their growth gathered steam following the 2008 financial crisis as a way to connect individuals seeking a return on investments and businesses that needed access to financing that was no longer available from conventional banks.
The revenue growth of conventional P2P investment platforms in the UK peaked around the mid-2010s and has since been on the decline. Surprisingly, some of the earliest platforms in this sector such as Zopa have now left the market completely, leaving behind a handful of firms.
One of the reasons given for the decline in P2P platforms in the UK is the growth of alternative fintechs such as digital banks, robo-advisors and cryptocurrency trading that have expanded the options available to individuals.
While the conventional platforms are in decline, more Islamic fintechs are launching Shariah compliant P2P investments, and in my opinion, the immediate future for Islamic P2P investment in the UK is positive. The financing structures that are commonly used in Islamic finance transactions such as Murabahah, Mudarabah and Musharakah are ready made for P2P platforms and suit the risk-sharing aspect of investing in growing businesses. There is a scarcity of Shariah compliant investments available to individuals, so there is an opportunity for new entrants to establish themselves in the market.
If you need any legal advice around this topic, please read more about our expert blockchain lawyers or contact us.
