MiCAR and Islamic Finance: Compatibility and Critical Issues
The MiCA regulation and Sharia principles present unexpected overlaps but also structural tensions. A concrete analysis for operators and compliance officers.
— Studio LX20 Law Firm
MiCAR and Islamic Finance: A Possible Dialogue, but Not a Given
Regulation (EU) 2023/1114 of the European Parliament and of the Council, known as MiCAR (Markets in Crypto-Assets Regulation), entered into force on 29 June 2023 and applies in full from 30 December 2024 for the most significant token categories. In parallel, Islamic finance — based on the principles of *sharia* — continues to expand in Europe as well, with estimated assets under management (source: Islamic Finance Development Report 2023) exceeding USD 3,900 billion globally.
The question facing CFOs of digital banks, compliance officers of fintechs and general counsel of companies exposed to Gulf or South-East Asian investors is a concrete one: are tokens governed by MiCAR compatible with the requirements of Islamic finance? The answer is not binary.
The Three MiCAR Categories and Their Sharia Relevance
MiCAR distinguishes three broad categories of crypto-assets:
- Asset-Referenced Tokens (ART): stabilised against a basket of currencies, commodities or crypto-assets (Articles 16-47 MiCAR).
- E-Money Tokens (EMT): pegged to a single official currency (Articles 48-58 MiCAR).
- Other crypto-assets (*utility tokens* and others): a residual category governed by Articles 4-15 MiCAR.
From an Islamic standpoint, the central issue is the prohibition of *riba* (interest) and *gharar* (excessive uncertainty), as well as the requirement that every transaction be anchored to a real asset or to a lawful (*halal*) economic activity.
EMTs, for example, functionally replicate electronic money: no yield is embedded in the instrument, which makes them broadly compatible with the prohibition of *riba*. However, Article 54(3) MiCAR explicitly prohibits the payment of interest to EMT holders — a provision that, paradoxically, converges with Islamic law. The mandatory reserve (Article 54(1)), invested in traditional bank deposits, nonetheless creates a problem: such deposits generate interest, which is prohibited under *sharia*. An issuer wishing to structure a sharia-compliant EMT would have to invest the reserve exclusively in compliant instruments (short-term *sukuk*, *murabaha* deposits), which requires a case-by-case analysis with its own sharia board.
ARTs present greater difficulties. A token pegged to a basket that includes conventional government bonds or currencies of countries with interest-based banking systems automatically exposes the holder to indirect *riba*. Article 36 MiCAR requires the reserve to be invested in secure, liquid assets, without specifying ESG or religious criteria: room for an entirely sharia-compliant reserve exists as a matter of law, but it requires a dedicated legal architecture.
The Issue of Governance and Embedded Rights
MiCAR grants ART holders redemption rights at par value (Article 39) and, in the event of issuer insolvency, a preferential claim over the reserve assets. These proprietary rights do not in themselves embed fixed returns, which makes them abstractly compatible with Islamic structures.
The question becomes more delicate when examining governance tokens or utility tokens that confer shares of the platform's revenues. If the distribution occurs in proportion to the token's value (akin to a share in profits), we are close to the *musharaka* contract (Islamic joint venture): potentially permissible. If, instead, the revenue is fixed and predetermined, we fall back into *riba*.
No provision of MiCAR explicitly prohibits *profit and loss sharing* distribution structures: the architectural choice rests with the issuer, provided that the *whitepaper* (Article 6 et seq. MiCAR) describes the embedded rights with precision.
DAC8 and Tax Transparency: A Further Layer
Directive 2023/2226 (DAC8), amending Directive 2011/16/EU on administrative cooperation in tax matters, introduces automatic reporting obligations for crypto-asset service providers as from 1 January 2026. The data transmitted to the Italian Revenue Agency will concern balances, transactions and revenues.
For Islamic investors — often structured through *waqf* (religious endowments) or *zakat* (charitable obligation) vehicles — the tax characterisation of flows is crucial. A token distributing proceeds under *murabaha* schemes could be qualified as interest (income from capital, Article 44 of the Italian Income Tax Code) or as a participation gain, with radically different effects. DAC8 does not resolve this ambiguity: it brings it to the tax adviser's attention before structuring.
AML and Institutional Islamic Clients
Regulation (EU) 2024/1624 (the Sixth AML Directive, in the course of transposition) and Regulation (EU) 2024/1620 establishing AMLA impose on crypto-asset service providers (CASPs) enhanced due-diligence obligations for high-risk clients. Islamic funds based in Gulf jurisdictions (the Emirates, Qatar, Saudi Arabia) are not automatically high-risk, but *hawala* structures or *zakat* flows may trigger automatic flags in *transaction monitoring* systems.
A CASP seeking to serve institutional Islamic clients must build enhanced due-diligence procedures specifically calibrated for this purpose, documenting in its risk analysis (Article 8 of Directive (EU) 2015/849, as amended) the lawful nature of such flows and their consistency with the client's profile.
What to Do in Practice
For operators intending to issue or distribute crypto-assets compliant with Islamic principles within the MiCAR framework, a three-phase structured path is suggested.
Phase one — Token classification: determine whether the token falls within the ART, EMT or residual categories, and precisely identify the embedded proprietary rights. This analysis precedes any sharia assessment.
Phase two — Preliminary sharia review: involve a qualified sharia board (preferably accredited with AAOIFI — Accounting and Auditing Organization for Islamic Financial Institutions) at the *whitepaper* drafting stage. Sharia opinions must be documented and, where possible, published together with the *whitepaper* pursuant to Article 6 MiCAR.
Phase three — Tax and AML mapping: coordinate with the tax adviser on the characterisation of flows for DAC8 and Income Tax Code purposes, and update AML procedures to handle institutional Islamic clients without generating false positives.
Conclusions
MiCAR was not conceived with Islamic finance in mind, but it does not exclude it. The convergence on the prohibition of interest for EMTs, the silence on the modalities of distributing proceeds in ARTs, and the architectural freedom granted to issuers all open up concrete opportunities. The challenge is technical and multidisciplinary: it requires coordination among regulatory lawyers, Islamic-law experts and tax specialists from the earliest stages of structuring. Those who approach this path methodically can access a global investor base still largely underestimated in the European crypto-asset market.