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Startups eye crypto in Islamic world

Companies aim to offer Islamic services as crypto takes hold in the Middle East and developing world
People pass by a cryptocurrency exchange branch near the Grand Bazaar in Istanbul, on 20 October 2021 (AFP)

Ibrahim Alkurd still remembers the day he heard of Bitcoin. "The first thing I did was go on google and ask: is bitcoin Halal?"

Almost a decade later, the 25-year-old entrepreneur, who has founded a slew of VC funds, including one focused on digital assets and another on halal oriented startups, struggles to find crypto investments that fit with his Islamic faith.

"It's not as if you have 50 projects to pick from," Alkurd told Middle East Eye. "The amount of companies out there is limited, and when you look at good ones, it's very limited."

'Islamic finance is a $3 trillion industry. We figure if we can get 1 percent of that market, it's $30bn'

- Khalid Howladar, Marhaba De-Fi

Cryptocurrencies have surged in popularity. Today they have a total valuation of $1.2 trillion globally, according to CoinMarketCap.

As digital assets go mainstream, Muslims have entered the market. Like other investors, they face volatility and wild price swings, but many also have added religious concerns.

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Islam sets strict guidelines on finance, the most well-known perhaps being a prohibition on interest. A $3 trillion finance industry that relies on the rulings of Sharia scholars and religious experts exists to serve practising Muslims. While traditional banking has functioned in the system for centuries, cryptocurrency is a relatively new arrival.

"Cryptocurrency is still an area of debate from a Sharia perspective," Mazin Khalil, associate director for financial services and Islamic finance at Grant Thorton, in Abu Dhabi, told MEE.

There is no central authority in Islam to declare whether cryptocurrency is halal or haram.

Khalil says sceptics perceive it as a virtual activity. Traditionally, even fiat currency like the US dollar would be considered haram since it's not linked to a tangible asset like gold, though most mainstream Islamic scholars have moved past this barrier.

He also said the "excessive uncertainty" in crypto prices could be interpreted as a form of gambling.

Despite lingering uncertainty by some, cryptocurrency has gained traction with investors like Alkurd and is expanding in the wider Muslim world.

In 2021, Pakistan ranked third globally in the adoption of cryptocurrencies. India, with a 15 percent Muslim population was second, and Nigeria, where half the country follows Islam, ranked sixth.

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"At this point, the cat is out of the bag, huge swaths of the Muslim population are using crypto," Ibrahim Khan, the co-founder of IslamicFinanceGuru, a platform focused on halal investing, told MEE.

lslamicFinanceGuru maintains a running list of halal digital assets, which Khan says has become a "key conduit" for the Islamic crypto world.

"Products that are considered halal definitely have an edge with Muslim investors," he said. 

The company consults with sharia scholars and determines whether a token is tied to haram activity like interest or alcohol. It provides analysis on its decisions and shares if lslamicFinanceGuru's own fund holds the asset. Recognisable names like Bitcoin, Ethereum, and Tether are all considered halal.

"There is a desire amongst Muslim crypto investors to have a halal option, or at least have products informed by Islamic principles," Khan said.

'Most halal things ever'

In that space, a small but ambitious number of startups have sensed an opportunity, and they are going beyond merely screening tokens. One such firm is Marhaba De-Fi, which launched in December 2021 and bills itself as the world’s first halal decentralised financial ecosystem.

Decentralised finance is a blockchain-based alternative to the traditional financial system that allows users to borrow, lend and trade cryptocurrency without an intermediary like a bank or broker. Investors have the potential to generate returns on their digital assets outside of appreciation, but also risk losses.

Khalid Howladar, Dubai-based chairman of Marhaba De-Fi, told MEE the company sees huge demand among millennial and Gen Z Muslim crypto investors for its halal products. 

"This new generation is socially conscious and mindful. Instead of an ESG badge, I think what we see are young Muslims expressing their ethics through their religion," he said.

'Crypto is a product really designed for emerging markets, and many of them are located in the Islamic world'

- Daniel Ahmed, Fasset 

For Howladar, Marhaba's mission goes further than simply offering a halal product. He worked in the world of traditional finance for over two decades and had a ringside seat to the financial crisis that left an impression of the dangers of fiat money and interest rates. 

