A guest lecture delivered by Dr Farrukh Habib at INCEIF, Kuala Lumpur, on 22nd March, 2018. Dr Farrukh Habib is an expert in sharia and Islamic finance. He is a adviser, researcher and trainer. He is keen interest in FinTech.

1. By Dr Farrukh Habib
Blockchain and Islamic Finance
Researcher and Advisor

2. How Did
Blockchain Start?
• History of
Blockchain
• Developments
in Blockchain
What is
Blockchain?
• Components of
Blockchain
• How Does
Blockchain
Work?
Characteristics
of Blockchain
• Why Use a
Blockchain?
• Where
Blockchain
cannot be
Used?
Blockchain in
Finance
• Blockchain for
Finance
• Use Cases of
Blockchain
Blockchain in Islamic
Finance
• Islamic Trade
Finance &
Blockchain
Section 1
Section 2 Section 3
Section 4 Section 5
What We Are Going To Learn Today?
Let’s see…

3. 1989
1996
1998
2009
2011
HistoryofBlockchain
DigiCash
• Introduced by David Chaum
• Centralized but anonymous encrypted system
• Faced strict regulatory requirements
B-Money
• B-money by Wei Dai
• Anonymous, based on proof of work system
• Only a concept, never deployed
Bit Gold
• Bit gold by Nick Szabo
• Anonymous, distributed, based on proof of work
system
• Failed to attract the attention of the community
Bitcoin
• Bitcoin by Satoshi Nakamoto
• Anonymous, distributed, based on proof of work
system
• Successfully deployed
Altcoins
• Emergence of Namecoin, Litecoin, Peercoin, etc.
• Different from Bitcoin in some features
• Started the boom of crypto-assets

4. 1983
1991
1992
1996
2005
2009
“Blinding”
algorithm was
created by David
Chaum using
cryptographic
encryption
technique to
achieve anonymity
of the transacting
parties
Stuart Haber and
W. Scott Stornetta
introduced the
concept of
cryptographically
secured chain of
data blocks
Wei Dai introduced
the concept of solving
computational
puzzles, Hashcash, as
proof-of-work (POW)
with the decentralized
consensus algorithm
for a digital money
system
Bayer, Haber and
Stornetta
incorporated
Merkle trees to the
design improving
its efficiency by
allowing several
documents to be
collected into one
block of data
Hal Finney
introduced the
concept of
“reusable proof-of-
work” to create a
cryptographic
digital cash system,
but it was not
decentralized
Satoshi Nakamoto
effectively used POW
at a decentralized
platform for a
cryptocurrency and
successfully deployed
the algorithm
Technical Developments
in Blockchain

5. Blockchain Explained
What is Blockchain?
Blockchain is a decentralized digital ledger technology to record anything of value.
Main Components of Blockchain:
• Public Key & Private Key: to create a secure digital identity reference
• Digital Ledger: the shared contents and databases available to the participants
of a particular Blockchain Ecosystem
• Node Application: every computer needs a node application specific to the
blockchain ecosystem that it wants to participate in
• Consensus Algorithm: it depicts status of the network and how the nodes in the
network arrive at an agreement regarding what transactions to
accept
• Virtual Machine: to run the node application on a computer

6. The requested
transaction is broadcast
to a P2P network
consisting of nodes.
The nodes validate the
transaction using
known algorithms.
Once verified, the
transaction is
combined with
other transactions
to create a new
block of data for
the ledger.
The new block
is then added
to the existing
chain of
blocks.
The
transaction is
complete and
verified.
Transaction
Initiation
Broadcasting
& Validation
Block
Creation
Block
Addition
Completion
How Does Blockchain Work?
Someone
requests a
transaction
from another
party.

