On 7 November 2018, I gave a talk on the potential of Blockchain to transform Islamic Finance. It was at the CUCIBF III conference (China-UAE Conference), held at the Grand Kempinski Hotel in Shanghai, China. The organizers included the Hamdan bin Mohammed Smart University of Dubai, the Dubai Ministry of Economy, and the China Islamic Finance Club. It was a pleasure for me to be part of the event, during which time, I also learned a lot of things.

1. China-UAE Conference
Blockchain; Transforming the Participative
Economy and Financial Systems
Kevin Koo Seng Kiat
7 November 2018
Grand Kempinski Hotel, Shanghai

2. About Me
●
Co-Founder, Lex Futurus LLC.
Legal advisory services for
blockchain projects and
decentralized ledger technology
projects.
●
Partner, Koo Chin Nam & Co.
Legal firm based in Malaysia.
●
Registered Patent Agent,
Industrial Designs Agent,
Trademarks Agent in Malaysia.

3. Introduction

4. The participative economy
●
The participative economy refers to the Islamic
economy as practiced in places like Morocco.
●
Islamic finance allows Muslims to deal with
financial affairs in accordance with their faith
●
Principles are derived from Quran and Sunnah

5. Participative economy (continued)
●
Forbids Uncertainty (gharar), Riba (interest), Maysir
(gambling), dealing in Forbidden commodities
●
Sharing of profit and risks in financing
●
Money is potential capital until it is joined with other
resources to bring about productive result.
●
Contractual obligations are sacred and must be honoured.
●
Zakah must be paid.
Reference: Thesis at inflibnet.ac.in

6. The Muslim economy
●
Worldwide population: About 1.8 billion people
(24% of world population)
●
South East Asia has the highest population of
Muslims in the world, with the highest number
coming from Indonesia (227 million Muslims)
Reference: Wikipedia

7. Sour
Source: Wikipedia

8. Challenges and bottlenecks

9. Some challenges
●
Uncertainties from financial innovation, increasing
prominence of non-regulated sector, increasing
connectedness of financial systems and markets.
●
Globalization and increasing cross-border financial
activities
●
Lack of accounting and auditing standards in Islamic
finance
Source: Presentation on Islamic banking, Slideshare

10. Challenges in obtaining financing
Reference:
Bank Negara Malaysia

11. Other Bottlenecks
●
Lack of financial track records = Unable to
qualify for financial services
●
Lack of access to financial services
●
Lack of identity due to statelessness, refugee
status, etc.
●
Expensive remittance fees for migrant workers

13. “Of the 258 million people living abroad, over 200
million sent money home. These remittances were
estimated at a value of US$480 billion in 2017. In
the Asia Pacific region alone, the remittances
totalled US$256 billion in 2017, amounting to 10
times the net official development assistance
going to the region.”
- Reference: United Nations

14. Reference: voxeu.org

15. “UN Member States have pledged, in the
Sustainable Development Goals, to reduce by
2030 the cost of transfer from an average of 7% to
less than 3%, and to eliminate remittance
corridors with costs higher than 5%.”
- Louise Arbor, UN Secretary-General Special Representative on
International Migration (Source: United Nations)

16. Bottlenecks (continued)
●
Need for legislative framework on real estate waqf,
moveable waqf, cash waqf (Reference:
Global Islamic Finance Report 2015)
●
Legal recognition for tokenized Islamic Finance
products (tokenization using blockchain)
●
Uneven / evolving legal framework for blockchain in
capital market products

17. Bottlenecks (continued)
●
Legal recognition of blockchain as a form of
documentary evidence

18. Some Shariah-compliant blockchain projects

19. “Stellar, an open-source
platform for distributed
payments, is reportedly the first
distributed ledger protocol to
obtain Sharia compliance
certification in the money
transfer and asset tokenization
field...
“The Shariyah Review Bureau,
a leading international Sharia
advisory agency licensed by the
Central Bank of Bahrain, has
examined the capabilities and
applications of Stellar and
released guidance that allows
for the deployment of Stellar
technology in Islamic financial
institutions.”
Source: CoinTelegraph

