Decrypting Cryptos – VI

Tokens from an Islamic Perspective

(Shaykh Dr Sajid Umar, Standing Shariah Committee, Islamic Council of Europe (ICE),  Interviewed by Usman Malik)

Continued from Decrypting Cryptos – V: Islamic Arguments against Cryptocurrencies

U: Let us move onto tokens. How would these be treated from an Islamic perspective?

S: Okay, I will summarise. With the unit of tokens, there are 3 things to look at: 1) what it represents, 2) how it is bought and sold, and when it is bought and sold, and 3) how it is staked. If the token is staked, in fact even with crypto-currencies, they have to look at the staking mechanism and how the rewards for doing so come to be.

So with tokens, their base ruling would be connected to what they represent. If they represent ?alal wealth, then purchasing the token will be permissible, provided all the conditions I shared when purchasing a crypto-currency apply as well.

However, if a token represents something ?ar?m, or something not considered wealth or legally tradable, etc. then acquiring it would be ?aram as well.

In terms of trading them, their ruling would be dependent on the rules of transactions found in Islamic fiqh, which ensure that the prohibitions which render a transaction invalid, such as riba, ambiguity, oppression, extravagance, etc. do not apply.

If they are staked, which is an umbrella term used to denote the act of pledging your cryptos to a cryptocurrency protocol to earn rewards in exchange, their ruling would be based on the staking operation, and the bases for which any gains are attained and then distributed amongst those who are staking. For example, if you stake it on a platform and then receive a percentage of the overall receivables made from that platform’s functions; that platform operates within the space of spreads, short selling, and derivatives, for example. Accordingly, the receivables would be ?aram, and the staking process itself also would be forbidden.

Also, as another example, if a token represents actual gold, then the rules of buying and selling gold would apply. And if they represent a right to the purchase of gold, and not the actual gold, then along with the rulings of transactions a fiqh study is required regarding the value proposition of that right. It would be required to determine whether that (right) conforms to something being considered (wealth) from a fiqh perspective, and accordingly an abstract ruling can be applied to the idea. And then a physical ruling will be applied to any actual transaction that takes place based on fatwa rules and regulations.

U: SubhanAllah. Given how many of these token are coming into existence and the spread of their ideas and operations, it’s important for everyone to have scholar on hand to help them with the affairs of Halal and Haram on these matters. As Allah commands us to ask the people of knowledge before we engage in maters that the Shariah has a view on, I encourage all attendees to engage our ICE Financial Consultancy and Advisory panel, for we have a rich panel of scholars to help you with your requirements insha’Allah.

ICOs and ITOs from an Islamic Perspective

U: People are asking questions in relation to ICOs and ITOs. How compliant are these operations from an Islamic perspective?

S: Initial Coin Offerings (ICOs), also known as Initial Token Offerings (ITOs) are a crowdfunding practice for blockchain projects, where a cryptocurrency or a token is offered to early investors before being listed on the wider marketplace. Now, from the outset I want to highlight that from an industry perspective, these are considered to be high risk investments, so it is fundamental to make sure that you conduct the necessary research around the project before putting your money in. This is especially so if you are going in from the perspective of investing, which is the norm really. I have not come across anyone yet who purely donates in order to find a token see the light of day.

Now, from a fiqh perspective I see two issues with the idea of ICOs and ITOs.

Firstly, are these tokens at this stage a form of wealth? And if so, then on what grounds? This is especially pressing given that at the early stage they do not normally possess a utility both within their ecosystem, as well as outside of their proposed ecosystem.

Secondly, if they do not possess a utility both within their proposed ecosystem, on what grounds are they being priced?

Now with this, we see that the issue of gharar (ambiguity) is naturally prominent, which makes the transaction at this stage closer to being forbidden than permissible, and let us not forget that through observation, we know of cases of people losing a lot of money jumping into these offerings before the actual idea matures.

And I use the term ‘matures’ here deliberately – as in relation to a tweet and LinkedIn message I put out around 6 months ago – regarding how the Messenger(pbuh) forbade fruits from being sold before they showed signs of ripening. Then I compared it to the idea of ICOs.

Why did the Messenger (pbuh) say and rule so? Because at that stage, the ambiguity is naturally high, and represents a gamble, in the event that the fruits are being purchased in order to be eaten and sold. Of course, if it was bought in as animal feed, then their price could be determined before they ripened, as they would have a purpose at that stage of existence. That would bring the gharar or ambiguity factor down.

And from this, we can derive an important precedent by ruling that the purchase of these tokens at the ICO stage for the sake of investment is impermissible. There may be exceptional circumstances, but those circumstances would need to be presented to me and the scholars for a more specific ruling. And Allah knows best.

To be continued at Decrypting Cryptos – VII: NFTs from an Islamic Perspective

Reproduced with permission from A Master Class on Decrypting Cryptocurrency