Fractional Reserve Banking, Islamic Finance & Bitcoin

Hi everyone, welcome back to Stephan Livera podcast brought to you by Bold, the best place to buy, save and store your Bitcoin over at getbold.io. That's for American listeners, and they have a two of three multi-signature vault. Now, onto the show today, joining me today is Harris Irfan. He is CEO of Quadruple Capital. markets, and he's also an advisor to Onramp, Mina, and he's also the author of Heaven's Bankers. So Harris, first of all, welcome to the show.

Thanks, Stefan. Great to be on.

So, Harris, I know you have an interesting, history and background with Islamic finance, with also working in, you know, conventional, banking and finance and coming from that world, and then of, of course, you've also gone, into Bitcoin as well. So that'll be really, interesting to, get into also. But let's start with a little bit of your, you know, just a little bit of your background on finance and how the Islamic banking aspect came up for you.

Yeah, well, I never thought I I, I studied physics at university, and I thought I would end up studying the stars from Palo Alto or somewhere, and, and actually I realized, that when I got to university, these people around me are way brighter than I am, so I think, trying to compete with them to become an astrophysicist was probably not gonna get me very far, and I decided that, something in the city looked interesting. and in London, when we say, you know, something in the city, that's usually investment banking. but I As a management, a trainee management consultant, and realized that the old saying of borrowing your watch to tell you the time is very true, and I didn't really feel very fulfilled by doing that kind of work, and I looked into something called project finance, and project finance is the financing of infrastructure. So, you know, there's many things within banking which one might consider to be socially useless, and in fact, that's a term that was used by a former head of the FSA in the UK, but, I felt that project finance, which is the financing Infrastructure, rail, railways, roads, hospitals, schools. Well, you know, that's kind of a noble endeavor, and I looked into it and, started working in a small British merchant bank, then moved across to Deutsche Bank in the late nineties, and, they sent me to Dubai. They said we'd like you to originate our corporate finance business out there, we'd like you to help open office there. And in fact, I was the first guy on the ground, so I arrived and, you know, Dubai was very much In the very early stages of its, journey as an international financial center, and two days after I arrived in Dubai, you know, in a serviced apartment surrounded by boxes full of my belongings, 9/11 happened, and, you know, all of a sudden you have this situation where a lot of money, a lot of capital owned by Gulf high net worth families starts getting repatriated to the Middle East because there's a lot of increased scrutiny of accounts in the US and the UK. And elsewhere, and, you know, they wanted to just move their money back to the Middle East, and that saw local markets, local real estate start taking off. The Dubai government said, "Let's create an international financial center," and Deutsche Bank was at the very beginning of that, and I just happened to be lucky enough to be the first Deutsche banker on the ground, so there I am, you know, fairly junior to mid-ranking banker, suddenly in the middle of this very exciting frontier's development, and there's this patch of desert out there Which is a, essentially a square mile, just like the square mile in the city of London, but it's, it's clean, it's, it's waiting to be built on. And we, as their first investment banking advisor, were, were part of that process, and, you know, we helped them to build that international financial center. So of course, here I am, sitting in Dubai in the Middle East, supposedly originating all of our corporate finance business, and, you know, we've got clients coming to us and saying, "Let's do deals on a Sharia compliant basis. We'd never done that business before, so I co-founded the Islamic finance team at Deutsche Bank, and we found ourselves-- we hired actually one of the world's leading theologians, a guy called Sheikh Hussein Hamid Hassan And he was considered to be the grandfather of the modern Islamic finance industry. So this is a, a man who is a, a very highly trained in, not only in theology and Sharia law, but also, in, comparative law and also in finance and economics. So he had multiple positions on various Sharia boards at, Islamic banks in the Middle East. But this was the first time, I think, he had ever encountered I guess young, dynamic, Western-trained investment bankers who were prepared to push the boundaries, you know, so up until then Islamic finance had been a sort of sleepy backwater, and you'd had very simple, mostly retail products, and really nothing particularly sophisticated or complex, and all of a sudden you've got these investment bankers saying, "What about if we started to create acquisition finance, leverage finance, structured investment products, hedging in?" instruments on a Sharia compliant basis. Never been done before. So we started creating these things, and I think he enjoyed that, that dynamism and that, sort of respectful pushback because the standard response there Islamic bankers would get from Sharia coordination departments, who were the sort of gatekeepers to the scholars, the middlemen, was doctor says no, right? But they would never say doctor says no and there's a way we think you can create this product, so here it is. So it was up to us to work out, to solve the, the puzzles, 'cause of course, investment banking is one of those few industries where people are Paid for cleverness, for solving puzzles. You know, it could be, I don't know, tax structures in Luxembourg, right? You give them a set of rules, a set of parameters, and they solve a problem. Hence why you often hire mathematicians and physicists to do these jobs. But here we had a different set of rules. So alongside the usual legal, commercial, and tax structuring, you now had Sharia law. Right? And there's this body of jurisprudence within Sharia law called Fiqh al-Muamalat, which means the jurisprudence of commercial transactions, which is a pretty sophisticated body of law, and we had to solve the problem against those parameters. And, and really no investment bank had done that before. So, you know, it was, it was really genuinely creating a new industry, and we started creating these huge benchmark-sized sukuk transactions, which are Islamic bonds. So, for example, the Dubai government through one of its, quasi government entities DP World, which is called Dubai Ports World, DP World, acquired a FTSE 100 company, called, PNO, the ports and ferries operator And it's a very large transaction, and we structured the very first exchangeable or convertible sukuk, Islamic bond, which was, I think, a three and a half billion dollar issuance. so, you know, really never been done before, quite sophisticated, you know, it was, paid in the form of a qualifying public offering later on, so a convertible or an exchangeable, and, you know, this was the kind of deal that Deutsche Bank brought to the table twenty years ago. and I was very lucky enough to- be a part of that. So I guess the Deutsche Bank part of my career, where I spent 11 years, is, is I guess the most significant part of, of what we did, which was essentially creating a revolution in Islamic finance.

