The document discusses the concept of digitizing sukuk using blockchain technology and cryptocurrencies, outlining some of the perceived advantages such as avoiding intermediaries, instant global transfer of ownership, and enhancing governance through smart contracts, and also addresses some of the regulatory challenges currently facing digital currencies. It proposes a framework for a global digital sukuk that could be issued on a public blockchain by a multilateral development bank to facilitate crowdfunding and investments that comply with Islamic finance principles.

1. Tariqullah Khan
Professor Islamic Finance, College of Islamic Studies
HBKU
Views expressed are personal
tkhan@hbku.edu.qa
Digitization of Sukuk in the Light of
Crypto Currencies & Economic
and Regulatory Challenges
+ Blockchain by Dalal Mahmood
Based on Symposium on Digital Currencies from Sharia, Economic and Practical Perspectives
March 19, 2018, College of Islamic Studies, Hamad Bin Khalifa University

2. 20%
15%
20%
15%
30%
Digital Assets Technology Regulation
Blockchain Ditigization of Sukuk
Presentation Outline

3. Digital Conventional
2017 US $12 TN
15.5% of global
economy is digital
Digital Conventional
2025 US $23 TN
25% of global
economy will be
digital
Digital Conventional
2000 US $8 TN
10% of global
economy was digital
Global Digital Assets - Tangible and
Intangible
Data Source: Huawei & Oxford Economics (2016), “Digital Spillover: Measuring the true impact of the digital economy” and author estimates
The Global Economy is transforming fast into digital economy

4. e-commerce
Assets
(transfer of goods,
for example when a
book is sold online)
e-business
Technology
(how business is conducted, any
process that an organization
conducts over computer-mediated
networks)
e-business infrastructure
(hardware, software, telecoms, networks,
human capital, etc.)
DLT
Composition of Digital Economy
Technology &
Digital Assets
Technology
Diffusion
ICOs &
Digital
Currency
Distributive
Ledger
Technology

5. Knowledge
Software
Information, Data & Big Data
Digital Tokens & Currencies
Designs
Patents & Trade Secrets
Art
Music
Entertainment & Media
Addresses
Virtual Property
Revealed perceptions and
preferences
Distributed
Ledger
Technology
Social
Media &
Internet
of Things
(IoT)
Intangible
digital
assets
Tangible
Digital
Assets
An asset which has physical form and
works through Internet connectivity or
standalone computer programs
e-business
(how business is
conducted, any
process that an
organization
conducts over
computer-
mediated
networks)
e-
commerce
(transfer of
goods, for
example when a
book is sold
online)
(Decentralized) Distributed Ledgers Technology (DLT) uses
independent computers -- to record, share and synchronize
transactions in their respective electronic ledgers, instead of
keeping data centralized as in a traditional ledger.
Trust Problem Utilization, generation
and dissemination of
data
Digital Asset

6. Global
Big Data –
Market
Size
billion $

7. Global
Internet
of Things
(IoT)–
Market
Size
billion $

8. 0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2013 2014 2015 2016 2017
Global ICO issues $ millions
Source: PWC Strategy
https://cryptovalley.swiss/wp-content/uploads/20171221_PwC-S-CVA-ICO-Report_December_final.pdf
Predominantly Bitcoin and Ethereum-based
Global
Initial
Coin
Offerings
(ICO)
Market
Size
billion $

9. https://cryptovalley.swiss/wp-content/uploads/20171221_PwC-S-CVA-ICO-Report_December_final.pdf
Source: PWC Strategy
Tokens and Digital Currencies
The Nature &
Basis of the
Digital Asset is
Important

10. Intangible Digital Assets & Failure of Trusted Third Party
Double
Spending
Trust
Problem
Solution of
the Trust
Problem
---
Digital Economy
based on Proof
of Work (PoF)
instead of Trust
Distributive
Ledger
Technology
(DLT)
Knowledge
as a printed
Book & as a
PDF
Knowledge
Software
Information,
Data & Big Data
Designs
Patents & Trade Secrets
Art
Music
Entertainment & Media
Addresses
Virtual Property
Digital Tokens &
Revealed perceptions and
preferences

11. Public Blockchain with Bitcoin as the Currency,
Bitcoin Mining as the Incentive & Replaces Trust with
Proof of Work
Source: Deutsche Bank AG (DE)
https://www.db.com/newsroom_news/cio_insights_reflections_-_cryptocurrencies_and_blockchains_-_us_-_client_ready.pdf

