California-based Stellar has received certification from Islamic scholars for its blockchain platform and related cryptocurrency, aiming to integrate the technology into the field of Shariah-compliant financial products.
The move highlights how financial technology firms are broadening their footprint to include growth markets in the Middle East and Southeast Asia, prompting Islamic scholars to assess the religious validity of digital currencies.
The certification covers Stellar’s blockchain and its native currency called Lumens — the 7th largest cryptocurrency with a market capitalisation of $4.3bn.
Over the past year the firm has been exploring partnerships with financial firms in the Gulf region and seeking sharia-compliance certification helped widen those discussions, said Lisa Nestor, director of partnership at Stellar.
“We have been looking to work with companies that facilitate remittances, including in the United Arab Emirates, Saudi Arabia and Bahrain. Its a huge market.”
Stellar’s digital ledger could be used in areas beyond cross-border payments, such as asset digitisation, and the firm has an ongoing partnership with IBM to develop such blockchain applications, Nestor added.
Cryptocurrencies such as Bitcoin and Ethereum enjoyed a bumper year in 2017 as mainstream investors entered the market, but they saw a drop in value earlier this year because of concerns over a potential regulatory crackdown.
Some Gulf regulators have also expressed scepticism, but Bahrain has bucked the trend by exploring the use of digital currencies to boost its role as a regional financial hub.
Stellar held discussions with Bahrain’s Economic Development Board early last year which led to wider engagements in the region, Nestor said.
In February, Saudi Arabia’s central bank and US-based Ripple signed a deal to help banks in the kingdom settle payments using blockchain technology.
Stellar was co-founded in 2014 by Jed McCaleb, the former chief technology officer of Ripple.
The Shariah Review Bureau (SRB), an Islamic advisory firm licensed by Bahrain’s central bank, provided the certification for Stellar, alongside guidelines for the types of assets that can be traded in its platform. “For the blockchain technology there was no issue, the main thing we needed to consider was the use of the underlying cryptocurrency,” said Mansoor Ahmed, assistant general manager at Shariyah Review Bureau.
Islamic scholars have pondered over the permissibility of cryptocurrencies, wary of price volatility and the types of assets behind digital tokens.
Islamic finance emphasises real economic activity based on physical assets, shunning interest payments and outright monetary speculation Cryptocurrenices have drawn conflicting rulings from scholars, but the assessment from SRB could help narrow the debate as it compared trading of Lumens to transfer of rights, which is deemed permissible in Islam.
SRB also set rules for trading assets other than Lumens, including requirements to ensure price certainty, constructive possession and timely settlement — while allowing for a short delay to verify transactions on the blockchain.