7. Decentralization
Secured
Immutability
Transparency
Efficiency
Decentralization is
one of the most
critical features of
Blockchain
Technology which
is the reason of
many of its
strengths.
The data on
blockchain is
highly secured,
trusted and safe. .
None of the
previous
entries in the
ledger could
be modified in
any way.
Whole
transactional data
is readily viewable
and traceable by
all parties
ensuring high level
of transparency.
The fastest ways
to transfer value
across the
globe.
No
intermediaries
are required.
Main Features of Blockchain

8. Many legal,
regulatory and
governance
issues need to
be resolved
before
blockchain
could go
mainstream.
The features of
transparency
and traceability
can be
considered as
strengths, but
privacy issue
might be a huge
problem.
Since the
technology is
still new, the
changes of
human error,
security flaws
and bugs are
and will be,
there.
Due to lack of
expertise,
developing or
coding
blockchain
algorithms
seem to be
highly
complexed.
If the network
is not robust
with widely
distributed
nodes, it
becomes more
difficult to reap
the full
potential.
Scalability Complexity Human Error
Privacy Regulations
Limitations of Blockchain

9. Audit &
Compliance
Data
Management
Speed &
Simplification
Achieving
Efficiency
Cost
Saving
Due to strong
transparency and
traceability features,
blockchain can offer
more convenient ways to
perform proper review
and audit. It can also
improve solutions to
compliance issues.
The transfer of value
has always been an
expensive and slow
process. This is
particularly true for
cross-border
payments. Blockchain
technology is able to
speed up and simplify
this process.
Blockchain technology
can offer more secured
and safer transactions,
hence more reliable.
Overall, the data
processing, sharing and
management can be
much more efficient.
Blockchain projects
have the potential to
reduce, and possibly
eliminate, settlement
times due to their
digital nature, ensuring
the timely and secure
processing of banks’
operations.
Banks are dealing with rising
costs for maintaining or replacing
their aging infrastructure and
ensuring compliance with heavy
regulatory burdens.
blockchain-based solutions could
generate cost savings of up to
$20 billion per year, according to
Santander.
What can Blockchain Offer to Finance?

10. Smart
Contracts
Decentralized
Apps
Identity
Management
Use of
APIs
Crypto-
Assets
A smart contract is a
computer protocol
intended to digitally
facilitate, verify, or enforce
the negotiation or
performance of a contract.
They allow the
performance of
transactions without third
parties.
This feature will enable
financial institutions to
perform credit check
and validation through
electronic KYC.
The same data can be
shared, processed and
managed for various
purposes.
Digital computer
applications which are
both decentralized and
distributed can hugely
improve quality of
financial services. These
applications can be
developed for various
financial services and
processes.
In computer programming,
an application programming
interface (API) is a set of
subroutine definitions,
protocols, and tools for
building application
software. In general terms,
it is a set of clearly defined
methods of communication
between various software
components.
A cryptocurrency (or crypto-
asset) is a digital asset
designed to work as a medium
of exchange that uses
cryptography to secure its
transactions, to control the
creation of additional units,
and to verify the transfer of
assets.
Blockchain Features for Finance

11. Use Cases of Blockchain in Finance
Life Term
Insurance
A life term insurance
product can be recorded
in a blockchain
technology smart
contract. Insurance is a
logical fit for self-
executing smart
contracts, since the
conditions that lead to a
payout can often be
clearly defined
beforehand in the
insurance policy.
Share
Trading
Share trading will
change even more
dramatically.
Blockchain technology
can not only cut out
brokers, but the stock
exchange itself could
also become
decentralized, without
a central system being
required to bring supply
and demand together.
Cryptocurren
cy Exchange
There is a problem of
exchanging the
cryptocurrency back into
locally accepted (fiat)
money at the
destination.
Due to extra complexity
and risk of fluctuating
exchange rates ,
financial institutions can
tap this market. The
numbers of entrants
have the potential to go
up once more beneficial
regulations are
developed.
E-KYC
Users only have to
identify themselves
once to one of the
banks or insurance
companies
connected to this
platform. The fact
that they have been
identified by one of
the parties is then
recorded on the
blockchain, so they
do not need to be
registered by the
other parties as well.
Loyalty &
Reward
Loyalty & rewards
programs can be
developed on the
blockchain. The coins
generated could be used
to enhance e.g.
regulatory compliance.
They can be a reward for
employees who share
knowledge, fill out time
sheets in time, or visit
certain events and take
courses.
Use
Case
1
Use
Case
2 Use
Case
3
Use
Case
4
Use
Case
5

