Ṣukūk on blockchain: a legal, regulatory and Sharī’ah review

Abstract

Purpose This paper aims to explore issues arising from ṣukūk (Islamic bonds) on blockchain, including Sharīʾah (Islamic law) and legal matters. Design/methodology/approach A qualitative methodology is used in conducting this research where relevant literature on ṣukūk was reviewed. Through a doctrinal approach, the paper presents analyses on the practice of ṣukūk and ṣukūk on blockchain by discussing its legal, Sharīʾah and regulatory issues. This culminates in a conceptual analysis of blockchain ṣukūk and its peculiar challenges. Findings This paper reveals that digitizing ṣukūk issuance through blockchain remedies certain inefficiencies associated with ṣukūk transactions. Indeed, structuring ṣukūk on a blockchain platform can increase transparency of underlying ṣukūk assets and cash flows in addition to reducing costs and the number of intermediaries in ṣukūk transactions. The paper likewise brings to light legal, regulatory, Sharīʾah and cyber risks associated with ṣukūk on blockchain that confront investors, practitioners and regulators. This calls for deeper collaboration in research among Sharīʾah scholars, lawyers, regulators and information technology experts. Research limitations/implications As a pioneering subject, the paper notes the prospects of blockchain ṣukūk and the current dearth of literature on it. The paper would assist relevant Islamic capital market entities and authorities to determine the potential and impact of blockchain ṣukūk in their respective businesses and the financial system. Practical implications Blockchain ṣukūk will assist in addressing issues inherent in classical ṣukūk and in paving the way to innovative solutions that will facilitate and enhance the quality of ṣukūk transactions. For that, ṣukūk would require appropriate regulatory technology to address its governance and regulation peculiarities. Originality/value Integrating ṣukūk with blockchain technology will add value to it. The paper advances the idea that blockchain ṣukūk revolutionises ṣukūk and enhances its practice against known inadequacies.

Sukuk on Blockchain: Application, Advantages, and Challenges

“…A typical sukuk issuance process involves the creation of a special purpose vehicle (SPV) by the issuer. According to Kunhibava et al (2021), the following parties will be present:…”

“…From a Shariah perspective, there is no difference regarding the requirements of the underlying Shariah contract used to issue a traditional sukuk and blockchain sukuk. The difference lies in the use of blockchain technology itself which is used through smart contracts to carry out functions in a transparent and reliable manner (Kunhibava et al, 2021). Blockchain is viewed as an enabling tool much like how commodity trading platforms are used currently to transact tawarruq or commodity murabahah contracts.…”

“…The use of unique identifiers for all participants, which can be shared and viewed in the network in a real-time manner (Al Subaei, 2019), can streamline the transaction flow more seamlessly and overcome any data mismanagement (Chen and Wang, 2020). Providing accurate information is very useful for sukuk holders to facilitate investment advisory and decisionmaking process (Kunhibava et al, 2021 andS&P Global Ratings, 2020). This also allows for more…”

“…However, in order to encourage growth in the novel sector, fintech solutions are subject to some form of regulatory sandbox that is typically less onerous compared to the regulatory regime imposed on traditional brick and mortar financial institutions. One of the characteristics of blockchain sukuk is that parts of the issuance process are decentralized thus raising regulatory issues particularly in respect of the possibility of breaching some of the current consumer protection standards used in capital markets (Kunhibava et al, 2021). Another main issues regarding blockchain usage is about how network operators will comply with national provisions on professional confidentiality and secrecy (Chen and Wang, 2020).…”

“…To ensure that the sukuk issued is in accordance with Shariah, issuers need to employ a competent Shariah advisor to inspect the blockchain algorithm/ programming in order to ensure that it is in accordance with the requirements of the underlying Shariah contracts (Kunhibava et al, 2021). For example, in a mudaraba contract, the profit is shared between the investor and issuer whilst lost is borne by the investor.…”