The Islamic Financial Services Board (IFSB) will issue a technical note which could also be applicable to Islamic social finance blockchain platforms, revealed Dr Bello Lawal Danbatta, the secretary-general of IFSB at IFN Singapore 2019.
This announcement was on the back of Dr Bello launching the physical copy of the IFSB Stability Report 2019, which for the first time in the publishing history of the report, included a chapter on blockchain technology.
Listed as an emerging issue in Islamic finance, the chapter explores regulatory and supervisory concerns arising from the utilization of the technology, with a particular focus on crypto assets or digital currencies.
“Like their conventional counterparts, Islamic blockchain and distributed ledger technology (DLT) applications would benefit from clear and supportive AML/CFT (anti-money laundering/countering financing of terrorism), prudential and consumer/investor protection regulations – given that transparency and accountability are highly regarded in Islamic finance,” noted the report.
Two factors of considerations have been highlighted by the global standard-setting body: the fact that consumer/investor protection should also focus on Shariah integrity of products apart from financial interest, and the lack of consensus on Shariah qualities of different types of blockchain-based crypto assets.
“For institutions that are not subject to an explicit and comprehensive Shariah governance system, regulations might prescribe Shariah certification procedures or disclosure requirements,” according to the IFSB.
Being exposed to contentious assets may also imply higher risk and lower liquidity for Islamic banks because conventional banks do not face a Shariah non-compliance risk and can find more trading partners for these crypto assets.
“The Basel Committee on Banking Supervision’s recommendation that results of the risk assessment shall be incorporated into the internal capital and liquidity adequacy assessment of a bank would imply a disadvantage for Islamic banks as long as no consensus on Shariah qualities of crypto assets has emerged. It seems that blockchain and DLT in Islamic finance pose greater challenges to Shariah experts than to regulatory authorities,” opined the IFSB.
In the case of blockchain applications in Islamic social finance such as Zakat, Sadaqah and Waqf, banking and capital market regulations may not even fully apply, which makes the upcoming IFSB technical note on financial inclusion relevant.
The IFSB has 182 members and its standards are widely adopted in Islamic financial jurisdictions including Malaysia.