This guest article was written by Ibrahim Mohammed, founder of OneGram.
As Bitcoin speeds towards the 3,000 USD mark and new digital currencies emerge each day, questions around sustainability in the market beckon. What’s driving this phenomena? Some critics claim that this bubble won’t last, and will soon be replaced with more sustainable options.
Yet, the cryptocurrency industry now has a market capitalization in excess of $100 billion, jumping threefold since 2016 with no signs of slowing. Conventional analysts believe that the drive is due to shortened supply from individuals holding Bitcoin and creating a false market need, combined with the fact that many digital currencies can only be purchased using Bitcoin. Could asset-backed digital tokens be the answer to creating a more sustainable, stable cryptocurrency market?
The Islamic principles of financial regulation require that there must be a physical attribute that is underlying on an equal basis to what’s being issued. The underlying asset cannot be leveraged, and needs to be issued on a one-to-one basis, ensuring that liquidity is real and not debt-driven. The governance surrounding Islamic products is extremely high, requiring Sharia advisory and audit boards to ensure products are traded ethically and within guidelines established for good business practices.
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These days, with the emergence of each new digital token, comes accusations of “fake!” and “scam!” from skeptics online. Investors have been burned before by shady projects and exits, and are demanding more transparency. With many new digital tokens, it remains to be seen whether they’ll follow through on plans to allocate funds and distribute tokens as promised.
That being said, asset-backed tokens that adhere to the Islamic financial sector’s high standards could eliminate these accusations and the volatility associated with them. Digital tokens backed by physical gold, for example, could lower risk and provide more compelling investment opportunities.
The addition of assets to digital currencies provides a layer of protection to investors, ensuring a minimum exit that can prevent a total wipeout of their funds. The concept provides much-needed clarity in the market, as physical assets can be tracked more visibly. This allows investors to evaluate the market value and asset base of a cryptocurrency, and deters the ‘get rich quick’ schemes as the token provider must fulfil baseline requirements to launch a product or cryptocurrency.
With the cryptocurrency industry and market cap evolving at a rapid pace, corrections are inevitable. One way we can ensure the longevity and success of digital currencies is by backing them with assets, thereby creating a more liquid, transparent, and sustainable future for the industry.