CJ Doherty
Welcome to the Lending Lowdown. I'm CJ Doherty, Director of Market Analysis at LSEG LPC. While this podcast is traditionally focused mainly on the private credit and syndicated loan markets, we've also explored the growing world of Islamic finance.
Today, we're continuing that conversation by looking at Islamic finance in the digital assets era.
We'll explore where digital financial infrastructure is heading and how Islamic finance can be embedded into trusted digital rails to broaden participation, improve execution, and unlock new opportunities for cross-border business.
Joining me today to share their insights are Rene Michau, Global Head of Digital Assets, and Alaa Alaabed, Director of Group Islamic Products at Standard Chartered. Thank you both for joining me.
Alaa Alaabed
Thank you, CJ.
Rene Michau
Yeah, it's great to be here, CJ.
CJ Doherty
Before we dive into the market, could you both briefly introduce yourselves to our listeners and tell us a little bit about your respective roles?
Rene Michau
So, I'm Rene Michau. I'm the global head of digital assets for Standard Chartered and based here in the UAE. And I've been with the firm for about 10 years and looking after the digital asset agenda for the last five. The way we think about digital assets at Standard Chartered is that it's fundamentally a core part of the future of financial services. And I work across all of our business lines to align against how we're transforming the bank to be digital asset enabled. That includes the work that we're doing in our investment bank around enabling crypto trading, cryptocurrency, crypto custody, the tokenisation infrastructure, but also working with clients who are navigating the space, whether that's crypto natives or more traditional firms who are exploring those kinds of things as well. We also work with our SC Ventures business where we have several subsidiaries doing crypto brokerage, stablecoin payments, custody, tokenisation and other things as well. And with our wealth and retail business who are looking at the way that our wealth clients are accessing that.
So I guess in short, what that means is for us as a firm, we see that digital assets are enabling and changing the way each part of our business is working. And that is very much led by the way that our clients are using digital assets in order to access financial markets and operate their business.
Alaa Alaabed
Thank you, Rene. So, I'm Alaa Alaabed. I'm part of the group Islamic Financial Market Products Team. I look after our Islamic financial market product propositions across jurisdictions. I'm based out of DIFC and I'm increasingly looking at digital asset initiatives led by the bank, with the recognition that digital is indeed the way forward and it is becoming mainstream. And capitalizing on our digital assets expertise and our Islamic banking franchise that spans more than 30 years, we think that Islamic and Standard Chartered is uniquely positioned to lead the way forward in Islamic digital assets.
CJ Doherty
Great, thanks for that. And Rene, let's start by defining digital rails. When we talk about institutional digital assets and digital rails, what are we actually referring to and how will they change how a financial institution operates?
Rene Michau
When we talk about digital rails, it's a really interesting framing. We'd like to think about that in the, you know, it’s a perspective from how we've traditionally operated, where we have a set of legal entities that manage centralised databases, and then we use messaging networks or rails to ensure that our various ledgers stay up to date between institutions. When we talk about digital assets, we think about that in the context of cryptocurrencies, stablecoins, tokenized assets, and in particular, large-scale blockchain networks. In a blockchain network, the ledger is shared amongst multiple institutions, and therefore the assets themselves, the accounts, the balances live on that shared ledger. And so, the rail and the asset and the liability all interact in pretty much a contiguous technological space. And so from that perspective, what that really enables us to do is rethink the way that we offer financial products to clients, how we think about the transmission of value across the different global locations, but also how we might enable traditional types of finance to operate using new technology in a way that is more transparent, more timely, and works at the speed of the internet. You can think of this like an infrastructure for financial services that is internet enabled.
CJ Doherty
Okay, great. And Alaa, what would Islamic finance by design look like in a digital infrastructure build, you know, versus retrofitting Sharia compliant workflows into conventional rails later? You know, where do conventional systems typically struggle and what needs to be baked in from day one?