I see, and so the perception might be that if you are trying to operate, you know, in today's fiat finance world with fractional reserve banking, that, you know, anybody trying to do this kind of thing would be at a disadvantage. Is that true or what, what kind of, how do you think about that, like this idea that, you know, it's like, you, you might have these, you know, religious ideas, these legal principles, and i-is it, you know, effectively like you're trying to compete and you're in this boxing match, but you've got one arm tied behind your back and the other guys, the other competitors in that market, they've got both their hands? How, how do you sort of, how does that work when you kind of pull it all together?

I remember reading a comment that another Islamic banker had made. He said, "Islamic finance or Islamic banking in particular is like trying to play American football." in a swimming pool. So you got all this gear on you. So you're trying to play water polo, but you're wearing this helmet and this padding and all this stuff that restricts your movement. And I thought that was a pretty fair analogy, because there are a significant number of parameters. the one that we never thought about twenty, twenty-five years ago was sound money versus fiat money. I didn't really have a concept. Look, I was a standard investment banker. I'd been brought up in, you know, with the received wid-wisdom Of fiat economics, you know, neoliberal economics, of, you know, having this received wisdom handed down through the generations since the early twentieth century, and this is just the way business is done. So we never stop to think about, okay, we're creating a system of finance that is supposed to be ethical, that is supposed to be risk sharing, that is supposed to be real economy based on real jobs, real wealth creation, not pieces of paper shuffling around. Creating intangible derivative contracts. That's the essence of Islamic finance. It's meant to be about the real economy, and it's meant to be financing businesses on a risk-sharing basis, so you share the profits and losses. It's not a case of, "Hey, you are, I'll give you a hundred thousand dollars or a million dollars, and you've got to give me a ten percent plus in exchange." It's just an exchange of money for money with a bit of money extra coming back to you. That's what riba is. Riba means excess or surplus, and we loosely translate that It's actually an asymmetric relationship where the borrower and lender aren't equal partners. One is the master and one is the servant. So I think we never really stopped to think about that in those early days, and we just considered, you know what, Islamic finance is just about creating halal or religiously permissible contracts on top of this banking basis. But I never stopped to think about that. And over time, I started to feel that, look, I'm trying to incorporate these risk-sharing arrangements Within a banking environment, but we always seem to be coming back to a debt relationship. So we created these sukuk, these Islamic bonds, and we tried to make them so that The bond has a maturity, but in theory, you're-- at least under an Islamic economic model, you're supposed to repay the market value of the bond back to investors at maturity. What actually was happening was the bankers created this additional contract called a purchase undertaking, and they would guarantee effectively to repay the full par value of your bond. So where's the risk? Right? The risk became the credit risk of the obligor. Well, hang on, that's no different From a conventional bond thing. So it be, it's, as much as people like me tried to introduce true risk sharing concepts into Islamic finance back in those days It was pretty much, we felt virtually impossible to do that within a banking environment because a banking environment is a fractional reserve banking system in which the banker gets his money back Whatever happens, come hell or high water. So that I think was the problem, we were trying to play water polo wearing American football gear or, you know, knocking a, a, a, a, a square peg into a round hole. And despite our efforts, I don't think we were able to get to that point. And then, in 2017, I was delivering a lecture, and I often delivered lectures on Islamic finance, and somebody in the audience asked me, "What do you think about Bitcoin?" And I said, "I, I'm really sorry, I, I don't know anything about it." And in, in my head, it was sort of a magic internet money. And I said, "You're gonna have to explain it to me, 'cause I don't know enough." And he said, and he explained all the characteristics, you know, it's, it's decentralized, it's got a high stock-to-flow ratio, it's divisible, it's secure, it's censorship-resistant, it's, you know, et cetera, et cetera. Yeah, that's basically what people are calling it. I said, "Okay, I'm gonna have to go and research this because I understand gold to be a form of money that has been Islamically significant over fourteen hundred years, and in fact, it defined a period of seven hundred years of what, you know, scholars will describe as the Islamic Golden Age, when there was a great advancement of learning, of culture, of science, of astronomy, of mathematics. Of learning, of even translating Greek philosophers, that's what the Islamic scholars brought to the table for seven hundred years. It was a time of great advancement in civilization, of low time preference, right? Why was that the case? I, I believe that it was because it was a period of a gold dinar standard. A period of low time preference defined by a non-inflationary form of money, and therefore people think of gold as being the ideal Islamic form of sound money. And when this guy said to me, "You know, Bitcoin is like this," I said, "Okay, I gotta go and research this." And from that day on, I became a Bitcoiner, and I realized the reason why we are failing to create true Sharia compliant products on a fractional reserve basis is because fractional reserve basis exists because of fiat money. And as long as fiat money is created in the process of credit creation, of lending by banks, you can't have a truly risk-sharing, real economy basis for finance, which is what Islamic finance is supposed to be. And in fact, even nowadays, I'm, I'm slightly reluctant to use the phrase Islamic finance because I think it's a form of finance that is universal for everybody, should be universal for everybody, and everybody should buy into the concept of- Finance, which is ethical, which doesn't finance unethical things, and also is real economy based. It's not the creation of intangible derivatives, paper upon paper upon paper, which ultimately led to the two thousand and seven, two thousand and eight financial crisis, and is risk sharing where you have a symmetric relationship between the financier and the financier, so they are partners in an investment relationship, which ultimately leads to better investment decisions. Right now, we're in a situation where money is Cheap money is plentiful, money is printed, money devalues over time. So if you're a VC, you wanna get rid of it as fast as possible, and you end up making poor decisions, frankly. What if we had a, a monetary system that nudged us towards better investment decisions, where our hurdle rate was a deflationary currency? Now, if you have that as a hurdle rate and a unit of account, now you're making, you're forced to make better investment decisions. So this was a sort of epiphany for me. This was a moment at which I said, "You know what? If you combine, combine the principles of Islamic finance with a sound monetary basis, and at the moment, I believe Bitcoin is perhaps the most Islamic form of money ever created, better than gold, at least gold in the way that it's, it's, it's- to use today. Then I think you have an ultimate ethical financial system.

