Blockchain is an innovative technology platform that emerged from bitcoin and uses cryptography and a distributed messaging protocol to create a shared ledger between trading counterparties, like the banking transactions of conventional banking. The idea is to allow for a simple transfer of asset ownership or more complex transactions using “smart contracts”.

The data on the ledger is pervasive, persistent and creates a reliable “transaction cloud”/block as this transaction data cannot be lost or corrupted by any of the participants. As technology progresses as well as the competitive landscape in the financial services market there may be many possible applications of Blockchain in investment as well. Cases in testing mode include Know-Your-Customer and Anti-Money Laundering data sharing, trade surveillance, regulatory reporting, collateral management, trading, settlement and clearing. Blockchain thus has the potential to make trading processes more efficient, to improve regulatory control and to eliminate unnecessary intermediaries. It also has the potential of disrupting incumbent business models.

Other benefits to the industry as listed in the Financial IT, a specialised publication, may well include: “faster and cheaper transfer of money across borders; alternative investments; facilitation of international trade between small and medium-sized enterprises (SMEs); verification of identities of clients or employees who need access to an organization’s systems; tracking of valuable items as they move through supply chains; facilitation of crowdfunding; and, of course, post-trade settlement and clearing.”

Financial IT also states that, “A major French bank will shortly introduce a Blockchain-based system that will greatly facilitate the onboarding of new customers, while complying fully with KYC and AML/CFT requirements. In the past, this has been an overly complex process, and one which has resulted in customer dissatisfaction. In Luxembourg, a Bitcoin exchange is now being overseen by the financial regulator. Elsewhere, Blockchain underpins a working Central Securities Depository (CSD) that provides any financial market participant with a permission registry service for payments, settlement and clearing of cash and financial instruments.”

In terms of a go-to-market strategy, we see an intermediary stage of investment banks running private (permissioned) Blockchain solutions. This is until regulation or legislation catches up to the Blockchains, where capital markets players are confident in the types of services they can offer on a public (permissionless) Blockchain.

Blockchain is definitely not designed to avoid audit trails nor do money laundering. Blockchain actually does leave a fully traceable history of transactions. And since it became very hard to convert any Bitcoin to fiat currencies without an extensive KYC check we are definitely moving towards a more mature state. As with every FinTech trend and innovation, it remains to be seen how it will develop to ease the processes needed in the various sectors of the financial services domain.

So where does Islamic finance fit in, and how can Blockchain take the industry to the next level? The potential of Blockchain’s transformation into an Islamic finance tool has not been widely explored. As discussed earlier, the Blockchain technology enables the creation of smart contract and decentralized ledgers. However, these technologies have yet to emerge on the Islamic finance scene despite the enormous opportunity for cost savings they can bring. Blockchain technology also incorporates the principle of maslaha (social benefits of positive externalities) as it can potentially provide banking services to those unbanked segment of the population almost for free or at a very negligible cost considering that transaction fees within the network are negligible. It also offers greater transparency due to its public ledger. Indeed Islamic finance and Blockchain are the two key innovations with potential as growth drivers in the financial sector. It is now up to Islamic finance players and regulators to make the bold step forward.

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