The emergence and growth of blockchain and Sharia-compliant finance has led to a debate about whether blockchain is Sharia-compliant. Both Sharia-compliant finance and blockchain are based on the same central components of fairness, transparency, accessibility and decentralisation. These similarities have led to an uptake in blockchain from Muslim markets and businesses.What is of critical importance for those wanting Sharia-compliant finance options, is that blockchain is compliant with the rules of Islamic finance and financial transactions.
WHAT IS BLOCKCHAIN?
Blockchain is a decentralised system where records of cryptocurrency transactions are maintained and linked. This form of digital ledger technology enables transparent and secure transactions across computers.
The ledger, or digital database, acts as a growing list of records (blocks) that are all linked together. Since Bitcoin and Ethereum became known worldwide, so too has recognition of blockchain platforms and their purpose.
BLOCKCHAIN - KEY FEATURES
The key features of blockchain are:
- decentralised databases: no single entity controls the data and this means it is resistant to manipulation, fraud, and censorship
- Immutability: once a transaction is logged onto the blockchain it cannot be deleted or changed.
- Transparency: all the transactions that are recorded on the blockchain are visible and transparent to all the participants in the network. This enhances transparency and authenticity.
- Secure: as each digital transaction is verified by participants being they are added to the ledger this prevents fraud and unauthorised transactions.
- Smart contracts: blockchain includes smart contracts that self-execute and automatically enforce terms. This means the room for error or fraud is massively reduced when compared to traditional contracts.
For Muslims looking for Sharia-compliant financial solutions, blockchain is becoming a viable option. Blockchain technology offers Sharia-compliant finance that offers transparent and secure alternatives that are compliant with Islamic rules relating to financial transactions.
According to Islamic finance rules, blockchain technology is considered to be a fairly neutral database tool that stores records in a transparent and secure way.
Sharia rules as they relate to financial transactions require adherence to Islamic finance principles that relate to ethical conduct and social responsibility. Key elements of prohibition include a ban on interest, speculation and investment in haram industries and practices.
Blockchain technology, as a secure and decentralised ledger system, certainly meets the Islamic finance standards of transparency and security. However, when assessing if any technology is truly compliant with Sharia rules several factors should be considered including the nature of the financial transaction taking place, the underlying assets, and the consensus mechanisms.
WHAT MAKES BLOCKCHAIN SHARIA-COMPLIANT?
Sharia-compliant finance revolves around fairness, equity, transparency, and risk sharing. Any blockchain technology or service needs to comply with these principles and be free from interest and speculation.
The development of currencies that are Sharia-compliant and based on blockchain technology is fast-moving. For Muslims looking for adherence to Islamic rules, blockchain is quickly able to verify transactions with a clear and traceable ledger.
It is important to note that not every blockchain transaction will be Sharia-compliant. This is in the same way that not every bank, project, return, investment, platform, and digital asset will be Sharia compliant. The compliancy will lie in the type of transaction and nature of the deal.
ISLAMIC FINANCE AND BLOCKCHAIN
The interplay of blockchain and Islamic finance is interesting. Not only does it present opportunities to transform and innovate the industry, but it also means that blockchain-based solutions can now facilitate Sharia-compliant transactions.
Blockchain facilitates fractional ownership, asset management, and efficient cross-jurisdictional and cross-border transactions. The transparent ownership and financial records and real-time settlement blockchain offers is compliant with Sharia rules.
Put very simply, blockchain technology and platforms support Islamic finance initiatives and businesses. This means Muslims can use blockchain to invest and transact.
ZAKAT AND BLOCKCHAIN POTENTIAL
For Muslims who want to comply with one of the five pillars of Islam, zakat, blockchain technology has a great deal of potential in enhancing and facilitating compliance with this pillar. Not only can blockchain enhance the administration of zakat money, but it can also help and provide value in the administration of zakat.
Blockchain technology streamlines the distribution of payments ensuring that zakat transactions are fast and transparent. By recording zakat on immutable ledgers that are visible to all participants, blockchain is being used more and more by Muslims across the globe.
People are easily able to trace and audit their payments and zakat transactions, tracing the flow of their funds. What's more, it is easy to check if your zakat contribution is affecting those in need in the most appropriate way. This greater visibility provides clarity and precision for donors.
Blockchain has the potential to revolutionise global zakat payments by using methodology that increases efficiency, transparency, and seamlessness. Donors are able to maximise their donations automation and traceability.
SUPPLY CHAIN MANAGEMENT
When it comes to business operations and analysis of Sharia-compliant methods, blockchain provides immutable records.
For Muslim business owners and customers, making sure of authenticity is key when it comes to analysing the halal elements of any dealing.
Blockchain technology can validate halal certifications and methodology throughout the supply chain. This provides a verifiable audit trail and ensures that Sharia-compliancy can be checked.
BLOCKCHAIN AND SUKUKS
Blockchain technology ensures that Islamic bonds (sukuk) are transparent, secure and fully Sharia-compliant. As blockchain enables real-world assets such as property and commodities to be tokenised.
Sukuk issuers can then tokenise the assets backing each sukuk, making sure that each token issued represents a percentage share of ownership. What this means in Islamic finance terms is that the sukuk is backed by tangible assets or services, making it compliant with Sharia rules.
In addition, each sukuk issuance and transfer is recorded on the digital ledger and this helps to verify authenticity along the chain of ownership and eliminate fraudulent or speculative activity.
When used properly, blockchain can be set up to automatically screen for Sharia compliancy for users. This screening not only screens for Sharia compliance, but also verifies participants.
This level of transparency is highly encouraged in Islamic finance transactions.
ISLAMIC FINANCE ASSET MANAGEMENT
Blockchain can be used to enhance Islamic asset management portfolios. By streamlining settlement of money, blockchain enables real-time settlements of transactions. Platforms dedicated to blockchain encourage peer to peer engagement and transactions and this eliminates the need for intermediaries and third parties.
What this means is that asset management becomes more transparent and more streamlined. The level of risk is reduced, and overall efficiency is improved.
MANAGEMENT OF WAQF
Waqf, Islamic endowment, is the act of dedicating or endowing a property for charitable, community, or religious purposes.Using blockchain, the management of waqf can be delivered in an easier and more efficient way.
This is done via platforms that provide traceability, authenticity and audit trails.
ETHICAL, SAFE AND DECENTRALIZED
Using blockchain properly means products and services can become more transparent and screened for Islamic adherence. Investors and organisations can use blockchain technology to enhance the efficiency, integrity, and accessibility of Islamic finance solutions.
Blockchain is emerging as a safe and ethical partner for Islamic finance products and services. The hybrid of modern blockchain technology, cryptocurrency, and long established Islamic principles of exchange is a welcome one for the finance world.