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Yeah Yeah, I mean, this is a very difficult discussion to have with a lot of incumbents in the Islamic finance space because they're quite, I guess Establishment, so they're quite, acquiescent to what governments tell them is good for them. So if governments say, "You know, this is our regulatory system, and these are our trusted intermediaries, and we regulate those trusted intermediaries, it's all good," I'm one of those people who is naturally skeptical of that, and I'm a firm believer in self custody, for example, or I, I'm, I'm, I've now become a believer in the idea of multi institutional custody. I do think that that is, that has a very, powerful, story for many users of Bitcoin going forward, and it'll be part of the important infrastructure of Bitcoin going forward. So, and I, and I appreciate that not everybody is, you know, is necessarily, you know, technically proficient at this stage to be comfortable with self custody. Yes, it's entirely human, human beings are human beings. Human beings are greedy by nature. You know, we are gonna create a fractional reserve system on top of Bitcoin. The question is to what extent, because at the moment it's, it's, it's on steroids, right? The fiat, fractional reserve banking system is a system that's completely out of control and I would like to think there's a part of me that's very optimistic that says because of the incredible need for proof of work within a Bitcoin system The ability to create Bitcoin from nothing just doesn't exist. Yeah, you can have pieces of paper floating in the economy which aren't necessarily backed up one to one by,

you know, Bitcoin. You know, safely held in custody. But you have this, you have a natural check. On the one hand, I think the idea of having, for example, Bitcoin ETFs right now is

positive because You know, people who aren't so familiar with self custody and/or who need to put it into the 401k, you know, or into their SIP in the UK, we have self invested pa-pension plans. You know, this gives them an opportunity to invest on a retail basis in, in Bitcoin so I think it's good from that point of view. On the other end, I would hope that once people start doing that, they realize there are better ways to custody Bitcoin, better ways to, to hold it And, you know, that they realized that this concept of trust versus verify is something that is fundamental to the uniqueness of Bitcoin. even if they were to use gold as a monetary system, they still require a trusted intermediary. And I would hope as the education, you know, improves, that, amongst retail buyers, that you, you see a move away from The, the establishment banking system and, the financial players like BlackRock to provide these pieces of paper that apparently are backed by real Bitcoin towards a self-custody model. There's no way I can predict that. No one has a crystal ball. I don't know which way it will be set. Will it, will it become more like the fractional reserve banking system, you know, or will it become a truly unique self-custody sound money system? I don't know. I'm an optimist, so I'd like to hope the latter. let's see.

Yeah, and I think, look, I think, it's probably fair to say that there will be a lot of custodial users, but I think it's also fair to say that Larger value, let's say whales and institutions, will have it more feasible for them to self-custody. And so it may be a system where there's a lot of individual smaller users, and maybe they are custodial, for better or worse. Now, of course, I want as many people to self-custody. It's just in practice, I've recognized there'll be limits and, like you said, there'll be technical considerations for people, you know, cost considerations for people, but I think it's probably fair to say For larger value hodlers, they will be able to self-custody or do some form of multi-institutional custody, or maybe some kind of hybrid thing where maybe they hold one or two keys and somebody else is holding a few keys, and that, in that way, it's kind of decentralized a bit in that way. and yeah. I-my suspicion is that gold ultimately politically failed in the sense that not everybody could easily- Self custody, and because of that, the centralization of custody happened with gold. So then most of it ended up with, in, you know, government central bank vaults, and a lot of it in the US government Fort Knox vault, and then that's how the system got captured and fractionalized on top of that. Whereas I believe in Bitcoin, I think it's gonna be a different, you know, now none of us knows for sure, but I think that's the tendency that Bitcoin is pushing towards. So that's where I see a distinction in the, let's say the fra- Fractional reserve system, you know, of today, of the fiat world versus what I believe is the full reserve system that we're moving into. But, you know, at the same time, it's gonna take time to get there, you know, won't it? It's not just gonna happen, even in, in a, you know, another four years. No, I think it's, it might be Ten to twenty years on the low end, but I'm curious, you know, how you're seeing that?