12.  DLT is:
a) Peer to Peer (P2P) network,
b) With Public Key Cryptography and
c) Decisions with Consensus, Immutable and Irreversible.
 Enables the creation, saving and transfer of Bitcoin without any double
spending and without any intermediary.
 Public ledger that acts as medium over which assets can be stored
digitally with finality and without any threat of fraud or loss.
 Where privacy is a must and preserved
Value Proposition: Examples
Blockchain – Distributive Ledger Technology (DLT) replacing
trusted third party
Bitcoin – the Blockchain’s Digital Currency

13.  A DLT Blockchain that allows Smart Contracts - self-executing virtual contracts
 Ethereum also supports Decentralized Autonomous Organizations
 Ethereum presents an opportunity for other uses of the Blockchain technology , in
areas of governance, management and decentralized databases.
 Ethereum has various types of applications built on it which include financial
applications, such as financial derivatives, hedging contracts, digital saving wallets,
trust funds and others.
 It also has non-financial applications such as wills, e-voting, and e-governance
structures, decentralized online databases.
 In essence Ethereum acts a store and means through which value is transmitted and is
also a platform for complex transactions where information can be shared over its
Blockchain.
Value Proposition: Examples
Ethereum

14. Gnosis on Ethereum Platform
Create market prediction applications for : a)
financial instruments b) insurances c)
information (where insiders are able to make
bets on, for example, the price discovery of
pieces of art) d) governance (oracle on decisions
taken by governance boards) e) sport betting
Ripple is DLT international payments system and
its Consensus Ledger can process 1,500 (Bitcoin
7) transactions per second and settles an
international payment in an average time of
three seconds. 50 of the largest banks in the
world have or are planning to integrate Ripple in
their payments systems
Value Proposition: Examples
Basic Attention Token (BAT) – Brave
browser on Blockchain
Monetizing content
Eliminating hidden cost of advertisement
blockers $276 per year
See advertisements by choice
Increasing speed of Cloud computing
Medtokens on Ethereum
Medical claims on hyper ledger
Blockchain
Medical practitioners and service users
can utilize
Patients can release their data if they
want to researchers based on incentives

15. Control Double
Spending with Peer-
to-Peer (P2P) Proof-
of-Work (PoF)
Perfect Divisibility of
Assets
Global Access
without any legal
formalities
Preserve Privacy
Avoid Intermediation
Cost
Law of Large
Numbers and
Economies of Scale
Instant Global
Transfer of
Ownership
Minimize storage and
protection cost
Create perfect
transparency without
law and regulation
Digitize wealth
Eliminate the need
for surveillance & its
costs
Spread Risk and
Enhance Stability
Enhance Governance
through Smart
Contracts without
human interference
Shared prosperity
Uberization and asset
utilization
Crowdfunding for
good causes
Perceived Advantages of the Decentralized Ledger Technology (DLT)

16. Perceived Advantages of the Decentralized
Ledger Technology (DLT)
1. Control Double Spending and Replace Trusted Third Party with Peer-to-Peer
(P2P) Proof-of-Work (PoF)
2. Perfect Divisibility of Assets
3. Global Access without any legal formalities
4. Preserve Privacy
5. Avoid Intermediation Cost
6. Law of Large Number and Economies of Scale
7. Instant Global Transfer of Ownership
8. Create perfect transparency without law and regulation
9. Minimize storage and protection cost
10. Digitize wealth
11. Eliminate the need for surveillance
12. Spread Risk and Enhance Stability
13. Enhance Governance through Smart Contracts without human interference

17. Regulatory Responses about Distributive
Ledger and Blockchain Technology
Globally, all important regulatory authorities are
encouraging the development of Distributive
Ledger Technology (DLT) as an innovation and most
regulators have established FinTech and Blockchain
Regulatory Sand Boxes for observation and support

18. Swiss Financial Markets Supervisory Authority
(FINMA)
Digital Tokens are classified by purpose:
a) Tokens used in Payments will be subject to AML
regulations
b) Token used as Investment vehicles will be
subject to Securities regulations and AML
regulations
c) Utility tokens will not be subject to the above
regulations
d) Hybrid tokens will be treated case by case
French Regulatory Authority (AMF)
Initial Coin Offerings (ICOs) are investment intermediation and
cannot be issued directly and must go through securities
regulatory processes for approval
USA Draft Act by Uniform Law Commission
Digital representation of value that is used as a medium of exchange, unit of account, store of value but not legal tender.
Companies should not do business in virtual currencies more than $ 5000, individuals are not restricted
States have different perceptions. A large proportion of global digital currencies are USA based. However, ICO prohibited,
money laundering and illegal act regulations enacted, cryptographic exchange tradition license scheme in force
Regulatory Responses about Digital Currency
Globally No Uniform Policy has Evolved: Singapore, Japan, Republic of Korea and Malaysia
encouraging, China, Indonesia etc., banning
Malta
Establishing Digital Technology Regulatory Authority through
Virtual Currency law
Sweden
Considering to issue Central Bank Digital Currency named e-
krona

