Under What Conditions Can The Digital Arab Market Grow Like Islamic Banking by 20% Annually

The head of the Financial Services Authority of Abu Dhabi Global Market (ADGM) called on the countries that are developing the digital market to finally adopt common rules for legal regulation.

Richard TENG asked the participants in the summit "Fintech Abu Dhabi" to send this message to their governments. "This space should be appropriately regulated, otherwise there is a risk of financial crimes," he told the journalists. "Every time a coin is stolen or lost, it affects the confidence of investors in this class of assets."

By the way, last year ADGM published a manual on virtual assets and the initial coin offering on trading platforms. The document has become a kind of response to the criticism of the high market volatility and the increased incidence of fraud. It, particularly, explains how digital assets can be used to attract investments. But most importantly, the text contains the reference to the fact that the virtual money offered during the initial emission should be defined as "special investments" within the framework of ADGM regulation.

“We are sure that our legal regime, which the US SEC, the UK Treasury, and other regulators are interested in, will help reduce risks and bring greater confidence to the virtual assets market," Richard TENG said.

The Deputy Chief of Police of Dubai, Lieutenant-General Dhahi Khalfan TAMIM even said that digital coins would soon replace cash, and all difficulties came from the lack of public and reliable information about that market and insufficient measures to prevent crimes. "Belief in digital currencies will be open to question," TAMIM said. "So far, their source and tracking system are unknown."

Moreover, the Deputy Chief of Police said that the experts had offered the government to set up a special Committee, which should work on developing normative documents. However, the new provisions of the laws should not contradict the government's policy to introduce distributed ledger technologies into administrative practice. The work should concern the improvement of the provisions of the laws on money laundering and the “Know Your Customer” policy of exchanges.

At the same time, the police official believes that 56% of all companies working in this sphere are closed four months after the start of work: "For each successful virtual currency there are five failed ones."

It is difficult to stay optimistic when you are investigating a fraud case involving the use of digital assets for 300 million dirhams (about $81 million). The law enforcers do not give any bill of particulars, but recently, a special warning for the residents about the danger of digital coins has been issued. It says that people can become victims of fraud due to the flow of uncontrolled transactions.

It is amazing how much the outgivings of the officials and the real actions may not coincide. But, while preserving the objectivity, we must admit that internal contradictions are embedded into the digital market. On the one hand – there is the desire for institutionalization and entry into the economic mainstream, on the other hand – there is the preservation of two fundamental principles: the anonymity of transactions and independence from regulators and emission centers. Unfortunately, these things are not compatible in modern law.

Any legislative regulation is a compromise. For example, in France, the norm-setting practice has followed the course of connecting the markets of virtual values and securities. This is convenient in terms of taxation and control but makes it difficult to use digital coins as payment instruments. In Germany, on the contrary, virtual money can be paid.

Which course will the Middle Eastern countries follow?

Perhaps, they will follow the course of the banking sphere of the monarchies in the Persian Gulf, creating the Islamic banking. From the financial management point of view, a credit institution operating under the principles of Sharia is nonsense. After all, according to this doctrine, all forms of interest from borrowed funds - "riba" (addition, usury) - are strictly prohibited. The principle is “Fiqh al-Mumalat”. The Islamic banking, unlike the traditional one, distributes risks but does not hand them over. The income arises through the distribution of profit (Mudarba), responsible storage (Vadia), a joint venture (Musharaka), financing of "costs plus profit" (Murabaha), and rent (Ijar).

Despite the worldview limitations, Islamic finance make up 1% of the world's ones and, in the recent time, are growing at a rate of 20% per year! And clients of such institutions are not only Muslims. Such demand is explained only by one fact: in the Islamic financial sector, monetary rules are subject to ethics - intangible value. In the context of a global crisis of confidence in political and financial institutions, this is, perhaps, a significant competitive advantage. A rational beginning discredited itself in the world.

The situation may recur with virtual assets. Regulators, operating not only rational mechanisms but also irrational, need laws in which the latter will be the element of control. And consequently, there will be a space of trust, which is most valued today.