You know, I have a particular perspective because I'm a Muslim myself, you know, a lot of my interactions are in the Middle East, a lot of the people that I speak to about Bitcoin are Muslims themselves. you often come up against the, the deep skeptic, and you mention Bitcoin and, it's as if it triggers something and, you know, they've heard the FUD, you know, it's, it's, Money, it's, you know, it's, it's, there are a few whales who control the prize, it's magic internet money, the usual fud that you hear. And of course, there is a, a, a sound rebuttal against each of those points. But one of the particular, challenges that I have in orange pulling Muslims about, Bitcoin, remember there's two billion of them, so that's a very large potential anchor group for, you know, evangelizing the concept of Bitcoin. one of the challenges I have with them is that many sincerely believe, based on scripture, that gold is the only sound form of money, the only Islamic form of money. Because they've, they've read many scriptures that mention gold, and there's one very famous tradition, it's called Hadith, which is a collection of the traditions and, and sayings of the Prophet, peace be upon him, and one of those is with gold, silver, barley, wheat, dates, and salt, they may only be exchanged hand to hand, meaning at spot price and no increase on the deferred payment. In other words, you can't charge interest on them. And it's often misinterpreted by many Muslims to say, "Oh, look, this says only these things may be money," but that's not what it means. It means things that are used as money. May not be exchanged for a higher value later, right? You can't create interest on them, 'cause then you're not taking any risk. You're not, you're not financing an underlying venture as such. You're just asking for more back in return, and that means rich people get richer and poor people get poorer. So it's a bad thing to do. So they misinterpret it, and they say Okay, we can only have gold. Gold is the only traditional Islamic form of money. And I say that's not true at all. You've misinterpreted. And yes, gold is mentioned because of course Bitcoin didn't exist fourteen hundred years ago. But if you look at the characteristics Of Bitcoin, you see that it has the characteristics of gold, but potentially even better. So perhaps it's even more sound form of money, perhaps it's even more Islamic, and that's the argument that I put to Muslims and say the characteristics of it are such that it would produce a better world, a more harmonious world, a more ethical world, a world in which you don't have these players that we call banks who are the masters of this financial universe, and we're all slaves to this master You would have a much more, equitable relationship between these parties. We would be partners. They would finance us as partners, and we would share in the risks, share in the profits and the losses, and they'd be forced to do extra due diligence on our ventures, so you wouldn't be throwing away your money at bad ventures. So these are the arguments that I use, and I try to convince them that, you know, this idea that gold is the only thing that we can return to, well, you know, it's heavily manipulated, it's deeply- Centralized, you know, you require trusted intermediaries as a cost of storage and transportation and et cetera, et cetera. Bitcoin is click your fingers and it's on the other side of the world, or you could send a billion dollars worth to the other side of the world, and it would be extremely safe if you self custody or if you use multi institutional custody, and you've got three parties holding a key. This is incredibly safe. You're not subject to sanctions. I mean, I don't know about you, but I mean, with my name, my bank account regularly get- gets frozen with completely innocuous transactions and I have to keep justifying them. You know, and, and I'm tired of it. I'm tired of being censored. I know many Muslim businesses who get censored regularly. In the UK, charities, Muslim charities get censored regularly and their bank accounts have extra scrutiny applied to them, you know, for, for doing things like helping the homeless or whatever it is. So This is something that I think people who are underbanked, you know, who are less represented for the global South in particular, I think it's an incredible form of freedom money. The gold simply can't offer them, and that's the argument that I use with Muslims.

Great, and I, I think you were also touching on some of the cultural differences, and this is something I've often spoken about as well, the cultural differences between operating and living on the fiat standard versus what I believe the future will be on a full reserve Bitcoin standard. I'm curious if you have any thoughts there in terms of How you explain that for people? Because, let me put it this way, when we operate in the fiat fractional reserve system, people are Because of the leverage associated, there's often always this incentive for people to just go and take on more leverage, right? Because if we think from an accounting or a finance perspective, if we think about the cash on cash return that we get when we're using leverage, it just, it just magnifies. And so nowadays, it's very, very common for entrepreneurs and investors to use this kind of leverage effect Even if they didn't necessarily strictly need to, but because it enhances their return from a leverage perspective. So can you, I-I'm sure you've probably spent a lot of time thinking about that, what is the difference? That's gonna take place in society once we, you know, change that leverage effect to a full reserve system.