Alaa Alaabed
Thank you, CJ. If I want to extend what Rene had kindly clarified and really established that digital rails are really the next generation of financial market infrastructure, then I can say that in Islamic finance by design, digital rail would be one that embeds Sharia requirements into the infrastructure itself rather than adding manual controls after the platform is built. So an Islamic by design infrastructure would be capable of evidencing aspects which are most important to Sharia and Sharia governance and Sharia compliance. These would be things like legal ownership, beneficial ownership, possession, transfer of title, agency relationships amongst others, really. And that would be an evidence thing that would be possible at every stage of the Islamic product or the Islamic digital asset lifecycle. So, as I said, these are the areas where Islamic finance tends to place greatest importance where a conventional system may only need to know what token is being transferred, an Islamic by design infrastructure would be interested in knowing what does the token represent, who owns it, and is the underlying asset itself Sharia compliant?
And this intelligence is essentially something that cannot be an afterthought. It would need to be embedded in the design of the digital real and in the infrastructure itself.
Rene Michau
If I might just follow on from that, CJ, I'm so sorry, because I think that lays the foundation for the really important part. If we think about one of the truisms of the, you know, the crypto world, it's trust but verify. Because you have a blockchain where everyone can see what's in the smart contract, if someone says a fact is true, you can go and verify that. So, this is exceptionally important for Sharia products because not only are you able to validate your interaction with that product is compliant, but even when you compose multiple products together, you can be confident that the net product maintains its compliance because there is no component which falls outside compliance.
Alaa Alaabed
And perhaps I would just add to that that the compliance here would be really a compliance that could be verified and could be monitored in real time, rather than being a pre-launch checklist or pre-launch exercise and something that occurs periodically with the help of the structure, the digital rails really, we can monitor compliance, Sharia compliance in real time. And that could be really an attribute to an Islamic by design digital rail.
CJ Doherty
Okay, great. Thanks for that. And my next question is, which areas of Islamic finance are most ready to tokenise today? And how could this improve access, liquidity and distribution, both for Islamic investors and beyond?
Alaa Alaabed
Sure. So, I think we could start from that common ground that indeed Islamic asset classes are ready for tokenisation. But perhaps as your question suggests, not all of them are equally ready. So, if I may address this by focusing on where tokenisation solves a genuine market inefficiency, while remaining faithful, compliant to Sharia principles, then I can perhaps start by focusing on 3 criteria for the most attractive, the most ready asset class or candidate. So, I would say these would be asset classes that have these three characteristics, clearly identifiable, underlying assets, establish legal and Sharia structures, as well as a genuine distribution or liquidity problem that tokenisation can solve. So, if we are to use this criteria, then the strongest near-term use cases for tokenisation of Islamic asset classes lies in the sukuk, Islamic capital markets, as well as in the mutual funds industry. So, both of these asset clusters can definitely benefit from the tokenisation, whereby tokenisation could indeed broaden the investor base, increase access to tokenised sukuk and mutual funds by lowering the investment ticket size and rendering this more accessible to a wider asset investors or asset holders bases across geographies and distribution channels.
Rene Michau
What we've seen in, you know, the traditional finance space leveraging digital assets as well, where we've seen tokenised money market funds from some of the large American asset managers find a home in, you know, on crypto exchanges and other sources of new liquidity that wouldn't be traditional investors in that asset class.
Right now, there's not really a Sharia option for that type of flow.
So, you know, with new market infrastructure like digital asset custody, with new venues, whether that's crypto exchanges or, you know, Sharia specific venues, we're really able to think about shaping that much more effectively. And as you say, provide more liquidity, market depth and different options and even give different institutions, potentially even smaller tier institutions, access to issuance as well.
CJ Doherty
And following on from that, how should financial institutions distinguish regulated institutional digital assets from speculative crypto activity in an Islamic finance context? And also, what Sharia legal and operational considerations come with tokenising an asset?
Rene Michau
In the same way as you would with traditional assets, one of the, you still at this stage definitely want to be working with a trusted advisor on and a trusted and reputable financial institution. You know, obviously, I like Standard Chartered Bank, that can help point to where those data points, where the smart contract constructs are verifiable, plus making sure that you know you have access into you know the appropriate approvals and compliance work that has been done. It's not that much different to a crypto asset that you go on a decentralised exchange to buy, there isn't necessarily a trusted advisor there that can help you navigate the difference between one that, you know, is more reputable or regulated and one that is not. So that requires a lot of trial and error on an individual basis or working with a trusted advisor. Alaa, feel free to add on to that in the way that we think about that with the Islamic network that we have.