12. Some of the Largest Blockchain Projects
Trade Finance Platform
• Using IBM’s Hyperledger Fabric aimed at international payments utilizing blockchain
• Partners include Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and Unicredit
Utility Settlement Coin (UTC)
• A tool for more efficient transactions, addressing the issues of currency backing, default and credit risks
• Partners include Barclays, CIBC, Credit Suisse, HSBC, MUFG, State Street, UBS, BNY Mellon, Deutsche
Bank, Santandar
R3 Consortia
• To develop infrastructure network, Corda platform, for financial institutions to build their own ledger-
based applications and services
• Partners like Temasek, SBI Group, Bank of America, Merrill Lynch, Intel, Wells Fargo, ING and many others
have raised USD 107 million in May last year

13. Data-Driven
Decision Making
Payment
Systems
Digital
Assets
Trading
Supply
Chain
Smart
Contracts
Data-driven decision
making (DDDM) is an
approach to business
governance based on
verifiable data. This
approach can be utilized
in sharia governance, VBI
system, and corporate
decision making.
Sharia compliant
assets, like sukuk,
securities,
commodities, real
estate, etc. can be
digitized and traded
on the blockchain
platform.
Many Islamic products
for payments, and the
payment systems
themselves can be
introduced and
improved by blockchain.
Blockchain can be used
to track the origin of
goods and
commodities, their
movement and
transfer of ownership
to facilitate Islamic
financial transactions.
Sukuk, sharia
compliant securities,
Islamic financial
products and
services, or any kind
of business logic
relying on data can
be coded by way of
smart contracts.
Blockchain in Islamic Finance

14. 1 2 3 4 5 6 7 8
Invoice
Factoring
- Use of invoices
for achieving
financing from
multiple banks
- Risk of delivery
failure
Manual AML
Review
- Manual AML
checks using
the financials
provided by
the import
bank
Duplicate Bills
of Lading
- Multiple
financing of
bills of lading
due to lack of
robust
verification
process
Delayed
Payments
- Multi-parties
verification
for funds
transfer to
the importer
Manual Contract
Creation
- Manual
review of
agreement
- Sending
financials to
the
correspondent
bank
Delayed
Timeline
- Numerous
checks by
intermediaries
and
communication
points
- Risk of delayed
timeline
Multiple
Platforms
- Different
parties use
different
platforms
- Risk of
miscommunic
ation and
fraud
Changes in
Financials
- Financials are
exchanged
among different
parties
- Changes could
be made during
the process
Today’s Trade Finance (Main Pain Points)

15. 1 2 3 4 5 6 7 8
Realtime Review of
Agreement
In real-time, the
import bank will
have capability to
review purchase
agreement, draft
terms of credit and
submit obligation to
pay to export bank
Digital LC Signing
After receiving the
obligations, the
exporter will digitally
sign Blockchain-
equivalent letter of
credit within the
smart contract to
initiate shipment
Transportation
of Goods
During transit,
goods will be
transported
from Country
A to Country
B
Automated
Payments
Using provided
acknowledgement
, Blockchain will
automate
payment from
importer to
exporter via a
Smart Contract
Creation of Smart
Contract
Upon purchase, the
agreement of sale
between the importer
and exporter is shared
with import bank using a
Smart Contract on the
Blockchain
Smart Contract for
T&C
Export bank will review
the provided payment
obligation and once
approved, a Smart
Contract will be
generated on the
Blockchain to cover
terms & conditions
and lock-in obligations
Digital Validation of
Inspection
Goods will be inspected by
3rd parties and the
customs agent in the
exporting country - with all
providing their respective
digital signature of
approval on the Blockchain
smart contract
Digital
Acknowledgement
Upon delivery,
importer will
digitally
acknowledge
receipt of goods
and trigger
payment
Blockchain in Trade Finance

16. The Way Forward
No More
Imitation
Game!
Changeof
Mindset
Most importantly
innovative
thinking, creative
implementation,
daring approach
is crucial in the
recipe of success.
Research&
Developme
nt
More serious and
in-depth research
and development
is needed in the
areas, sharia,
regulations, legal,
governance, etc.
Sharia
Compliant
Crypto-Assets
Halal-Chain coin,
OneGram, GoldX
have already
been launched.
More crypto-
assets will come
soon.
The Islamic finance
ecosystem could
leverage on it to
exponentially
enhance business
processes and
streamline
operations.A
Revolution

17. Allah Knows Best!
The End
Questions?
Or Comments?
Dr Farrukh Habib
doctorfarrukhhabib@gmail.com