This summer Marhaba will launch a halal staking mechanism. "Staking" is a process in which participants lock up their coins to support a currency’s blockchain and verify transactions. The move boosts the value of the currency and in exchange, participants are paid with new coins.

Some forms of staking generate interest. This is forbidden according to Islamic finance and is screened from the platform. But Howladar said putting one's assets to work to create new value and earn a return is "one of the most halal things ever" and Marhaba wants to give that option to users. Islamic finance relies heavily on profit sharing.

The company already has a Sahal Wallet with cryptocurrencies deemed halal and the entire site is anchored around its own utility token. In the future, Marhaba plans to offer liquidity harvesting, giving investors a halal way to lend their coins to exchanges. It is also working on physical gold-backed tokens.

"We are not trying to stretch it and give people half the products out there in the crypto world," said Howladar, who sees enough untapped potential in the halal space alone. "Islamic finance is a $3 trillion industry. We figure if we can get 1 percent of that market, it's $30bn."

Another company in the industry is Fasset, which is fresh off a $22m funding round led by New York-based VC fund, Liberty City Ventures.

Fasset recently completed a sandbox in Bahrain and is making a major push into the developing world. It obtained a licence to establish a crypto exchange in Indonesia and is in the early stages of offering peer to peer crypto lending in Pakistan.

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"We realised that crypto is a product really designed for emerging markets, and many of them are located in the Islamic world," Daniel Ahmed, who co-founded the company after working as an advisor at the UAE prime minister’s office, told MEE.

Ahmed says crypto and decentralised finance offer unique solutions in countries where political risk is high and governments are devaluing currency. Last year in Turkey, people flocked to digital assets as the lira plummeted. Bitcoin usage surged 600 percent from April 2020 to 2021, while crypto transactions quadrupled.

He says crypto's potential to help address problems like the high number of unbanked individuals in the developing world and increased access to financial services has already led many to overcome doubts about Sharia compliance.

"Remarkably, the uncertainty hasn't been a barrier to the early adaptors. It's the next layer that will be more difficult."

'Money under the mattress'

Fasset's advantage, Ahmed says, is its ability to localise itself to the market. "You won't see big industry players wake up tomorrow and say they are Sharia-compliant." Ahmed's family is from Pakistan and his co-founder is from Bangladesh. "Our heritage is in these regions, we understand the needs."

He admits that at times it can be difficult to navigate whether a crypto asset or service is halal. "There are lots of different opinions out there amongst scholars," and a broad range of groups issuing Sharia-compliant certificates.

"What we are saying is that we take Sharia compliance seriously when building our products and that digital assets in and of themselves are neither Sharia-compliant or not compliant, but should be looked at on a case by case basis."

Changing the way individuals in Islamic markets view crypto is still a key challenge for the industry.

"The main competitor isn’t other investment platforms, it's money sitting under the mattress. We are trying to educate people about investing options," said Mark Zubov, Dubai-based founder of Umma Finance, a startup looking to connect halal crypto investors with businesses in emerging markets. 

'We see incredible opportunity' 

- Salman Masaud, Australian Gulf Capital

Just as many of these new ventures are taking off, more headwinds could be on the way. Digital assets have plummeted in recent weeks. Bitcoin is down about 50 percent from its record highs, while roughly $1 trillion has been wiped out from cryptocurrencies' value year-to-date.

Salman Masaud runs Australian Gulf Capital, an Islamic oriented VC fund that has invested in Marhaba. He is not flustered by the sell-off in the crypto market, saying his investments are long term and that Australian Gulf Capital is actively seeking new projects. 

"We see incredible opportunity, both for startups servicing Muslims in the West with halal options, and bringing this technology to the developing world." 

"A Bear market can be healthy," he added. "During this upward cycle, it's been hard to find good projects with a reasonable valuation."

Australian Gulf Capital recently opened an office in Abu Dhabi and Masaud said he is invigorated by the UAE’s support for crypto projects. The Emirates are competing to become industry hubs. Binance set up shop in Dubai earlier this year and in April Abu Dhabi granted Kraken a licence to operate a virtual asset exchange.

"A lot of Middle East countries are being very supportive, and that helps the ecosystem in the wider Muslim world," he said.

This article is available in French on Middle East Eye French edition.

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