Cryptocurrencies are causing measurable disruptions in the finance world. The speculative nature of many of these currencies casts doubts on their economic value and their role in improving the prosperity of the lives of human beings.
But the underlying technology, the blockchain technology and the cryptographic techniques, are obviously of immense potential. The question, however, is how to apply these technologies productively. One such application is in the area of Islamic capital markets instruments, particularly Sukuk.
Sukuk are commonly defined as “Islamic bonds”, which is unfortunate. Sukuk, as characterized by AAOIFI standards and many other authentic sources, include both fixed and variable income modes of finance, and thus they cover both risk-sharing and debt-based structures.
Regardless of the underlying structure of the Sukuk, “crypto Sukuk” could be of value to Islamic financial institutions and issuers of both the public and private sectors. To be clear, crypto Sukuk have two essential properties:
Crypto Sukuk are a form of crypto assets, for which there is a wide variety of exchange platforms [1]. Regulation of crypto assets is evolving and yet to reach global consensus. However, the standard disclosure requirements can be easily met through blockchain technology.
Crypto Sukuk will offer a more reliable, transparent, and verifiable mechanism for the issuance and exchange of Sukuk. Studies show that the cost of issuing tokenized Sukuk will be substantially lower [2]. Additional potential benefits of crypto Sukuk include:
There is no free lunch, as economists emphasize, and the transition to crypto Sukuk will involve costs. However, the benefits in terms of diversity, stability, and performance, seem to overweigh the costs by a reasonable margin.
[1] Wilfred Daye et al. (2020) Understanding the Cryptoasset Market, www.quantifisolutions.com.
[2] Nida Khan et al. (2020) “Tokenization of Sukuk: Ethereum case study,” Global Finance Journal, https://doi.org/10.1016/j.gfj.2020.100539.
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