19. Regulatory Worries about Digital Currencies
Public Interest
–
understanding
the services, its
transparency
and safety
Money
Laundering and
Abuse
Financial
Disintermediation
and Collapse of
Banking System
with unknown
consequences
Digital
Currencies
Bubble and
Financial
Instability
Counter abuse
through DLT could
be more effective
and regulators are
advised to consider
such prospects
International
Monetary Fund
(IMF)
Malaysia,
Singapore, Japan
and Republic of
Korea allowing
transactions in
Cryptocurrencies
with proper
identity of the
parties

20. Central Bank Digital Currency (CBDC) - Prospects
Sweden
Considering to issue Central Bank Digital Currency named e-krona
Bank for International Settlements (BIS) in its report to G20
a) A wholesale currency limited to select financial institutions
b) General purpose currency accessible to the public
Impact to be assessed carefully in three areas – a) payments, b) monetary policy implementation and c) financial
stability
 A wholesale currency limited to select financial institutions seems promising to enhance efficiency of
international and national payments systems
 General purpose currency accessible to the public seems to exacerbate banking instability
 Careful studies are needed.
https://medium.com/@Torquecapital/a-snapshot-of-current-crypto-regulations-of-all-g20-member-states-3b5f80ffac81
Current State of Regulation in G20 Countries is summarized in this link
Singapore
Project Ubin for Blockchain-based inter-bank payments system

21. https://www.db.com/newsroom_news/cio_insights_reflections_-_cryptocurrencies_and_blockchains_-_us_-_client_ready.pdf
Source: Deutsche Bank AG (DE)
Can Bitcoin
Perform the
Function of
Money?
No, Based on
Volatility
No, its not a legal
tender
Yes, within the
Blockchain ICOs
Yes, for
transferring
money

22. During 2017 Bitcoin Price was driven by
increase in ICOs
Market capitalization 160b $
Market capitalization 140b $
Bitcoin price
volatility is due to
regulatory
uncertainty with
respect to ICOs

23. Source: BIS
https://www.bis.org/cpmi/publ/d174.pdf

24. Global Digital Sukuk (GDS) – Basic Framework
 GDS is a digital and perpetual
Mudharabah Sukuk – a crypto-asset
proposed for potential study and
consideration for issuance by a highly
credible entity like the AAA IDB based
on its overall balance sheet
 Total size of GDS crypto-asset will be US
$ 1 billion divided into 0.50 $ each GDS
 Small denomination and very large
number of investors will spread the
Mudharabah risk
 GDS will be globally tradable on a public
Blockchain for investment by individuals,
institutions and new ICO crypto
businesses
 GDS will facilitate crowdfunding for
SMEs
Global Digital
Sukuk (GDS)
Public
Blockchain
GDS-
based
ICO
GDS-
based
ICO
GDS-
based
ICO
GDS-
based ICO
GDS-
based ICO
GDS-
based ICO
Source: Based on the author’s paper “Global Digital Sukuk – Basic Framework” in process for publication

25. Features of GDS
Value propositions
 A global public Blockchain platform
offered by a AAA Sharia compliant
multilateral development bank
 A Crypto-asset that can be used by
individual small investors globally and
Islamic banks specially for liquidity
management
 A digital asset in compliance with the
Sharia, which can also be tuned with
SDGs and ESGs concerns
 Potential addition of Smart Contracts
based on suitable Islamic financial
instruments
SWOT
Strength:
• Clear concept offering by a AAA institutions with global
mandate
• Small denomination of the GDS and a very large number
of potential investors will spread the Mudharabah risk
• Perpetual nature with ensure stability and continuity
Weakness:
• Internal capacity with the new technology development
and implementation
Opportunity:
 Significant global opportunities of DLT and Sharia-
compliant crypto-assets and crowd funding of SMEs
 Confirming with SDGs and ESG requirements
Threat:
• Regulatory and AML uncertainty

26. Concluding remarks
 Digitization of global economy grows and brings a number of benefits
 DLT enhances efficiency and robustness of payments systems
 DLT facilitates initial coin offerings (ICOs) – many companies like airlines, heath
services, e-commerce, software etc., may gradually opt for ICOs
 Smart contracts potentially improves overall governance
 Financial disintermediation takes place; regulation is encouraging technological
innovations
 Regulators are developing consensus to classify the so-called crypto-currencies
as crypto-assets to be legalized and regulated by securities regulators
 ICOs are Sharia compliant or non-compliant based on the underlying
businesses
 There are good prospects and opportunities of issuing Global Digital Sukuk by
the Islamic Development Bank
Digital currencies and tokens are expected to prevail posing unknown risks, requiring more studies

