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Blockchain is a digital transaction recording system where individual records, known as blocks, are linked together in a sequential register called a chain. This technology holds significant potential for Islamic social finance and fintech (financial technology), offering Muslims worldwide opportunities to explore these fields in an Islamic context, particularly through the use of blockchain. Blockchain’s transparency in transactions and high security in data storage, especially through smart contracts, makes it a valuable tool for enhancing various financial processes.
Blockchain technology records every transaction in a decentralized and secure manner. Participants can interact and conduct electronic transactions automatically, recorded through cryptographic algorithms without needing to know or trust each other, and without third-party intervention. This characteristic is particularly beneficial for Zakat collection, as it increases the transparency of the process by allowing all transactions to be tracked and recorded securely.
In Indonesia, the potential for national Zakat funds is immense, estimated in the hundreds of trillions of rupiah. However, the actual funds raised have fallen short of this potential, highlighting a need for increased public trust in Zakat management institutions. In 2022, IDR 22.43 trillion (US$1.38 billion) in Zakat funds were collected nationally, representing only about 4% of the potential. Integrating blockchain technology, particularly smart contracts, into Zakat collection and distribution could significantly improve this process. Zakat institutions can benefit from peer-to-peer transaction systems operating through autonomous processes facilitated by smart contracts.
Looking ahead, blockchain-based businesses are projected to exceed US$3 trillion by 2030. Islamic social finance institutions, including Zakat management entities, stand to gain from adopting blockchain technology. Studies have underscored the benefits of integrating blockchain into Zakat management, highlighting enhanced transparency, reduced transaction costs, and a reliable environment for Zakat transactions. This integration will likely foster better cooperation and efficiency among Zakat managers and institutions.
Strengths of blockchain in zakat management
Transparency: Blockchain provides robust, traceable, and transparent transaction records, enhancing the efficiency of the Badan Amil Zakat Nasional (BAZNAS) or the National Zakat Agency. This system better ensures the achievement of Zakat goals.
Data and information security: Once data is entered into a digital ledger, it cannot be altered, making it easier to control and detect dishonesty in reporting. This aligns with BAZNAS’s existing ICT Governance Unit policies and allows easy access to Zakat collection information from anywhere.
Real-Time information: Blockchain updates information for everyone on the network simultaneously, facilitating real-time monitoring. This feature makes data retrieval faster, easier, and more accurate, saving BAZNAS time and costs.
Legal implications of using blockchain for zakat management
Regulatory compliance: Organizations must adhere to local and international laws governing blockchain technology in Zakat management.
Data protection: Ensuring data stored on the blockchain complies with data protection laws, such as the General Data Protection Regulation and the Personal Data Protection Act, is crucial.
Contractual obligations: Smart contracts must be legally binding and comply with relevant contractual obligations.
Taxation: Organizations need to consider the tax implications of using blockchain for Zakat management, including cryptocurrency transactions and potential tax evasion.
Liability: Addressing liability issues, including potential legal disputes and the allocation of responsibility in the event of a blockchain system breach or failure, is essential.
Jurisdiction: Organizations must consider the jurisdictional implications, including cross-border disputes and the need for international cooperation in case of a system failure.
Intellectual property rights: Ensuring the use of blockchain technology does not infringe on patents, trademarks, or copyrights is necessary.
Privacy: Organizations must ensure that blockchain technology does not violate individual privacy rights, including data protection and the right to be forgotten.
By addressing these legal implications, organizations can effectively implement blockchain technology for Zakat management while ensuring compliance with local and international laws. Consequently, the contribution of Zakat to poverty eradication and community welfare improvement becomes achievable.
The author is the Managing Director & CEO of National Bank Limited. He is a fellow member of the Institute of Cost & Management Accountants of Bangladesh (ICMAB) and the first Certified Sustainability Reporting Assurer (CSRA) in Bangladesh. He is also a post-graduate diploma from the Institute of Islamic Banking & Insurance (IIBI), United Kingdom.
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