Artificial Intelligence and Blockchain-Driven Islamic Capital Markets

Artificial Intelligence and Blockchain-Driven Islamic Capital Markets

Hazik Bin Mohamed, Norhanim Mat Sari
DOI: 10.4018/978-1-7998-0218-1.ch044
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New innovative digital and advanced technologies are transforming the way we access and use existing financial products and services. Fintech is becoming disruptive more and more by latest and advanced technologies such as blockchain, cloud computing, big data analysis, Internet of Things, robo-advisors, and artificial intelligence. This chapter discusses the crucial innovation, structural and institutional development for financial technologies in Islamic Finance. The blockchain proposes a new operational design, where all actors within the capital market can work from common ledgers, with collective datasets in almost real-time, and supporting operations which are more streamlined. The system will also incorporate fraud-detection and compliance enhancements, where applicable. This conceptual chapter also assesses the key features of the AI and blockchain architecture and protocol developments. It identifies areas where AI and blockchain can bring substantial transformational change, while at the same time, identifies some of the major barriers to adoption within the capital markets.
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Business leaders in the financial industry are trying to prepare for or predict what the financial services sector will look like 5 to 10 years from now. Will artificial intelligence replace operations? Will performing financial functions occur in an instantaneous manner from the palm of people’s hands? Will there be enough disruption so that large banks will no longer exist? Since an asset can be traded today electronically in the blink of an eye and then take days to settle. Both the supply-side (investment banks) and the demand-side (their clients) are demanding more — and the market is responding. The authors discuss below some of the main shifts in technology and processes.

Cloud-Based (IoT Infrastructure)

It appears that public clouds, private clouds, cloud as a disaster recovery (DR), and cloud communications are being used extensively and will increase exponentially as the adoption of cloud-based computing accelerates. All companies, regardless of size, should build with a cloud-based infrastructure in mind, and seriously consider a server-less environment with adequate cyber-security measures.

Banks are very concerned with security, and the ability to safely store their sensitive information in the cloud. It should be noted that most of the high-visibility hacks in the past 10 years have affected networks but not one of the cloud providers. It is much easier to protect small amounts of connection points than it is to large amounts of entry points coming into a system. Financial institutions need to find ways to mitigate security fears with the path to future computing, which is all in the cloud.

Cloud computing also serves as an opportunity to consolidate platforms and connectivity. However, it is the role of vendors to provide further efficiencies using cloud computing rather than financial institutions believing that if they simply move everything to the cloud, their processes would be cheaper and easier to maintain.

Going full cloud is like disconnecting from cable; it may not make sense for every player. Some cloud service pricing is flexible in that they charge by the number of minutes used on the platform. This is very encouraging and innovative, as making an upfront commitment no longer necessary. Financial institutions should focus on managing balance sheets, trading, and risk management while using whatever tools they have at their disposal to provide mobility and competition in their space. Improved technology enhances the effectiveness of information tools that result in efficiency of financial institutions (Rafay & Gilani, 2016)

Key Terms in this Chapter

KYC: “Know Your Customer” (or KYC) is a term used to describe how a business identifies and verifies the identity of a client. KYC is part of AML.

Immutable: Unchanging over time or unable to be changed.

AML: Anti-money laundering (or AML) rules help authorities detect and banks to report suspicious activity including the predicate offenses to money laundering and terrorist financing, such as securities fraud and market manipulation.

Smart Contracts: Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.

Blockchain: A blockchain is a growing list of records, called blocks, which are linked using cryptography. Each block contains a cryptographic hash of the previous block a timestamp, and transaction data (generally represented as a Merkle tree).

IoT: The Internet of Things (or IoT) is a system of interrelated computing devices, mechanical and digital machines, objects, animals or people that are provided with unique identifiers (UIDs) and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction.

Flash Crash: A flash crash is when a market, whether stocks, bonds, or commodities, plummets within minutes and then rebounds. It is usually caused by a technical glitch, not a loss of confidence.

CDD: Customer due diligence (CDD) are background checks on the customer to ensure that they are properly risk assessed before being onboarded.

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