27. Blockchain
By Dalal Al Mahmood,

28. Starting point:
= Blockchain
Digital Currency Technology of transfer

29. Current Practice : Centralized
Financial Intermediator
(Ex, Banks, PayPal..)
Ledger
Transfer from A
$5 to B
A B
Transfer $5 from A
Ledger Balance updated
A balance - $5
B balance + $5

30. Current Practice - Centralized ledger
 General Ledger: A general ledger is a company's set of numbered
accounts for its accounting records. The ledger provides a complete
record of financial transactions over the life of the company. The ledger
holds account information that is needed to prepare financial
statements and includes accounts for assets, liabilities, owners' equity,
revenues and expenses. (Investopedia)
 The current practice is that the general ledger stored and managed
using applications and databases referred to as ERP (Enterprise
Resource Planning) system or Core Banking system
 The applications also store the Bank/company customer information

31. Current Practice : Update Balance
Transaction:
Transfer from A
$5 to B
A
Acct Balance
A 100
B 100
Acct Balance
A 95
B 105
Transaction
updates Balance
 Database (in the form
of tables) stores
balances

32. Centralized ledger - Features
 The customer only knows about his transaction
 The Bank is a ‘trusted’ entity
 Security issues as being in a centralized location it can be copied,
corrupted,…etc.

33. Concepts: The beginning (2008)
 Satoshi Nakamoto (Bitcoin founder)
A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going
through a financial institution. Digital signatures provide part of the
solution, but the main benefits are lost if a trusted third party is still
required to prevent double-spending. We propose a solution to the
double-spending problem using a peer-to-peer network. The network
timestamps transactions by hashing them into an ongoing chain of
hash-based proof-of-work, forming a record that cannot be changed
without redoing the proof-of-work. The longest chain not only serves as
proof of the sequence of events witnessed, but proof that it came from
the largest pool of CPU power.(1)
(1) Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto, satoshin@gmx.com, www.bitcoin.org

34. Concepts: Peer to Peer
Server Based Peer to Peer

35. Concepts: Digital Signature
(2) http://www.lawyard.ng/understanding-the-legal-framework-for-digitalelectronic-signature-in-nigeria/

36. Concepts: Public & Private Keys
 Public & Private Keys:
• Public Key (Your address) it is made available to everyone via a publicly
accessible repository or directory.
• Private Key (Your Password) must remain confidential to its respective
owner.
• The Public and Private key pair comprise of two uniquely related
cryptographic keys (basically long random numbers). Below is an example
of a Public Key:
• 3048 0241 00C9 18FA CF8D EB2D EFD5 FD37 89B9 E069 EA97 FC20 5E35
F577 EE31 C4FB C6E4 4811 7D86 BC8F BAFA 362F 922B F01B 2F40 C744
2654 C0DD 2881 D673 CA2B 4003 C266 E2CD CB02 0301 0001
https://www.comodo.com/resources/small-business/digital-certificates2.php

37. Concepts: on going chain
Hash: XXB
Prev Hash: XXX
Hash: XXC
Prev Hash: XXB
Hash: XXD
Prev Hash: XXC
TRX BTRX A TRX C

38. Distributed ledger
A distributed ledger is a database that is consensually shared and
synchronized across network spread across multiple sites,
institutions or geographies. It allows transactions to have public
"witnesses“, thereby making a cyberattack more difficult. The
participant at each node of the network can access the recordings
shared across that network and can own an identical copy of it.
Further, any changes or additions made to the ledger are reflected
and copied to all participants in a matter of seconds or minutes.
Underlying the distributed ledger technology is the blockchain,
which is the technology that underlies bitcoin. (Investopedia)

39. Distributed Ledger
Node
Transfer from A
$5 to B
A B
Transfer from A
$5 to B

40. Distributed Ledger
Replace
Ledger with
list of
transactions
Node
Transfer from A
$5 to B
A B
Transfer from A
$5 to B

41. Distributed ledger - Features
 Everyone know what everyone has
 There is no ‘one trusted’ entity
 The balance is not stored only list of transactions
 Transactions are encrypted. Each node(customer) has a private
key to generate an encrypted transaction and public key to decrypt
a received transaction
 This makes it harder to attack or corrupt

42. https://blockgeeks.com/guides/what-is-blockchain-technology/

43. Example Use cases
 Payments & Settlements
 Data Management (ALM & KYC)
 Protection of intellectual property

44. Thank you

45. Citations & References
1. Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto, satoshin@gmx.com, www.bitcoin.org
2. http://www.lawyard.ng/understanding-the-legal-framework-for-digitalelectronic-signature-in-nigeria/
3. https://www.comodo.com/resources/small-business/digital-certificates2.php
4. https://blockgeeks.com/guides/what-is-blockchain-technology/