21. Source: CoinTelegraph
Blossom Finance, a fintech startup
based in Indonesia, has released a
report by their internal Sharia
advisor that concludes that Bitcoin
(BTC) is “generally permissible”
under Sharia law, …
… crypto not being legal tender is
a main point in labeling Bitcoin
haram. However, Abu Bakar writes
that since crypto is widely
accepted, its legality or illegality as
tender does not disclude it from
being money; another reason is
that crypto is not controlled by a
central authority – Abu Bakar
writes that crypto technology, like
Blockchain, can be more secure
than the current systems in place.

22. Its cryptocurrency product,
dubbed GOLDX, was
launched at the end of last
year and has now received
certification from Amanie
Advisors, a Malaysia-based
Islamic finance consultancy,
said chief marketing officer
Manuel Ho.
Unlike other cryptocurrencies,
GOLDX involves the issuance
of a token backed by physical
gold stored in a Singapore
vault, and transactions must
be completed within a defined
time period, Ho said.
Source: Free Malaysia Today

23. NoorCoin claims to be the
first shariah token in the
world certified by the World
Shariah Advisory
Committee.

24. NoorCoin claims to be certified as
shariah compliant.
Source: NoorCoin whitepaper

25. Reference: Vulcan Post
“I am a man of Shariah,
and I see ways to
preserve Shariah within
digital currencies,
especially because
digital currencies are a
phenomenon that will
happen, whether we like
it or not.”
-Datuk Dr Mohd Daud Bakar,
Chairman of Shariah Advisory
Council, Bank Negara Malaysia
Other reference: kewangan.org

26. 1: Blockchain is more than currency
●
“The problem is, blockchain has been touted as a currency,
even though its purpose extends beyond that. Its purpose is a
tool for firstly, exchanges, and secondly as a tool for
remittances. The usual way for remittances between currency
to currency would take up cost and approximately two days to
go through.”
●
“Meanwhile, with these tokens, it could take only 10 seconds or
even 5 seconds, and the money will already reflect in your e-
wallet.”

27. 2: Blockchain could help fight
money-laundering.
●
“For example, if we pay zakat though Bitcoin—if this is allowed by
fatwa—then we can see exactly how the money is spent.”
●
Blockchain can help ensure that any identities linked to their
monies are kept on-record, rather than fiat money (regular
currencies) where one can more easily hide their identities—
especially using cash.
●
Know Your Customer (KYC) verification procedures can be
applied to ensure that identities linked to any cryptocurrency can
be kept on-record.

28. Other points by Datuk Dr Mohd Daud Bakar
●
Cryptocurrency has many applications in Malaysia.
●
Fluctuations per se do not make cryptocurrency
haram, even though there is risk.
●
“From a fatwa standpoint, a government can declare
something haram because of the risk. But in terms of
Shariah, it can’t be said that something is haram
because there is a risk.”

29. Disclosure: I was legal advisor for an ICO startup from Malaysia called Hada DBank
which planned to build a blockchain-based Islamic bank. They claimed to raise more
than USD3.5 miilion in their token pre-sales. (Reference: Reuters.com)
Read Hada DBank whitepaper

30. Decentralization

31. Blockchain is a form of decentralized ledger technology (DLT). Other DLT’s exist, such
as Hedera Hashgraph, R3 Corda, Ripple, IOTA Tangle, DAG (directed acrylic graph)
etc.

32. Difference between centralized and distributed ledgers. Centralized ledgers rely on a
central party to maintain the integrity of the ledger. Distributed ledgers rely on a
network to maintain the integrity of the ledger.

33. Decentralized systems
●
Provides resilience against censorship and attacks
●
Allows for widespread adoption of technologies
●
Eliminates “single point of failure”
●
Allows for adoption of decentralized ledger technologies
●
The nature of the technology allows for more nodes to
participate and validate transactions = more resilient.