This is, this is a particular, obsession of mine, you could call it. So the company that I run, CCM, Cordova Capital Markets, its, its purpose is to create a form of trade finance or working capital that is truly risk sharing. Now, of course, it exists in the fiat world, okay? It doesn't do it on a Bitcoin basis. but the way we are trying to do it Is as a, a complete alternative to the banking system. So what we say to good quality companies is, you have a particular trade, we will raise money to finance that particular trade, it's trade finance or working capital, supply chain financing, whatever you wanna call it. And what we'll do is we'll create a capital market instrument listed on an exchange somewhere, but it won't be a debt. That instrument won't pay a simple coupon on a regular basis that is fixed, again, come hell or high water. In fact, it will be based on whether that trade is successful or not. So the trade makes money, you share the profits with your investors. We'll try and make sure that we build in as many, structural operational, Let's say, restraints on the downside so that investors have some assurance their money is being handled well, so capital controls, you know, making sure that we follow through the, the flow of cash from start to finish, various KPIs are in, are in place, a level of due diligence that a banker wouldn't do. So we are with, we are with the company through every step of that trade journey, and we can follow it from start to finish, and at the end, which we have a reasonable assurance that there's gonna be a profit made on our- High quality trade. That level of due diligence, those controls that we put in place, and the upside sharing are unique in this industry because bankers do debt. Bankers don't do what we call PPNs, profit participating notes. And that's a particular obsession of mine, because that's a return to the roots of trade, which I think are fundamental to Islamic finance. And if I can marry that with a Bitcoin monetary base, I think we have the ultimate form of-- and again, I'm, I, I wanna be careful using the word Islamic finance, because I just think it's good finance. I think everybody should use it. And what that ends up happening is the company that you invest in and the investors are now aligned. Their incentives are aligned. There's not an asymmetric relationship between them, and these aligned, partners now have an incentive to grow an economy in a wholesome way. So in the Middle East particularly, we are finding that many business owners, family offices, high net worth, heads of families are saying, "I'm really interested in this PPN." Because I'm very uncomfortable. There's a, there's a, a level of discomfort culturally with debt in general, and they say, "I'm very uncomfortable with the idea of debt on my balance sheet." It doesn't help me to sleep at night, you know, the idea that I have to pay back a bank. Whatever happens, so that they're not taking on the risk and I'm taking on all the risk. But I do like the idea of being a partner with investors, with an instrument that, in some senses, looks a little bit, the format looks a little bit like a bond. It's listed on exchange, it pays out a regular payment, but that payment is based on what we are actually doing and the way that the financier is measuring our performance, I like it because we're now in a healthy way moving towards, The same goal. So culturally, I think that this form of finance is really, something that's well suited to, particularly the Middle East, but I think in general, I mean, we're finding businesses in the US and the UK who are ver-- very interested in it and investors who are very interested in those two jurisdictions and saying, "You know, I do feel uncomfortable with financing these often owner-managed businesses, right? So they don't wanna dilute their equity 'cause they own the business. They don't wanna raise money that way, and they don't wanna take on bank debt because it doesn't help them to sleep at night. So they think, "How can I do this in a way that's wholesome?" That helps me to sleep at night, in which I have partners, my financiers are my partners, I'm not beholden to them in some other way. And I, I think that leads to a very healthy economy in which risk is shared and in, incentives are aligned, and everybody rises up together. I mean, I think this is about leveling up. and it's difficult to quantify the effect of that, but I think ideologically, there are a lot of people who are getting behind that idea.

Yeah. So I'm just curious then, what happens when things break down or let's say Not successful. what's like, what's the recourse there? How, how, how does that then play out for the investors who've chipped in money? how does that work?

Well, there's four circumstances in which they would get their money back, against a pledge of typically inventory or shares, and those circumstances are fraud, they could be negligence, they could be breach of contract, and they could be insolvency. So if you've put your money into a specific trade and not directly related to that trade, but for some other reason, so the company collapses for some other reason, you have a pledge over, you know, certain things, whether that's shares or property or inventory or whatever it is. However, as an investor, you aren't taking Taking market risk. So if the world p-price of, I don't know what it is you're financing, let's say it's coffee beans, if the world price of coffee beans collapses, you are taking a market risk. Right. Maybe there's some, protections in place. So for example, you-- we have one deal where we're dealing with Brazil nuts, for example, and we make sure that the trading account that we control doesn't release money to the company To buy the raw materials, which they then process in their factory, until we've seen pre-sold contracts with wholesale buyers, so we have a reasonable degree of comfort that actually this, there's gonna be a profit made. So we see that there's some contracts that are locked in, we release the money from the trading account, and out it goes, and the profit is made. Now, that's not a capital guarantee, 'cause there is a time lag between the money going in and the trade being made, but it does reduce some of that, discomfort that investors, investors are used to seeing Guarantees. They're used to seeing guaranteed returns. They're used to seeing what's my security here. So we need to give them some level of comfort, but we have to do it in a Sharia compliant way where a, a risk is being taken and incentives are aligned, and this is a real economy transaction. So there is some market risk for sure.

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Yeah, sure. I mean, we're targeting ten to sixteen percent per annum yield, against trades which are, in my opinion, the benchmark here is sukuk or Islamic bonds. And typically, if you buy an Islamic bond, you're buying an investment grade, rated instrument listed on an exchange somewhere. It Governor and issuers or very large corporates, you know, an entity like Emirates Airline, for example, and you're typically earning low single digit, four, maybe five percent per annum My view is you're, if you're buying a corporate sukuk, you're actually taking on a level of risk that many investors don't properly understand. and this was borne out some years ago When a, a real estate operator in Dubai called Nakhil issued a sukuk that, paid seven percent, and people thought, "Oh, seven percent, that's a nice return," but actually, you had no real ability to enforce over apparent underlying assets under that sukuk, which was a patch of land, you know, being built in, in Dubai. and so therefore, the level of return you were getting was not high enough for the level of risk you were taking. And I found that with many sukuk, there's this expectation from investors who have- I haven't read the documents in detail, but they're gonna get their money back like a bond, whereas in fact, they're, they're taking on a level of risk that I don't think has been properly assessed. And what we're trying to do is to try and-- we're trying to deliver a similar level of risk, but roughly double or triple the level of yield against that. So the range would be ten to sixteen percent. In fact, in our first two deals, we've delivered an average of sixteen and a half percent yield. You know, so we think that's very good. I don't think that, that's, by the way, and that's pretty high. We were predicting eight to thirteen percent. That's what we were, we were predicting the range would be. Of course, you can't guarantee a return, so you say to investors, "Our expectation is eight to thirteen percent," and we ended up delivering plus over sixteen percent. So, you know, I think that's a good start, and, you know, we'll, we'll continue to, suggest a range of sort of ten to Term that we expect to give our investors at a, a little bit more market risk than a typical sukuk, but many of the similar downside risks like insolvency protection, bankr-bankruptcy remote segregated, bank accounts, you know, an, an SPV issuer that's regulated in a well-known jurisdiction, et cetera, et cetera.

