







The cryptocurrency industry faces regulatory scrutiny around the world. But in countries with large Muslim populations such as Saudi Arabia and Indonesia, Shariah compliance adds another layer of complexity. Islamic laws ban interest-based asset classes and prohibit investments in financial instruments that are based on speculation. That puts cryptocurrencies in a gray area.





But as the first cases of Shariah-compliant cryptocurrencies emerge, so do new crypto-related services and products for the Muslim world. And it’s far from a niche market: the global Islamic economy is projected to hit US$3 trillion by 2021.





"I am always on the lookout for good Shariah-compliant deals to park my money. Decent places that generate decent returns but, most importantly, places that conform to my values and system of belief,” Asfundyar Mufti, a Karachi-based crypto trader, told me.





“When Bitcoin became the talk of the town in 2017, I was very tempted to get my feet wet, yet skeptical about its status,” the 33-year-old said. “It was only later when Bitcoin and other cryptocurrencies were declared [Shariah-compliant] that I finally started to build my crypto portfolio."





Islamic countries' contribution to global gross domestic product (GDP) is significant. In 2016, the 57 countries in the Organisation of Islamic Cooperation made up 15% of global GDP, or US$18.3 trillion, according to calculations based on Purchasing Power Parity (PPP). A major contributor to growth is financial products, thanks to robust interest in Shariah-compliant services among Muslim millennials. It’s also an area that could benefit greatly from disruption, as a shockingly large number of Muslims globally are excluded from formal banking and financial service sectors.





Only 49% of Indonesians—Indonesia is the world’s largest Muslim country by population and GDP—have access to a financial institution. The figure is even lower in Pakistan, where nearly 100 million adults conduct their everyday lives without a bank account. Blockchain technology could solve pain points and barriers to financial inclusion, including cost, documentation requirements, and religious factors.





“Due to legal boundaries set by Islamic principles of banking and businesses, it is very costly and laborious to form agreements among various parties,” says Dr. Zeeshan Usmani, a Los Angeles-based blockchain consultant and former visiting professor at the University of Massachusetts.





“Moving everything onto blockchain-based smart contracts would save time, resources, and simplify the process of Islamic banking manyfold,” he explains. Specifically, settlement tokens or centralized cryptocurrencies pegged to respective fiat currencies could be used to improve remittances — an enormous business in Muslim countries. Saudi Arabia alone witnessed nearly US$40 billion of outward remittances in 2016, making it the second-largest source of outward remittances in the world after the United States.





The debate about whether Bitcoin is technically permissible under strict tenets of Islamic law first emerged towards the end of 2017, as a surge in cryptocurrency prices caught the attention of investors across the Muslim world.





Traditional Islamic scholars, most of them untrained in the complexities of global finance and unnerved by Bitcoin’s history of facilitating deals on the Dark Web, have weighed in on the debate. Late last year, one declared the virtual currency to be at odds with Islamic law due to its “ambiguous nature” and the “anonymity it provided to criminals.”





For Islamic banks and financial institutions to get onboard with crypto, they need to be assured that they won’t run afoul of their own compliance requirements. Religiously-inclined members of the public also want to be told that such activity is not a sin.





To smooth over skeptical Muslim governments, particularly in the wealthier Gulf countries, entrepreneurs have launched gold-denominated cryptocurrencies such as OneGram, as Shariah-compliant banks prefer to judge economic activity based on physical assets.





Companies like OneGram claim that their digital assets conform to Shariah tenets as the value of the currency is pegged to physical gold in a vault. Malaysia’s HelloGold, which allows users to buy units of gold from as little as 1 MYR (US$0.25), recently closed its own initial coin offering, or token crowdsale, and says its core product is completely Shariah-compliant.





Robin Lee, CEO of HelloGold, believes blockchain-based platforms such as his own are a key component in bringing financial products to the underbanked and underserved. He says part of their product roadmap is to leverage small mom-and-pop stores to act as “virtual agents,” particularly in areas where banking infrastructure is non-existent.





“If someone were to come [into your store] with a mobile phone and cash, they would give you the cash and you would transfer the products and services on your app to them,” explains Lee. For instance, a customer could go to a brick-and-mortar shop and exchange US$10 for the equivalent amount in gold.





In addition to gold-backed crypto firms, more general blockchain infrastructure startups are also starting to get certified. In July, Stellar, a prominent California-based blockchain startup, received certification from Islamic scholars, opening the doors for Shariah-compliant blockchain apps solving problems in finance to build on top of the framework.





“We have been looking to work with companies that facilitate remittances, including in the United Arab Emirates, Saudi Arabia, and Bahrain. It’s a huge market,” said Lisa Nestor, director of partnership at Stellar, in an interview with Reuters.





Beyond gold





For now, certifying as Shariah-compliant is more of a proactive defense measure than a necessity. Rather than risk an outright ban by right-leaning governments in Saudi Arabia, Kuwait, and Bahrain, savvy entrepreneurs have earned the trust of regulators by working within Islamic principles.





It’s too early to say whether crypto products are gaining in acceptance in the wealthy parts of the Muslim world, but there’s clear potential: Islamic financing accounts for over 30 percent of banking activity in Saudi Arabia and 20 percent in other Gulf countries. Blockchain could also dramatically increase financial inclusion in the Muslim world.





Such countries are also host to a large number of expatriate workers from Muslim-majority countries like Bangladesh, Pakistan, Indonesia, Yemen, Sudan, and other parts of Africa. Their families back home rely on the income that such workers remit. This is an area where blockchain companies are already starting to make a difference, with cost savings as high as 75 percent compared to traditional channels. These payments are also faster than wire transfers, and arrive in hours as opposed to days.





This doesn’t mean investors in the Muslim world are only swayed by products that are certified to conform with Islamic principles. Saudi Arabia’s sovereign wealth fund is also an investor in venture capital outlays like Softbank’s Vision Fund, which certainly doesn’t limit its investments to only Shariah-compliant companies. But as crypto products are new, it makes sense for entrepreneurs to err on the side of caution.





Dr. Usmani explains that cryptocurrencies are based on consensus algorithms, unlike fiat currencies which are influenced by central bank interest rates.





“Making cryptocurrencies Shariah-compliant will open the whole market of Islamic finance to crypto assets,” Dr. Usmani says. “Islamic finance is and should be crypto's home ground as there is much in common. The philosophy behind crypto assets is [closer] to Islam than any other religion."





Osman Husain is a journalist based in Islamabad.