While Islamic scholars have long struggled with the question of whether cryptocurrency is halal, what if it is really not allowed?
Islam has strict rules regarding finance and historically defines currencies as goods with intrinsic value – including gold, silver and salt. Waseem Mamlouk of DeFi platform Nimbus argues that government-issued fiat currencies have no intrinsic value and are incompatible with a careful interpretation of Sharia law. This would be a problem for the burgeoning Islamic financial industry, which aims to generate financial income in accordance with religious law.
“Mined cryptocurrencies have an intrinsic value because they cost a certain amount to be produced – but fiat currencies that are digitally printed on a balance sheet have no intrinsic value.”
Mamlouk sees cryptocurrencies as a viable alternative. As Vice President of Capital Markets at Nimbus, Mamlouk is working to have parts of the company certified as Sharia-compliant to delve into the growing pool of investors who want their investments to conform to their religious beliefs. While this would certainly be profitable, Mamlouk also sees Islamic finance as a way to encourage responsible long-term investing.
Mamlouk’s claim that fiat money has no intrinsic value is certainly controversial and would have a huge impact on the Islamic financial industry if his assessment were more widely accepted. In fact, he says Fiat is not halal. He is not the first to question the possible incompatibility of fiat with Islamic finance, as there has long been an academic discussion about the desire to return to a gold standard – like in the days of classical Byzantium.
“So if we immediately start talking about someone making dollar-denominated Sharia-compliant funds, it doesn’t make sense to begin with. With mined cryptos, however, it actually makes sense. “
I was honored to be part of the panel discussions on Challenger Banks & FinTech Disruptions at the 1st International Islamic Fintech Summit 2019 hosted by @ashurst London. Great ideas / opportunities for FinTech and crypto in Islamic finance. pic.twitter.com/oJKi4eKaSo
– Dr. Kingsley Udofa (@DrKUdofa) February 15, 2019
Mamlouk believes that cryptocurrencies are key to better implementing Islamic banking. In short, this relates to financial and banking practices in line with Islamic religious doctrine. The central point of these religious teachings is prohibition riba, generally equated with usury – or interest.
Since interest makes up a large part of the current DeFi landscape, Islamic DeFi, which must not include interest, requires tailor-made solutions. In the Islamic banking industry, Mamlouk explains that banking fees sometimes replace income that would otherwise come from interest, but he’s not a fan.
“Banks like to play with people with different words and concepts. “We will charge you fees, but we will not charge you any interest” – we know what that is. “
Islamic economics includes a broad idea that money must be made through fair and legitimate work, rather than through unfair exploitation, often compared to labor theory. For the same reason, the money received for work must have real and intrinsic value.
Though there are no exact numbers The economist has estimated that Islamic Finance is $ 2 trillion a year and will “reach $ 3.69 trillion in 2024” according to Gulf Business. Given that the world population of Muslims is set to “increase by 70% – from 1.8 billion in 2015 to nearly 3 billion in 2060,” according to the Pew Research Center, financial services that cater to Islamic sensitivities are certain to continue Attract capital.
Although Islamic finance has been around much longer, it is an unlikely brother of the cryptocurrency industry. Both are fast-growing financial industries – each controlling about 1% of global wealth – and are hoping for a much larger share in the years to come.
What are the rules
Much of the rules of the Islamic banking center revolve around the concept of riba, generally understood as usury. This makes it possible to pay interest or to earn haramwhich means forbidden. “You don’t get interest on any amount of money you deposit,” says Mamlouk.
In his opinion, there is a ban on selling things you don’t own, which means short selling, derivatives and possibly even day trading stocks are off the table, as stocks usually don’t settle until the end of each business day, and you can end up with stocks Resell them before they even “receive” them. At least in terms of custody, the immediate settlement of swaps in the cryptocurrency market could well be an answer.
While many crypto traders would be appalled to limit themselves to multi-day spot trades instead of high-margin day trading, Mamlouk doesn’t feel like he’s missing out. “I’ve never done any of these personally, and you know, I’m still alive here – it’s not that hard to follow the rules,” he says with a friendly laugh.
Gambling Known As maisir, is also prohibited. This is in part because it means making money by accident rather than through legitimate efforts. A comparable concept bay ’al-gharar, includes any trade that involves excessive, inappropriate risk – that, too, is haram.