Alaa Alaabed
Thank you very much, Rene. If I may perhaps address the second part of the questions about the considerations, Sharia, legal and operational. I would perhaps start from a point where I'll be saying that the assessment, the Sharia assessment is really consistent and is not any different from traditional asset classes in the sense that the Sharia is very much focused on the value of the digital assets, its permissibility, and it will be asking questions such as, is the underlying asset permissible? Does the token genuinely represent ownership?
Are the beneficial rights being, I mean, conferred in a way that is legally enforceable as well? And does the compliance, can the compliance be monitored? Can the compliance be demonstrated? As far as legal is concerned, of course, the legal considerations that we may expect are those that have to do with the legal enforceability of the digital assets’ rights and the recognition of the ownership in the relevant legal framework. And then what happens in insolvency, transfer, redemption or enforcement scenarios. So, these would be the legal considerations that are of most importance. And perhaps I could maybe just take a step back and really recognize the fact that as far as Islamic finance and Islamic banking principles are concerned, speculation and excessive speculation is not really permissible, and that to a certain extent contributes to the debate which is ongoing in the Islamic banking industry circles about the permissibility of digital assets at large and crypto in specific in particular. So that's an important distinction, perhaps that there is that intrinsic Sharia built, impermissibility towards speculation. Of course, whether the token, the digital asset is regulated, or it is not, those Sharia requirements or criteria, legal and operational considerations come to fore while assessing the viability or the permissibility of the token.
CJ Doherty
Okay, yeah, thanks for that. Could you tell me now or next, what role could stablecoins, tokenised deposits and CBDCs play in Shariah compliant settlement and cross-border payments?
Rene Michau
Yeah, so let's start with their with their foundational function. So, so it's important when we think about you know those three forms of money that we distinguish them quite clearly. So, central bank digital currencies are orientated around the domestic digital enablement of a fiat currency issued by a central bank. In many cases, they're talked about in the context of being a settlement asset in a wholesale context. In the case of the digital euro, we're really talking about something which is meant to be a retail central bank digital currency. But fundamentally, it is a central bank issue, via currency, running on digital rails.
If we move to tokenised deposits, you know, this is very much the domain of multi-legal entity and large commercial banks today. And what it does is it takes blockchain infrastructure usually to enable the deposit account to be much more mobile within the boundaries of the legal entity.
A stablecoin looks a lot like a banker's draft or a traditional bearer instrument. So, you know, if you were to refer to the Bills of Exchange Act of 1882, which describes negotiable instruments, the construct of a stablecoin is actually not much different from that. In that, it really is as an issuer, it has a bearer, which is the wallet in which the stablecoin lives and then it has a set of other conditions in terms of face value and the various other things as well. What enables it to be functional is it can live on a large-scale public blockchain and it can move freely over that network. And so, it's like a, you know, in the same way we saw the historical liberation of finance through the introduction of paper instruments, because they were very portable, and they meant that we could have global trade much more effective without having to carry gold and other assets of value around. Stablecoins kind of do the same thing for the internet. So, in those 3 constructs, it's helpful then to think about what is, you know, what's most functional. Stablecoins are in some ways like a Islamic product on a blockchain, whereby a lot of the value that they have comes from off-chain activity, right? A reserve, a fiat currency and treasuries that is managed invisible, which builds trust in the smart contract that lives on the blockchain. And, you know, a lot of the, you know, when we get into the more speculative crypto assets, just to go one step outside of the three that you've asked about, they derive their intrinsic value, if there is some, from everything that exists on the blockchain in the first place. So, in that case, the stablecoins represent this off-chain pool of assets, much like a narrow bank that's fully transferable on a blockchain.
Tokenised deposits, in order for cross-bank value transfer, they need some sort of clearing infrastructure. So that would look like something along the lines of the Swift Ledger, Project Agora from the BIS, you know, some of these clearing infrastructures to allow a standard chartered tokenised deposit to interact with another bank tokenised deposit.
But you can think of all of those instruments really as a settlement asset that would allow the cash leg of any instrument to move at the same speed and across the same networks as the digital Sharia compliant product.
