Managing Crypto-pegged Exchange Rates Risks in Islamic Banks in the Era of Digitalization Economy and Tokenization

Abstract

The FX markets of the world have become one of the largest of all financial markets. Trading turnover averaged as high as $4.7[1] trillion a day in recent years, 70 times the daily trading volume on the New York Stock Exchange. Online foreign exchange trading is increasing. Electronic foreign exchange trading volume tops 60 percent of overall global foreign exchange trading. Traditionally foreign exchange risk is considered as part of market risk despite being a profound one. Foreign exchange is a critical risk factor that has at times been profound enough to cause entire economies to face crises and move towards recession. In the world of globalization, digitalization and tokenization where banks are expanding their businesses internationally faster than ever the growing foreign exchange and newborn cryptocurrency risk should be set as an independent source in risk management process. The paper analyses the growing pattern of foreign exchange risk within five years period for six Islamic banks in GCC region: National commercial bank Saudi Arabia; Al Baraka Banking group, Bahrain, Al Rajhi Bank, Saudi Arabia, Dubai Islamic Bank, UAE, Qatar Islamic Bank, Qatar and Samba Financial Group, Saudi Arabia (traditional bank with Islamic banking business). The analysis reviles the need for more robust exchange risk management and establishing a new “crypto-gold standard†or crypto-pegged exchange rates for eliminating the volatility and future losses due to it. The results show that tokenization could be a good tool for managing the exchange rate risk.

[1] https://www.wsj.com/articles/SB10001424053111903999904576468211853284114