35. Blockchain for payments
●
Bitcoin can be considered a use case of blockchain
for payments.
●
Businesses can receive Bitcoin and other
blockchain tokens as payment.
●
Cryptocurrency can be an alternative means of
payment for those without access to banking
facilities.

36. Opportunities in blockchain

37. Opportunities
●
Blockchain as a form of payment solution
●
Proof of ownership through tokenized ownership titles
●
Proof of identity through digital identity
●
Providing financial track record
●
Using smart contracts to create new platforms which
give rise to new services

38. Opportunities (continued)
●
Public DLT for auditable, verifiable and trackable
financial payments
●
Private DLT for banks, financial institutions
●
Tokenizing capital market products such as bonds, unit
trusts, debentures
●
Creating of stable cryptocurrencies which are backed
by precious metals, immoveable assets

39. Opportunities (continued)
●
State-issued cryptocurrencies as an alternative form of
legal tender
●
Decentralized marketplaces to sell anything to anyone
e.g. OpenBazaar
●
Reputation systems using blockchain identity solutions
●
Merchants payment solutions

40. Opportunities (continued)
●
Using smart contracts to streamline and
automate Islamic finance contracts.
●
Tokenized version of Islamic financial
instruments e.g. waqf
●
Crowdfunding and crowdsourcing through
blockchain

41. Opportunities (continued)
●
Decentralized, automated platforms to sell
expertise or freelance for work
●
Tokenization of real estate
●
Using blockchain for big data recording and
artificial intelligence

43. ●
Blockchain can be
used to record
movement of aid and
money

44. Tokenization
●
Blockchain tokens can be more than just a
means of payment.
●
Tokens can be linked to underlying assets i.e.
asset-backed tokens.
●
If legally recognised, tokens can be used to
prove ownership, identity, origin

45. Brief description of blockchain technology

46. Describing a Blockchain
Blockchains are a secure, decentralized ledger.
- Append-only, immutable
-Public. Every transaction is auditable
-Transactions are verified by nodes in a peer-to-
peer network using “Proof of Work”.
-PoW prevents hacking and alteration of records.
-Nodes are incentivized

47. Types of blockchain
PERMISSIONLESS PERMISSIONED
PUBLIC Proof of Work
Anyone can download the
protocol and validate transactions.
Proof of Stake
Anyone who meets pre-defined
criteria can download the protocol
and validate transactions.
PRIVATE Federated Byzantine Agreement
IPDB
PBFT
Multi-Signature
Only member of consortium can
validate transactions.
Source: BlockchainHub.net

48. PERMISSIONLESS PERMISSIONED
PUBLIC Immutable and censorship
resistant. Useful when network
participants do not trust each
other.
Operators receive special access
rights. Banks view this as their
ideal.
PRIVATE Very few use cases exist. Useful for smaller niche markets
and company internal use cases
that need to have a certain degree
of oversight and control.
Source: Modified from an article by CapGemini

49. Consensus mechanisms
●
Proof of work = Computational power provides
security.
●
Proof of stake = Account age and investment
position provides security.
●
Delegated proof of stake = Only a certain number
of nodes will validate. Validators are elected.

50. Proof of Work makes it difficult and
expensive to cheat the Bitcoin system.
An attacker would need to have more
computing power than the entire
Bitcoin network of computers, which
would be quite expensive.
However, this assumption relies on the
large number of nodes on the Bitcoin
blockchain node network. Other
blockchains may have very small
number of nodes, which makes the
hashing rate quitelow.

51. A question was raised on
whether it was possible
to spoof the timestamps
on a privately mined
blockchain.
Source: Stackexchange

52. Blockchain Functionality
●
Recording transactions without the need of a
middleman.
●
Tokenization of assets.
●
Smart contracts and other programmability
function.

53. Smart Contracts
●
The Quran in surah Al-Maidah: 1 says, “O you
who believe! Fulfill all obligations”
●
Blockchains can assist the creation of self-
executing digital contracts.
●
The code will only execute when the conditions
are met.
●
Huge potential for automation of contract
process for Islamic finance, which can lead to
cost savings.