Alaa, you feel free to add anything to that in terms of how we're thinking about stablecoins and tokenised deposits in the context of Islamic finance.
Alaa Alaabed
Thank you very much, Rene. Indeed, it is viewed as a settlement, a means of settlement, and indeed it is one that could achieve a reduced settlement time, almost real-time settlement, as well as a fractional cost associated with the same. So, it serves the same purpose, but from a Sharia perspective, of course, the label or the, I mean, the name does not suffice. And then what matters is what's underneath. So, this is why for stablecoins, for instance, there'll be emphasis and there'll be attention paid to the reserve backing, the redemption rights, the governance arrangements underlying the stablecoins. And then of course, the absence of interest and prohibited elements in the structure. As for the tokenised deposits, again, we'll be looking at the underlying structure and then the rights that would be associated with the tokenised deposits. And for CBDCs, for instance, the analysis again is very much aligned with that of a stablecoin, but of course with the regulatory angle, they're lending support to the whole proposition from an Islamic finance perspective.
CJ Doherty
Thanks for that. Very insightful. And now the final question before we finish up. Is Islamic financing starting to accelerate progress in terms of tokenisation and digital asset adoption? And also, what are the key challenges and where does Standard Chartered fit in?
Alaa Alaabed
Thank you very much. There is indeed interest in Islamic digital assets and that we could see both interest by clients and as well as regulators to ensure that the regulatory framework is clear enough in order to render and grow the industry. In terms of challenges, of course, Islamic banking itself is characterized as an industry which is not fully standardized. There is room for standardization, for harmonization. The interpretation of Sharia texts or opinions is not uniform. And there has been, and especially recently as well, there has been a revival in questions about the cryptocurrencies and their permissibility. So, I think this is one of the challenges.
But then perhaps it's a healthy challenge, if we may say, and then it's one that Standard Chartered is trying to address and is trying to help alleviate by way of industry thought leadership forum that are organized and which bring together all of the Sharaf industry together. And for discussion of some of these most important topics, including, of course, digital assets, and the way that they are perceived from a Sharia angle.
Rene Michau
The challenge with all tokenisation at the moment is the scaling of the underlying infrastructure. As Dr. Alaa has mentioned, you know, when we think about, you know, the regulatory part of this makes a lot of sense. The more you can have transparency and verifiability, particularly where there are very stringent requirements or requirements that have been formally agreed. That is, you know, that is super powerful. But it's new. It's not something, it's not an infrastructure where we've been able to have supervisors, regulators, or even, you know, users of financial products able to get that level of visibility over the underlying. So, what does the outlook look like?
As we, you know, we need Islamic banks to be able to provide custody for these assets, to be able to provide execution, to allow clients to access them, and to allow those to move to venues for distribution, and for all of that to be working together.
From a Standard Chartered perspective, you know, we've been fortunate to be able to establish quite a lot of the foundational capabilities over the last decade where we've been working on digital assets and Islamic finance for much longer, where we've really been able to lean into some of these problems quite early.
But we do need and we do encourage the broader industry to move in the same direction. It's funny, really, because in some ways, although many of the cryptocurrencies and cryptocurrency infrastructures are not aligned to Sharia because of the speculative nature of certain aspects of that, the foundational technologies that they drive are actually absolutely essential in scaling Islamic finance by leveraging those, you know, exact same, you know, large scale internet enabled infrastructures that are transforming the rest of finance. So, from our perspective, we see a really strong intersection between these two really important and high growth sectors of the market.
And, you know, by facing those problems and having those discussions early, we are fortunate to be in a position of, you know, having thought about this quite a lot and being in discussions with clients and regulators on both of these topics and their intersection.
CJ Doherty
Great. And on that note, we'll wrap up for today. Rene and Alaa, thank you both very much for joining me and sharing your insights. There's clearly a lot happening in this space and we'll be following developments closely. Thanks again for joining us.
Rene Michau
CJ, thank you so much for having us. It's been such a pleasure to have this discussion.
Alaa Alaabed
Thank you, CJ.
CJ Doherty
And thank you all for listening. As always, I invite you to check out our news, data, and analysis on LSEG Workspace. I'm CJ Doherty. Subscribe to the Lending Lowdown on your favorite podcast platform.
