Islamic family offices continued to be challenged in 2021 as a result of the global COVID-19 pandemic. While a pronounced recovery from the ravages of the global pandemic did not fully materialize in 2021, the future is cautiously optimistic for a more prosperous 2022 for Islamic family offices. Over the immediate horizon for Islamic family offices lies the prospect of a crypto revolution in decentralized finance while remaining true to Shariah principles that the family has established for itself.
Review of 2021
While the past year saw most Islamic family offices understandably focused on investment-related themes in the wake of the global pandemic and the resulting financial tumult, the areas of greatest emphasis in 2021 included a focused need to improve their technology and reporting systems. Many Islamic family offices continued to prioritize a top-down review of how technology should serve the family more confidentially and effectively.
Preview of 2022
In the wake of two years muddling through the realities of the global pandemic, Islamic family offices can identify meaningful and thoughtful benchmarks by which to thrive in the new year.
While the baseline in 2022 for Islamic family offices should unquestionably remain to build on priorities carefully identified and largely met in 2021, a new paradigm centered around decentralized finance may become the center stage for Islamic family offices, not least of which will be a significant focus on blockchain technology and embracing a financial revolution.
The widespread adoption of blockchain technology and decentralized finance holds enormous promise for Islamic family offices.
Smart contracts aim to revolutionize the execution of legal contracts. Smart contracts are essentially self-executing digital contracts, the terms of which are electronically coded and will execute only if certain preliminary conditions are met. Smart contracts automate the entire contractual process for Islamic family offices, thus eliminating administrative and legal complexities and redundancies.
In addition, smart contracts are relatively simple to verify, immutable and secure. They mitigate operational risks arising from settlement and counterparty risks. As an alternative to traditional legal contracts, smart contracts may significantly streamline the operations of Islamic family offices and automate the entire contractual process. The long-term implications for Islamic family offices could not be more profound.
Distributed cloud storage
Virtually all cloud storage services link to a centralized server. However, a centralized database runs the risk of compromising the data from a single point of entry. On the other hand, a decentralized system eliminates the risk of conflict of interests and moral hazards between participants. Within a decentralized network, one needs only to trust the static protocol of the blockchain governed by cryptographic mathematical algorithms.
The blockchain’s distributed cloud storage can seamlessly manage the huge amount of data and information from Islamic family offices. Currently, data storage in Islamic family offices is centralized and manually managed. Decentralized data storage offers security and cost efficiency to Islamic family offices and provides an efficient and more secure method by which to counter the risk of single-entry cyberattacks or data loss. Distributed storage also eliminates the need for documentation and manual reconciliation of transactions.
The emergence of blockchain technology is in tandem with the advent of cryptocurrencies. Significant effort is required to produce Bitcoin, Ethereum and other principal cryptocurrencies. This is called ‘mining’, where individuals or entities use sophisticated computer equipment and software to solve complex mathematical problems through the use of cryptography.
Since the blockchain is a decentralized network, miners have an important role in securing transactions. Their interests will be aligned since miners will be rewarded with cryptocurrencies for every successful block they secure. The exertion of computing power, electricity and time by the miners represents the value that validates the creation of cryptocurrencies.
From the perspective of Islamic family offices, money should possess an intrinsic value and should be asset-backed. Cryptocurrencies can be seen to be more intrinsically compatible with Islamic finance and an ideal alternative for Islamic family offices.
The blockchain is a revolutionary technology that Islamic family offices could leverage to enhance business processes and streamline operations. The blockchain creates the possibility of coordinating transactional activities within a strong mechanism of trust and transparency. Moreover, it is apparent that the characteristics and conditions of the blockchain align with the principles of Islamic finance and therefore offer an ideal alternative to Islamic family offices to incorporate Islamic values of justice, equality, trust and fairness into the daily operations of Islamic family offices.
Not surprisingly, entrepreneurial Islamic families are in the best position to effectuate a meaningful focus on decentralized finance and the vanguard of the blockchain in the 21st century.
Marc J Halsema is the founder and principal of Jaclise International. He can be contacted at [email protected]