Decrypting Cryptos – VII

NFTs 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: Tokens from an Islamic Perspective

U: What about NFTs, or Non-Fungible Tokens, which represent a unit of data stored on the blockchain, which certifies a digital asset to be unique and therefore not interchangeable?

S: To be honest it is a strange world out there, and value is seemingly being created from anything at record speed today…

U: They say it is similar to a patent today and helps create scarcity.

S: Well it depends really, because firstly patents are not given to everything and anything, and secondly, NFTs do not necessarily create scarcity. With digital images, for example, reproduction is possible and very easy as well.

From what you have described, I could deduce that NFTs can make the claim towards someone holding the original of something scarce…and that is different to it just making something scarce.

Also, patents have an executive authority governing them in the form of the worldwide patent system, which is based on patent registers and operated by global patent offices. I do not see NFTs providing this level of authentication as patents do…especially with matters related to the digital sphere, and especially with no regulation. I mean: let us assume that the original was duplicated and the duplicate became tokenised so that it could now claim itself to be the original!

I mean, just by looking at it in a cursory manner, the value that I can ascertain is in the form of tracking transactions related to actual patents that have been granted. So if one was to tokenise the actual patent portfolio, then you theoretically may transfer your interest in patents to a third party without having to involve the patent offices. So this would create speed, efficiency, and reduce the costs associated with it. I see value there.

U: So what about tokenising things as NFTs and buying them?

S: Similar to our discussion on tokens earlier, this would depend on a list of factors:

What does the token represent: something halal or haram?

• Is the right to the original being purchased true?
• