Global law firm Clifford Chance has advised on the issuance of a pilot digital Islamic ‘bond’, or Sukuk, that utilised the distributed ledger technology (DLT) of the Corda Protocol by R3, a well-known blockchain solutions company. Interestingly, the parties involved chose not to use digital currencies often associated with such technology, but instead relied upon the more traditional fiat currency settlement system, SWIFT.
Sukuk financial instruments are designed to avoid the paying of interest in order to conform with Islamic practices, and so have a sometimes more complex legal structure that produces payments for holders from underlying assets or project activity.
Sukuk ‘bonds’ are an important part of the Islamic financial world – with plenty of Western banks showing an interest in them as well. There are currently hundreds of billions of dollars’ worth of such instruments in circulation, and the total steadily grows each year.
There has been substantial work in the West in relation to DLT-based bond issuance, in part driven by the hope such database technology, sometimes using smart contract approaches, could reduce the costs of issuing and managing payments derived from a bond. Or, to put it simply, to cut out some of the manual labour needed to handle the transactional elements.
The new pilot Sukuk was developed by Wethaq, a Dubai-based financial services company. Al Ghurair Investments acted as the issuer, and it was also advised by Mashreqbank PSC acting as lead arranger. It was issued under the supervision of the Dubai Financial Services Authority (DFSA).
This pilot issuance ‘demonstrated how Sukuk issuances can become more accessible with the application of financial technology to the issuance process which is, at present, manual, non-standardised and fragmented’ said Wethaq in a statement.
Wethaq consolidates and automates the agency and infrastructure services required in the entire lifecycle of the Sukuk product while enabling transaction participants and their service providers to interact more efficiently through digitised workflows, they added.
Cathy Minter, Chief Revenue Officer at R3, said: ‘Wethaq’s contribution to the Sukuk market represents an important step in bringing the benefits of automation to Islamic capital markets. Its collaboration with the DFSA reflects R3’s own ethos of working closely with regulators to achieve sustainable results for the industries we are looking to transform.
‘As such, we are proud that our Corda platform can enable Wethaq to deliver the promise of distributed ledger technology to Islamic capital markets. We look forward to seeing Wethaq achieve continued success.’
While Jack Hardman, Counsel, and Rafe Khokhar, Senior Associate, at Clifford Chance, concluded: ‘We are delighted to be involved in this landmark project. Wethaq’s pilot issuance marks an important milestone in the development of fintech solutions for Sukuk transactions and we are excited by the potential application of the Wethaq technology in debt capital markets generally.’