Decentralized Islamic Finance: A New Frontier in Digital Finance

Today, Fintech and decentralized finance (DeFi) applications are revolutionizing the financial world, pushing it into uncharted territory. While Fintech often integrates with traditional financial institutions, decentralized finance focuses on blockchain and distributed ledger technology (DLT) based solutions. Both areas are being carefully examined through the lens of Islamic finance, as experts explore the potential opportunities they may offer.

Starting with Bitcoin, the debate over the compatibility of cryptocurrencies with Islamic finance continues to evolve, sparking diverse interpretations. Scholars and economists often hold contrasting views, leaving Muslim investors in a gray area between halal (permissible) and haram (forbidden) investments. However, it seems inevitable that digital assets will become a central part of financial management in the future. Therefore, this issue should not be reduced to a simple halal-haram dichotomy but should instead be examined from multiple angles to highlight its permissibility or prohibition.

Conceptualized as “Decentralized Islamic Finance”, there are both Islamic finance applications and traditional practices deemed permissible in this space. To address this complexity, the following categorization can be applied:

1. Decentralized finance applications based on Islamic finance principles
2. Islamic finance-compliant decentralized finance applications
3. Islamic finance-compliant decentralized finance applications integrated with traditional finance
4. Decentralized finance applications integrated with traditional finance
5. Traditional finance applications compliant with Islamic finance principles

According to this framework, the first three categories — Islamic finance-based (1), Islamic finance-compliant (2), and Islamic finance-compliant decentralized finance integrated with traditional finance (3) — fall under the umbrella of Decentralized Islamic Finance. All applications emerging within this scope can be evaluated under this framework.

Since decentralized finance began gaining traction in 2016, Islamic finance-compliant digital assets, exchanges, and technology solutions have started to emerge. However, due to the nascent nature of the field, unclear business models, and sustainability challenges, many initiatives have struggled to survive. Early examples include FICE adab solutions, Qintar token, hada dbank, Bayan token, ateon, biocoin, noorcoin, IslamiChain, and ZakatTech. While these projects generated excitement, most failed to sustain themselves. A few, like OneGram, continue to operate passively. This is a common trend in the broader blockchain economy, where many projects fade quickly.

Today, several decentralized finance applications offering Islamic finance services are active and fall under the first category of my framework. Examples include Marhaba DeFi, Islamic Coin, Qitmeer, Takadao, and Cryptozakat. Additionally, there are initiatives that, while not fully decentralized, provide blockchain-based solutions or prepare for new innovations. Tokenization of real-world assets also fits into this ecosystem.

Layer 1 blockchain platforms like Bitcoin, Ethereum, and Solana, along with their digital assets, are also considered compliant with Islamic finance. Notably, this assessment comes from the Shariyah Review Bureau (SRB), a body of Islamic scholars. They have stated that these digital assets do not inherently conflict with Islamic finance principles.

Thirdly, there are Islamic finance-compliant service providers, such as exchanges facilitating digital asset trading. Platforms like Fasset, Rain, and Coinmena fall into this category, enabling broader access to digital assets.

To evaluate decentralized finance applications, an assessment canvas with three main pillars can be used: 

• Purpose and Design, Technical Infrastructure, and Governance. Each pillar includes specific building blocks:
• Technical: Infrastructure, digital asset, smart contract structure, and interoperability with other chains and applications.
• Governance: Execution, Shariah advisory board, official establishment and representation, and oversight.

This canvas provides a structured framework for assessing the compliance and viability of decentralized finance applications within the Islamic finance context.

Decentralized finance is poised to play an increasingly significant role in our financial lives. Given the alignment of blockchain’s transparency, reliability, and distributed nature with Islamic finance principles, it is crucial to address this topic systematically. Ignoring this space could deprive Muslim communities of a transformative technology and its benefits.

The rise of asset-backed digital assets and global investment opportunities presents a unique chance to enhance the sustainability and reach of Islamic finance. Neglecting this potential could result in significant missed opportunities.

As the potential of Decentralized Islamic Finance becomes clearer, I believe all stakeholders will grow more enthusiastic about its possibilities. Until then, we will continue refining the ecosystem map and advancing this transformative field.