Labuan IBFC’s Shariah-compliant blockchain hub, launched in May 2024, is marketed on a specific promise: artificial intelligence screening that “identifies and eliminates non-compliant activities,” with smart contracts automating every transaction to ensure adherence to Shariah principles, according to the hub’s own booklet.
The instrument that actually governs those tokens says something else. Labuan FSA’s Guidance Note on Shariah-Compliant Securities Token (RAMZ) Offering, issued 15 December 2023, contains no mention of artificial intelligence anywhere in its text. What it contains instead is clause 6.2:
The issuance of RAMZ shall be approved and endorsed by a Shariah adviser(s) to ensure compliance with Shariah principles on its documentation (including smart contract), structuring, investment as well as other administrative and operational matters.
Read the parenthesis carefully. The smart contract is not the thing that certifies compliance. The smart contract is one of the things a named human has to certify.
That is not a contradiction Labuan needs to resolve. It is the correct design, and it is worth studying precisely because the brochure obscures it.
What the Guidance Note actually requires
The binding text puts a person in every position where a determination has to be made:
- Clause 6.1 — the issuer must appoint Shariah adviser(s) under the Shariah Pronouncement on Labuan Islamic Digital-Based Solution issued by Labuan FSA’s Shariah Supervisory Council. Not any adviser: one drawn from the registered Listing of Shariah Adviser in Labuan IBFC.
- Clause 6.2 — that adviser approves and endorses the issuance, expressly including the smart contract’s own documentation.
- Clause 6.4(v) — where the underlying assets fall outside the enumerated categories, they qualify as “any other assets approved by the Shariah adviser.”
- Clause 6.5 — if an underlying asset stops being Shariah-compliant mid-investment, it must be substituted, on a disposal timeline set by resolution of the Supervisory Council.
Clause 6.5 is the one that exposes what automation can and cannot carry. An asset ceasing to be compliant during the life of an instrument is exactly the event a screening model is good at flagging — a change in a revenue mix, a leverage ratio crossing a threshold, a subsidiary entering a prohibited line of business. Detection is a machine problem. But the substitution has to be agreed between parties, against a timeline fixed by a council of scholars, and re-endorsed. The model can raise its hand. It cannot sign.
Why the gap between the two documents matters
The pattern is not specific to Islamic finance, and it is not specific to Labuan. It recurs wherever an AI capability is sold into a regulated workflow: the marketing describes the model as the decision-maker, and the rulebook — quietly, in a clause nobody reads at the pitch stage — names a person who carries the decision.
Both documents can be true at once. The screening layer can be real, useful, and genuinely running. The endorsement still sits with a registered adviser whose name is on the file. The failure mode is not that the technology is overstated. It is that a buyer reads the brochure, forms a mental model in which the system is self-certifying, and staffs accordingly — one adviser stretched across a book of instruments, reviewing what a model has already cleared, on the unexamined assumption that the model’s clearance means something in law.
It does not. Clause 6.2 does not distribute liability between the adviser and the tooling. It puts the whole of it on the adviser.
There is a live contrast worth noting rather than re-arguing: in credit scoring, the European regime is moving in the opposite direction, writing explicit obligations around the automated system itself. Labuan’s instrument does the reverse — it leaves the technology unregulated and regulates the human. Two coherent answers to the same question. An operator needs to know which regime it is standing in, because the two produce opposite staffing decisions.
The disclosure gap is the part to watch
Labuan FSA’s own RAMZ paper puts the cumulative amount listed via Labuan digital exchanges at USD 50 million as of December 2023. Since then, figures reported through trade coverage and executive interviews have ranged from several hundred million to over two billion US dollars, on listing counts that also vary between sources.
None of those figures appears on Labuan FSA’s Islamic Digital Asset Centre page, which as of this writing publishes no licensee count, no listing count, and no traded volume. That is a disclosure choice, not evidence of weakness — and it is exactly why the Guidance Note matters more than the growth number. When a jurisdiction’s traction figures circulate faster than its regulatory disclosures, the binding text is the only thing an operator can plan against.
Malaysia’s Budget 2024 granted a five-year full income tax exemption on qualifying Islamic digital finance activity in Labuan, running from year of assessment 2024 to 2028. Anyone modelling entry on that window should be reading clause 6, not the booklet — because the cost line the exemption does not touch is the qualified human review the rulebook mandates for every instrument, for as long as each instrument lives.
The transferable rule
For any ASEAN or Japanese operator evaluating an AI-assisted compliance product, the diligence step is cheap and almost never taken: read the marketing claim and the governing instrument side by side, and find the clause that names who signs.
If the instrument names a person, the AI is a preparation layer. Budget for the reviewer, price the review into every unit, and treat model output as a queue that a qualified human clears — not a queue the human spot-checks.
If the instrument names the system, the obligations attach to the system, and the build cost sits in documentation, logging, and traceability instead.
If no instrument names anyone, that is the finding. Nobody has decided yet who absorbs the loss.
Key takeaways
- Labuan FSA’s binding Guidance Note on RAMZ offerings, issued 15 December 2023, does not mention artificial intelligence. The hub’s promotional material leads with it.
- Clause 6.2 requires a registered Shariah adviser to approve and endorse the issuance, explicitly including the smart contract’s documentation.
- Clause 6.5 requires human-agreed substitution when an asset stops being compliant mid-life — the detection is automatable, the remedy is not.
- The regulator publishes no current licensee or listing count; circulating valuations are not reconciled against any regulatory disclosure.
- The diligence rule: read the marketing claim and the governing instrument together, and find the clause that names who signs.