Inappropriate risk sounds a lot like cryptocurrency, especially in the early days. Dogecoin, a speculation and memes-based cryptocurrency, seems to suit the description of gambling or excessive risk. Is Dogecoin haram? Mamlouk reckons with it and cautiously argues that it has “no project” and “that is pure speculation”. That’s a no to Doge von Mamlouk (but the jury is still pending).
Another important aspect of Islamic finance, according to Mamlouk, is to ensure that Sharia-compliant funds do not mix with non-compliant funds. This is a very difficult question for the modern financial system as banks contain money from many different sources.
“That could be blood money – that could be an arms dealer’s money that is in a foreign bank,” whereby the bank officials have no way of knowing where their customers’ money really comes from and are therefore unable to tell other customers Communicate that the money is coming from legitimate and permitted sources in bank balance.
Cryptocurrencies are key to fixing many of these issues, Mamlouk believes. Above all, this includes the inherent traceability of many cryptocurrencies and the fact that newly mined or minted coins with a verifiable family tree – and thus a moral purity – can be mined or acquired that are absolutely detectable.
The rigorous approach of Islamic finance could only provide the counterbalance that opens the doors to a billion Muslims around the world to participate in the blockchain revolution.
Mamlouk was born in DC, USA, but grew up in the Kingdom of Saudi Arabia, where his father worked for the state-owned oil company Saudi Aramco. He describes the environment in which he grew up and in which he still lives today as a highly “intellectual, international community”. When he was young, he remembers being taken to a supercomputer, one of only three in the world at the time. The experience stayed with him and led to his interest in technology, crypto and financial solutions.
He returned to his hometown of DC to study business law at American University, where he graduated in 1994 and embarked on a career in financial IT consulting (early fintech) and IT security. Technology and telecommunications companies in the Middle East and around the world.
Back then, he says, there wasn’t really any investment banking in the Middle East. Mamlouk helped found the Atlas Investment Group in Amman, Jordan, and later sold it to Arab Bank, which he calls “the largest bank in the Middle East.” As he progressed in his career, he saw the growing dominance of computers and the Internet, which inspired him to return to the US to study IT at the University of Virginia and his in 1999, the year before the infamous Y2K bug Graduation.
The next goal of Mamlouk is to have some of the Nimbus solutions certified as Sharia-compliant in order to reach a wider range of users. Currently based in Malta, Nimbus is a DAO controlled platform that gives users access to a range of DApps that open the door to various potential sources of income including crypto staking, trading and lending, among others.
How is a financial company certified as Sharia Compliant?
Neither the process nor the requirements are standardized, as Islam, for example, is not a centralized religion in the sense of Catholicism. Instead, each country – for example Pakistan, Iran, Malaysia and the member states of the Gulf Cooperation Council – will have their own systems and procedures.
These systems can differ, as demonstrated by the Malaysian Shariah Advisory Council, which praises the “great potential” of crypto. While others, including the Grand Mufti of Egypt and the Fatwa Center of Palestine, have previously declared cryptocurrencies to be haram.
Mamlouk has his sights set on either Saudi Arabia or Bahrain, which he believes have largely interchangeable regulations. Bahrain, whose central bank recently licensed a Sharia-compliant crypto exchange, is a bit more nimble. It is planned to submit a proposal to a local Sharia council.
“This advice has to look at different aspects – basically an exam,” explains Mamlouk. Then they can make a decision or “give you specific indications” of what needs to be changed in order to be approved. After a successful audit by a Shari’ah Council that reviews the proposed practices, a project can be declared Sharia-compliant.
“We look forward to it being blessed, but we don’t look forward to having a Sharia council because it’s a burden … for us it’s more about social responsibility.”
From Mamlouk’s point of view, the guidelines surrounding Islamic finance can be more than the rules of any particular religion. This is because they generally promote responsible practices that discourage inappropriate risk while emphasizing transparency and honesty.
“It’s a responsible investment and realistic,” he says of the method.
The idea of Sharia councils approving business practices and investment vehicles is fascinating and could foster fascinating collaboration between fintech innovators and religious scholars.
This could point to a future in which Sharia councils will examine all types of cryptocurrency projects, tokens and smart contracts before issuing opinions on their appropriateness for Muslim investors. Mamlouk agrees and says that there is a huge opportunity for all types of rating and ranking services because “we don’t get any of it”.
As for the DeFi industry as a whole, Mamlouk is mega bullish. He sees a worldwide increase in acceptance in the coming years.
“There is no way DeFi will grow less than 100% on average over the next five years – exactly one year – and it will intensify. After these five years people will look at it and say, ‘Wow, how did I not see this coming’. “