Yeah, interesting. And so the other aspect that you touched on is the due diligence and the, let's say, it's, it's, it's more hands-on, let's say. And so that obviously implies certain things, that, you know, this would be for, you know, larger businesses, more professionalized, you know, this isn't just for like kind of mom and dad shop down the road kind of, you know, level. Yeah. There's a certain level of size and, You know, there's a certain level of size required to make these kinds of things sort of operate, and I think to me, one thing that I've noticed, let's say, in the fiat world today, is that a lot of these cheap fiat loans are actually just government subsidized, right? Like that really, when you think about what happened in, you know, even in the US, the GFC, talking about, you know, F-Fat-Fat-Fatima and Freddie Mac, these are basically government entities that subsidize loans for the everyday people to just buy houses. Right. And so there's kind of different segments of the market, and I, I wonder whether, you know, in the future, if we have a full reserve sort of, style of banking and, you know, finance like we're talking about It might only be at certain size, you know, or a certain kind of scale that maybe mom and dad shop, it might not be as feasible. But I'm curious where you see that, like, do you see that maybe in the future, you know, this kind of thing could apply even for smaller businesses?

You know, I, I'm hopeful that the technique that we've developed will trickle down. At the moment, we have to apply it to medium-sized companies, you know, typically turnover over ten million dollars per annum up to two hundred million dollars, with very tight criteria, you know, very strong supplier chains, you know, very good market position, a, a global international star, you know, something we, we think will be the, the next big thing. So we apply very strict criteria to the companies that we help finance. I would like to see the technique trickle down to smaller, medium enterprises. I want to see this technique used for smaller businesses. I can't do it today because I don't have the resources to do that. But once I have the resources to do that, you can be sure that I'm gonna apply it to smaller and smaller businesses. And, you know, actually, we can structure it so that the default rates are very, very low, because I think at the moment you're quite right, there's so much-- when, whenever you have a subsidy. You, you take away the element of due diligence, you know, because now someone else is picking up part of the tab. But where you have to align yourself, where the investor and the investee are aligned, you have to be extra careful. We spent several months with our clients beforehand assessing whether they are ready to issue a capital markets instrument. Bankers don't do that. I mean, in my time at Deutsche and then Barclays, you know, we typically spent a month or two doing our analysis due diligence Diligence, financial statements really. We weren't doing trade finance analysis, we were just looking at the big picture, you know? And with, within a month, you can click your fingers and issue a bond. Now, that's not a lot of due diligence, whereas we spent several months doing this. So if you have a system, again, of low time preference, where the financier sits down, embedded within a company, and says, "Right, take me through all of your processes. I wanna meet everybody here. I wanna go through the whole process. I wanna see how you generate a return Walk away at the end of it and let investors just, you know, hopefully they'll get their money back. No, I want to be part of the process going forward. So every three months, I'm gonna assess all of these KPIs. That's a very different process, and I want to see that become the new standard, at least in the Islamic finance industry, if not in all of finance. I don't know if we're gonna get there, but that's my ambition.

Yeah. so I've got two other questions there. let's start on this question. So what we've been talking about, as you said, is trade finance. Now, you know, you came from this world of, you know, finance where there's all these other forms of finance that exist. So I'm curious Are some of those forms of finance not going to exist in the full reserve Bitcoin future? Do you think that maybe only some of these forms are actually going to be viable?

I, I wonder whether venture capital as it exists today would continue to exist under a Bitcoin standard because the hurdle rate is now Bitcoin itself, and therefore the level of due diligence, the level of analysis. You know, we're throwing, currently, you know, good money after bad. W- if you're lucky, you'll hit one in ten projects. And, you know, I, I don't invest in VC firms. I don't, VC is not part of my personal pension or, or retirement fund. You know, it's just too risky for me, and I don't trust them. I don't, I don't understand why they make the decisions that they do. Well, I, I do understand it's 'cause they have high time preference, right? so I, I do think that VC, the VC industry must change under a sound money standard. the banking industry in general, I mean, at the moment, you have an ability to create money from nothing Credit creation leads to money creation. Obviously, under a Bitcoin standard, you can't do that. So again, you are forced to make high quality investment decisions in which you align with the financed party. I, I think that there's a pot-- potential for Bitcoin banking, and I'm reluctant slightly to use the word banking, but Bitcoin financing is a very different process. It's more like true VC, you know, true private equity, where you are investing in the profits of The losses of a business and not merely financing a line of credit and creating new money in the process, because you can't create new money in the process. So I'm hopeful that we'll move a model. As I said before, we can't account for human greed and people will find ways to create interest bearing contracts on a Bitcoin standard, of course they will, but hopefully they'll be much reduced because of proof of work. It becomes much harder to create money from nothing or effectively, you know, create pieces of paper backed by nothing. so I, I'm, again, I'm hopeful about

Yeah. Yeah, I think, I think you made a lot, you think you explained it well. as an example, like even for me thinking back to my university finance courses and things like this, people talked about as an example the LBO, the leverage buyout, right? So that was like another thing that was kind of common from the investment banking world that may go away in the full reserve future because the whole concept, leveraged buyout, right? Like I'm only gonna put up five percent or ten percent of the capital and borrow ninety percent, that's clearly not gonna be, like You know, or the, the amount of return that I would need to be anticipating back from that is just so high that I don't know that it would exist in a full reserve world. So that's one example. I think it would be very hard.

