Introduction

A digital asset is something which has a value and can be owned but has no physical presence, but is recorded, stored or represented in digital format. Digital assets include knowledge (books, websites, documents), software, data, designs, patents, art, currency. Digital assets have become an emerging class asset that has attracted many investors and started to penetrate the Islamic finance space. The growth potential and expansion of digital assets have become very prominent in Islamic finance after the recent guidelines on digital assets issued by the Securities Commission Malaysia on 15 January 2020, and the Resolution of the Shariah Advisory Council of the Securities Commission Malaysia issued on 29 June 2020 and 20 July 2020. These initiatives have provided more certainty and clarity to the nature of digital assets and their investment requirements from the Shariah and regulatory perspective.

Definition of Digital Asset

In addition to the above-mentioned feature of digital assets, the Securities Commission Malaysia has, in its Guidelines on Digital Assets, defined them collectively as digital currency and digital token (SC guidelines, 2020). In the Capital Markets and Services  Act  2007  (CMSA), 'digital currency' means a digital representation of value which is recorded on a distributed digital ledger whether cryptographically-secured or otherwise that functions as a medium of exchange and is interchangeable with any  money,  including  through the crediting or debiting of an account, whereas 'digital token' means a digital representation  which  is  recorded on a distributed digital ledger whether cryptographically­ secured or otherwise.

Digital Currency and Digital Token

The CMSA has provided specific criteria for digital currency and digital token as follows:

Digital Currency

• is traded in a place or on a facility where offers to sell, purchase, or exchange of, the digital currency are regularly made or accepted;
• a person expects a return in any form from the trading, conversion or redemption of the digital currency or the appreciation in the value of the digital currency; and
• is not issued or guaranteed by any government body or central banks.

Digital Token

A digital token which represents a right or interest of a person in any arrangement made for the purpose of, or having the effect of, providing facilities for the person, where:

• the person receives the digital token in exchange for a consideration;
• the consideration or contribution from the person, and the income or returns, are pooled;
• the income or returns of the arrangement  are generated from the acquisition, holding, management  or disposal of any property or assets or business activities;
• conversion or redemption of the digital token or the appreciation in the value of the digital token; the person does not have  day-to-day  control  over  the  management  of the property, assets or business of the arrangement; and the  digital   token   is  not  issued  or guaranteed by any government body or central bank.

The CMSA also states that digital  currency and digital token are not share or debenture of, a body corporate or an unincorporated body; or a unit in a  unit trust scheme or prescribed investments scheme. This to provide clear distinctive features between the different investment class assets, because each investment class asset has its own features and behaviour in the market.

In addition to the above regulatory guidance on digital assets, the Shariah Advisory Council (SAC) of Securities Commission Malaysia (SC) also issued a resolution that provided guidance for investors who are seeking the digital asset as an investment class. The resolution of the SAC of SC is as follows:

Resolution of the SAC of SC Background

Background

Digital assets as regulated under the jurisdiction of Securities Commission Malaysia (SC) consist of digital currency and digital tokens (digital assets). The definition and scope of digital currency and digital token which were defined as securities are as prescribed under the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019. Several issues from the Shariah perspective in relation to digital assets were presented to the Shariah Advisory Council of SC (SAC).

Issue

Since there are digital assets which are categorised as capital market instruments, the SAC discussed the following issues from the Shariah perspective:

• Whether digital assets can be recognised as mal (asset) from the Shariah perspective;
• Whether  digital  assets  can  be  classified  as  currency  or ' urudh (goods); and
• How to determine the Shariah status of a digital token.

Resolution

SAC, in a series of its meetings, discussed issues in relation to digital assets from the Shariah perspective. The discussions on digital assets in the SAC meetings were limited to digital assets that are regulated by the SC. The SAC had, at its 233rd meeting held on 29 June 2020 and its 234th meeting held on 20 July 2020, resolved the following:

Digital Currency

Digital  currency  is  recognised  as  mal  from  the  Shariah perspective. The SAC views digital currency from two scopes, as follows:

Digital currency that is based on technology without any underlying asset

Digital currency in this form is categorised as 'urudh and it is not a currency from the Shariah perspective. Such digital currency is not categorised as a ribawi item. Therefore, the trading of such digital currency is not subject to the principle of bai' al-sarf (currency exchange).

Digital currency that is backed by ribawi items

1. Digital currency that is backed by gold, silver and currency

• If a digital currency is backed by ribawi items comprising gold, silver and currency, it is categorised as a currency from the Shariah perspective. Hence, the trading of such digital currency is subject to the principle of bai' al-sarf.

2. Digital currency that is backed by ribawi items other than gold, silver and currency

• If a digital currency is backed by ribawi items other than gold, silver and currency, it is categorised as amwal ribawiyyah (ribawi items).Therefore, the trading of such digital currency is subject to the Shariah requirements of ribawi items.

Digital Token

Digital tokens are recognised as mal under the category of 'urudh from the Shariah perspective.

In determining the Shariah status of a digital token, the following matters must be fulfilled:

• The proceeds raised from the issuance of the digital token must be utilised for Shariah-compliant purposes.
• The rights and benefits attached to the digital token must be Shariah-compliant.
• In the event that the utilisation of proceeds under item:
  • the entitlement of rights and benefits under item
  • above are for mixed activities of Shariah-compliant and Shariah non-compliant purposes, the existing SAC resolution on utilisation of sukuk proceeds and the business activities benchmarked under the Shariah screening methodology for listed companies on Bursa Malaysia are applicable.

If a digital token is backed by ribawi items, the trading of such digital token is subject to the Shariah requirements for the trading of ribawi items.This resolution is not applicable to any digital assets which are outside the jurisdiction of SC. The SAC has also resolved that investment and trading of digital assets that fulfil the above requirements,and which are traded on Digital Asset Exchange (DAX) registered with SC, are permissible.

Conclusion and Summary

From the above-mentioned relevant provisions of the Guidelines on Digital Assets of the Securities Commission Malaysia and CMSA 2007 of the Securities Commission Malaysia, and the resolutions of the Shariah Advisory Council of the Securities Commission Malaysia, we can conclude some key points that could be regarded as guidelines for Islamic Finance investors, which are as follows :

• A digital asset is not regarded as a share or unit trust scheme.
• A  digital asset is regarded as a Shariah-compliant investment  asset  class.
• Digital currency is recognised as maI/ property from the Shariah perspective.
• Digital currency without any underlying asset is regarded as goods (a normal digital asset) .
• Digital currency without  any  underlying  asset  which is regarded as goods is not subject to the rules of ribawi items in the exchange including bai' al-sarf rules.
• Digital currency backed by gold, silver and currency is regarded as a currency, hence its trading is governed by the Shariah rules of bai' al-sarf.
• Digital currency backed by ribawi items other than gold, silver and currency is regarded as amwal ribawiyyah (ribawi items), where the rules of quantity and spot exchange will be applicable.
• A digital token is regarded as ma/ (property) from the Shariah perspective, where the normal Shariah rules and standards in trade are applicable.
• For digital tokens backed by ribawi items, trading will be governed by the Shariah rules of trading of ribawi items, where the rules of quantity and spot exchange will  be applicable.