The analytical agency Chainalysis performed the research on the Middle East and North Africa (MENA) cryptocurrency markets. The study showed that in the MENA countries, the crypto winter is over. Markets began to grow. Experts share their opinions on growth drivers and market prospects.
The Crypto Boom in MENA
The MENA region has witnessed a significant increase in cryptocurrency adoption and trading. Several factors have contributed to this boom:
- Economic diversification. Many countries in the MENA region have been actively diversifying their economies away from oil-dependent revenue sources. In this pursuit, cryptocurrencies offer an alternative investment avenue, potentially reducing economic vulnerability to fluctuations in oil prices.
- Young population. The region boasts a young, tech-savvy population that is eager to embrace new technologies and financial opportunities. This demographic is increasingly turning to cryptocurrencies for investment and remittance purposes.
- Financial inclusion. Cryptocurrencies have the potential to expand financial inclusion by providing access to the unbanked and underbanked populations, especially in areas with limited traditional banking infrastructure.
While there is debate in the West about whether crypto winter is finally over, in the Middle East and North Africa, the answer is clear. In September 2023, Oman announced a series of investments in crypto-mining infrastructure worth almost $800 million. This move indicates the country’s intention to enter the competition for control over the regional market and become a center for cryptocurrency mining.
Just two years ago, such large-scale investments would have been impossible. It is likely that the MENA countries have finally found a solution to the long-standing problem associated with cryptocurrencies and compliance with Sharia law.
VARA (Virtual Assets Regulatory Authority) in the UAE released in February 2023 a comprehensive regulatory framework for free zones to attract crypto innovation. Thus, far-sighted regulators have taken the first step to form a global cryptocurrency hub in the country. The smaller crypto markets in MENA are joining the ongoing competition. India, the Philippines, and Pakistan are among the top ten countries whose residents actively use cryptocurrencies for money transfers. Turkey has focused its activity on centralized exchanges as its residents purchase crypto assets mainly to protect against the devaluation of the national currency.
A favorable legal framework, relative independence from global financial turmoil, and early investment have contributed to growing regional interest. MENA is off to a solid start on its path to leadership in the global crypto space. According to Pitchbook analysts, blockchain venture deal volume in the UAE is up 50% in 2022, and the whole region has seen more than 111 large early-stage Web3 funding rounds.
Another long-term driver of cryptocurrency development was the strategic decision to diversify government revenues from unstable hydrocarbon production in the Gulf countries. In the near future, the UAE intends to increase the share of the digital economy in non-oil revenues to 20%.
Overcoming Shariah Compliance Challenges
Despite the growing popularity of cryptocurrencies in MENA, the question of Shariah compliance has raised significant concerns. Islamic finance adheres to strict ethical and moral principles outlined in Shariah law. Several aspects of cryptocurrencies can potentially conflict with these principles:
- Gharar (uncertainty). Cryptocurrencies are known for their price volatility, which may introduce an element of uncertainty or “gharar” into transactions, a concept discouraged in Islamic finance.
- Riba (usury). Islamic finance strictly prohibits usury or “riba.” Some argue that cryptocurrency speculation, lending, and staking could involve interest-bearing activities, potentially violating this principle.
- Unlawful activities. Cryptocurrencies can be associated with illegal activities, such as money laundering or illicit trading, which are clearly against Islamic ethics.
To address these challenges, there have been several efforts in the MENA region and beyond to develop Shariah-compliant cryptocurrency solutions. These initiatives include:
- Shariah-compliant cryptocurrencies. Projects like “Islamic Coin” and Haqq have emerged to offer cryptocurrencies designed to be in accordance with Islamic principles. These coins are structured to avoid elements of uncertainty and usury, making them more acceptable for Muslim investors.
- Regulatory oversight. Regulatory bodies in the MENA region have started to take an active interest in crypto-assets and are working towards creating a framework that ensures compliance with Islamic finance principles.
- Education and awareness. Educational programs, seminars, and conferences are being conducted to raise awareness and provide guidance to Muslims interested in investing in cryptocurrencies. These initiatives help individuals make informed decisions about their investments within the bounds of Shariah.
The cryptocurrency market in the MENA region is flourishing, driven by economic diversification, a young and tech-savvy population, and the potential for financial inclusion. However, this growth has been accompanied by challenges related to Shariah compliance in Islamic finance. Efforts are underway to create Shariah-compliant cryptocurrency solutions and regulatory frameworks that align with the principles of Islamic finance. As the market matures and evolves, it is likely that more options will become available for investors seeking to navigate the intersection of cryptocurrency and Shariah compliance. This flourishing market presents both opportunities and responsibilities for the MENA region as it seeks to integrate cryptocurrency into its financial landscape while staying true to its cultural and ethical values.
Despite the fact that the debate about the compliance of cryptocurrency and Islamic law continues, a number of religious leaders already consider some crypto products to be halal investments.
Experts evaluate the halal status of a digital asset according to the following criteria:
- use of cryptocurrency as a means of payment;
- exclusion of speculative transactions and prohibited activities;
- cryptocurrency must have a definite and limited supply;
- obligatory payment of zakat;
- fair division of profits and risks for any project;
- providing real benefit to society from any cryptocurrency-related activity, be it mining, buying, selling, or holding.
Typically, a legally binding decision or fatwa determines a project’s compliance with Shariah. It confirms the halal nature of the product. In order to state the compliance of cryptocurrency, blockchain, and smart contracts with Sharia, scientists had to analyze how Islamic principles relate to these new technologies. According to the co-founder of the Islamic Coin cryptocurrency, Mohammed AlKaff AlHashmi, the developers initially incorporated in the project compliance to Muslim laws and traditions.
We collaborated with well-known scholars who classify various crypto assets to get the fatwa. The affiliation of these specialists with reputable financial institutions gives their fatwa significant weight. Thus, the fatwa that Islamic Coin received unequivocally determines the compliance of our project with Islamic principles and values, and its strength directly correlates with the authority of the scholars who issued it.
MENA cryptocurrency market predictions
A Chainalysis study conducted in 2022 – 2023 showed that the Middle East and North Africa are developing the sixth largest crypto economy, valued at $389.8 billion (7.2% of global transaction volume). UAE shows the highest level of cryptocurrency activity. The three largest cryptocurrency markets from the Top 30 (Turkey (12), Morocco (20) and Iran (28)) are in the region.
Thanks to government grants and a steady increase in private investment in infrastructure and digital hubs concentrated in the Gulf States, Web3, and digital currency projects in the region continue to grow. The adoption of cryptocurrency by governments and businesses, coupled with a favorable regulatory climate, has positioned the MENA region as a dominant player in the blockchain industry. A significant growth factor is the solution to the problem of Sharia compliance in the crypto space, as well as the growth of projects focused on Muslim ethics and receiving fatwas. According to analysts, cooperation between traditional financial establishments and blockchain startups in the region will continue.