54. Smart contracts (continued)
●
Smart contracts can be audited and verified,
and are secure in nature.
●
Helps mitigate operational risks arising from
settlement and counterparty risks.
●
Concept was mooted by Nick Szabo, and first
implemented in the Ethereum blockchain
Reference: EthisCrowd blog

55. Decentralized cloud storage
●
Blockchains can be used for decentralized cloud storage.
●
Could be used for storage of Islamic financial institution’s
data and information.
●
Decentralized data storage offers the advantages of
security and cost efficiency.
●
Some projects in this space: IPFS, MaidSafe, Siacoin,
Storj.
Reference: EthisCrowd blog

56. Cryptocurrency creation
●
In Islam, money should possess an intrinsic value and is ideally
asset-backed.
●
In a blockchain network, miners play an important role in
securing transactions. Their interests will be aligned since
miners will be rewarded with cryptocurrencies for every
successful block they secure.
●
Computing power, electricity and time used by the miners
represents value that validates the creation of cryptocurrencies.
Reference: EthisCrowd blog

57. Tokens
●
Most Blockchains involve tokens. Some people
even say that you cannot have a blockchain
without a token.
●
Blockchains records show movement of tokens
between blockchain addresses.
●
Native token vs asset-backed token
●
Mined vs Pre-mined

58. Token sales
●
In recent times, token sales have become a popular means to raise
funds to cover project development costs.
●
Tokens can be sold to users who plan to use the tokens on the
future blockchain platform (which will be created using the funds
raised).
●
Token sales are also known as initial coin offering (ICO), initial token
offering (ITO)
●
Alternative models: Initial loan procurement (ILP), initial scrip
offering (ISO), security token offering (STO)

59. Example of how the token sale for a security token is carried out. GenEOS is carrying
out a “secured token offering”, in line with the SEC requirements in the US, through a
non-profit registered in the USA. (Disclosure: Lex Futurus is providing advisory services
to GenEOS).

60. Some classification of tokens
●
FINMA (Switzerland): Payment tokens
(cryptocurrencies), utility tokens, asset tokens.
●
Singapore: Securities, non-security
●
Australia: Financial product, derivative, non-
cash payment facility

61. Some Islamic considerations for blockchain

62. Maqasid / Maslahah
●
Al-Ghazali identified the goal of shariah as
promoting the wellbeing of all mankind, through
safeguarding faith (al-din), self (al-nafs), intellect
(al-aql), posterity (al-nasl), and wealth (al-mal)
●
Al-Ghazali and Al-Syatibi divide maslahah into
three levels: al-haruriyyah (essential), al-hajiyyah
(necessary), al-tahsiniyyah (luxury)
Source: Islamic CSR in Islamic banking: Towards poverty alleviation

63. Access to financial services, which
can be regarded as one of the
essential services of modern life,
should also be considered one of the
goals of the shariah.
Blockchains can allow individuals to
transact, to receive payments, and to
send payments. The individual can
also save his money using an e-
wallet.
With blockchain, the cost of
remittances will be cut down
tremendously.
Source: Islamic CSR in Islamic banking: Towards poverty alleviation

64. Based on the above definition, blockchains, coupled with smart contract
functionality, could meet the needs of society and mankind at all three levels.
Blockchains would be an enabler.

65. Some legal maxims
●
Al-Mashaqqah Tajlub Al-Taysir (Hardship begets facility)
●
Blockchain has the capability to solve many of the
problems faced in Islamic finance, and the world at
large.
●
If it is able to resolve outstanding issues, such as lack of
access to financial services, it should be encouraged as
it will benefit many people.

66. Legal maxims (continued)
●
Al-Yaqin La Yuzalu Bi-Shak (What is certain
cannot be removed by doubt)
●
Since blockchains are a tamper-proof, secure
decentralized ledger technology, the secure
features of the technology should be able to
overcome doubts about the technology.

67. kevin@lexfuturus.io
@kevinkoosk (Telegram / Twitter)
Thank you