I'm, I'm gonna give you a specific example actually, with Deutsche about, I guess, fifteen years ago, we did the largest, leverage buyout, in the Middle East. It happened to be also the largest ever Sharia compliant leverage buyout, and it was a company called Egyptian Fertilizers Company. and a private equity fund was, fund was buying this, this company. and of course, it, because the fund was a Sharia compliant fund, it had to be done on a Sharia compliant basis. Now, in, in my industry, there is, there's a lot of synthetic stuff that goes on. So a lot of Islamic banks are essentially entering into a, a particular type of contractual relationship called commodity morabahah. It doesn't mean-- doesn't matter exactly what that means, just to know that it's basically a proxy for a loan with interest, and the bankers have done some very clever manipulation. To make this apparently halal contract look halal, but actually it's based on a very dubious underlying structure. We recognized that, and we said, "Okay, what's the real economy way of financing this leverage buyout?" And we said, "Well, here's a company that you're buying. It manufactures a particular product, which is fertilizer." What if Deutsche Bank, as the financier, enters into a forward purchase of the product, the manufactured product of this company? So we, we give eight hundred million dollars as this tranche of finance, and we effectively buy eight hundred million dollars worth of bags of fertilizer to be produced over the next seven years, which is the maturity of this financial instrument. Now you've got a real economy transaction, 'cause now you're saying, "I'm actually buying something that you manufacture." Now this, this doesn't literally mean that, you know, in seven years' time or over the course of seven years, you have, you know, eight hundred million dollars worth of bags of fertilizer turn up at the door of Deutsche Bank in London, right? That doesn't, it doesn't literally mean that, 'cause you have an off-taker. So as long as you can have some assurance about who that off-taker is, you on-sell these bags of real

Of, effectively a full reserve financial instrument which is backed by a real commodity. And I think that's a very ethical form of finance, 'cause now you are financing the real economy without-- I mean, clearly there's a lot of, financial structuring behind this, and it's very hard to get people on side within an investment bank, and we had a hell of a time trying to convince our colleagues that this was a good trade, and actually you can, you can mitigate a lot of the risk Risk in this, but you have a real economy trade underpinning your financial instrument. So it's possible to do a leverage buyout on a true hundred percent backed, real economy risk-sharing basis, and we proved it. But sad-- sadly, the industry has stagnated since then. We don't tend to see that kind of transaction anymore.

Yeah, and as you, certainly appreciate, we are still today swimming in the fiat waters, right? So even if we try to have one particular transaction that's full reserve, the kind of the broader waters that we're swimming in are fiat fractional reserve, and so that's kind of driving, maybe perhaps some of the returns, and even, you know, as we talked about, the VC model, certainly relies, at least in today's world, it relies on people taking these highly speculative bets, right? That these angel investors and VC investors are kind of, they're putting in money into startups that they know maybe ten of them, nine out of ten of them are gonna fail, but they're hoping that one of them is like the hundred X or the thousand X that repays, for all the others. and then even when it comes to things like- certain types of private equity, like the kind of roll-up form of private equity where the idea is, okay, let me buy some of these different entities, roll them together into one entity, and then hopefully the valuation multiple on the joint entity is much higher, therefore I'm gonna get my money out of that. So, you know, that's again, it's kind of, I don't know how much of that, you know, certainly in the future there may be some return that comes from economies of scale, certainly, but maybe it won't be enough to justify the, you know, opportunities that exist, you know, in, in the fiat world today, especially when rates are low, I think that's probably the other big thing. It's when rates are low, you start to see all these crazy behaviors, right? Yeah.

Yeah. In, in a, in a weird sense, it's actually helpful for rates to go up in order for people to see the benefit of a real economy transaction. I, I hate to say that because I, I, as a Muslim, I don't want to see interest rates at all. You know, I want them Money. But, you know, i-i-as I say, in a weird sense, it's actually quite helpful for the business that I'm doing right now. whether we can completely get away from- Financial structuring as investment banks and private equity firms do today, where they aim to extract value from a business, not from the real economy trade itself, not from the business itself, but- From, you know, restructuring the balance sheet in some arcane way, which I, I, you know, this is something that I, I'd like to see us move away from, and I'd like to think that getting onto a sound money standard and using risk sharing techniques will move us away from that and move us towards real economy being the master and the financial economy being the servant. Whether that will happen, I don't know.

Yeah. So one, I guess, tragic question or way to frame this is also, how can a person be moral in today's age, right? Like, you, you could say, "Oh, it's difficult to, you know, get a house without a mortgage, and participate in the fiat system," or even, you know, coming back to that example before of, you know, the NFL guy, you know, underwater, or the guy, the boxer who's got one arm tied behind his back. So even if you're trying to be a moral, upstanding person And we're kind of stuck in this world as it is today. So what are some of the ways that, you know, people, you know, are trying to, you know, proceed in that world?

Yeah. You know, this is gonna sound a little bit, corny, and I'm sure many of your viewers will start rolling their eyes at this point, but I've observed something about people who forswear debt, and particularly interest-bearing debt, and particularly in my community, when I see people who finance their businesses,

with a lot of riba, with a lot of interest.

they don't sleep very well. They-- there's a

lot of stress in their lives, and that stress is reflected in their personal relationships, in their financial dealings, in their daily lives. And when I see them move away from riba-based debt, interest-based debt, I see that burden lifted from them. I see this with my own eyes. You know, it's, it's something that I can't quantify. I can't put a number on it. I can't put a finger on it. I couldn't tell you it's a-- this is a The vibe that I get when I see people who have taken debt away from their lives, they sleep better and their personal relationships improve and their family lives improve and their daily lives improve. You know, this is something that, it's, it's hard for me to, to articulate, but Personally, I am convinced, and it's a belief, you know, it's no more than that, I am convinced that people who move away from interest-bearing debt and move towards a more wholesome form of finance, they just lead better lives, they're just healthier, they're just happier. and you know, the measure of human progress nowadays is just GDP. It's a crude way of measuring human progress. It's the value of goods and so the exchange value of goods and services, not the experiential value of human life. We don't measure suicide rates and divorce rates and literacy rates and environmental pollution and so on within GDP. We only measure this very blunt metric, which is exchange value of goods and services. You know, if that's our only metric for human life, we're, we're gonna fail, you know, as a civilization. Or maybe we need to start thinking about other metrics that determine progress, in the world. A- and, you know, one of those metrics might be the degree to which there is debt in our lives. I was just listening to your podcast with Lawrence, you know, about the US national debt, and, you know, again, it's just something you can't quantify. Sure, you can say, "Here, here is what the national debt is How has that impacted daily life for people on the ground? You know, how do we measure that in terms of these things like literacy and suicide rates and divorce rates and happiness? How do you measure happiness? So, I don't know if that's a, it's kind of a hokey answer for you, but, you know, that's the way I feel about it.

Yeah, I think it's an interesting point to make, and certainly we can talk about- as you said, this kind of people mistake economics, and especially I, I would say Austrian economics, is often mistaken as being kind of homo economicus, when actually if you go and read Mises, he talks about how man is not homo economicus, right? He's not just like this soulless automaton thinking, "Oh, what can I sell this for the maximum? And I'll sell my children away, and I'll do all this..." No, like it's, the economy is meant to be how we are living our lives and our, you know, our family life. Lives are part of that. It's not just about kind of how do I maximize the monetary number gain, and so I think that's an important distinction to make. Of course, you know, we can talk about, okay, s- in certain ways we are materially wealthier today, for sure, but there are other ways in which, you know, maybe, religious, spiritual, or other moral aspects, yeah. And much of the

family life has improved, yeah.

Yeah, and you think about how atomized a lot of people are in society today. You look at how, you know, people aren't marrying as often or they're marrying later. When they have children, they're having children later, they're having less children than they used to. Like, there's all these other elements of it, that, you know, I think many of these things will improve, in a Bitcoin standard, one other big question area that I was curious to ask you is around hurdle rates, right? Because as you know, obviously you're a finance guy yourself, and a lot of Bitcoin hodlers are gonna be thinking, "Well, hey, the last ten years, if I've hoddled my Bitcoin, I got sixty percent per year. That, that makes it very difficult." to invest in projects. Now, you know, people aren't necessarily all in Bitcoin, maybe they've got some stack of Bitcoin and they've got another stack or another area that they're making active investments. So, but where does it all blend together when we're thinking about hurdle rates, you know, in terms of Bitcoin, purchasing power growth? Now, of co- to be fair, I'm not saying it's gonna be sixty percent, you know, forever. It's obviously it's gonna taper down. It's obviously, it's obviously also volatile. Some years you lose, many years you win. But If you had to sort of blend it all together, what does it look like in terms of Bitcoin and hurdle rates compared to today?

Yeah. I often hear people say that, "Oh, you know, it's, it's deflationary, so therefore nobody's ever gonna spend it, you're gonna stick it in a, in an account somewhere, and you're never gonna, you know, and, and the economy will freeze as a result." But that's not true, because- You know, tech, the va-- the, the cost of tech decreases over time, and then we don't say, "I won't buy this laptop or this phone today, "because in a year's time it's gonna be ten percent or twenty percent cheaper. " Nobody-- well, maybe some people do, but the majority of people don't. They say, "Yeah, I, I actually need a laptop now, "so you buy it, right? Even though you know in a year's time it's gonna be cheaper. " So I don't think that's necessarily an argument that

You know, something that's, a, a phenomenon that we're gonna have to live with for always, and it's just become a store of value rather than something that's used as a medium of exchange. I think in time we will see it used. And at the moment, so for example, at the moment my use case for Bitcoin is getting it to parts of the world that the banking rails won't support. so if you wanna support aid on the ground in Gaza, for example, you wanna save lives and distribute medicines and food to people who are starving and dying of illnesses Bitcoin is one of the only ways you can do that. I'm a strong believer in that. so it is being used for certain things. Over time, that use case will become much more like a medium of exchange, I'm absolutely sure of it. we do have a-- there's a couple of, venture funds out there That are using Bitcoin as a, a, a, a hurdle rate, as a unit of account. so I think we'll start to see the proliferation of these sorts of funds, and we'll start to see venture funds making high quality decision making processes and due diligence, because they have to. And I think that's a fantastic thing for the economy overall. So, you know, I'm, I'm an optimist. It's sometimes hard to quantify the future, it's very hard to quantify the future, but I, I think if we are all optimists, that's helpful because, you know, it's a sort of almost self-fulfilling prophecy, and I, I think it's, it's healthy for human beings to be optimists at heart.

Yeah, I think that's a great spot to finish. so, Harris, where can people find you online?

I'm on Twitter, Harris Irfan. I'm on LinkedIn as well, very easy to find me. And, I've been doing a podcast with Onramp Media, which comes out quite regularly.

Fantastic. Well, Harris, I enjoyed chatting with you, and, yeah, hope to chat again soon.

Thank you for having me, Stefan.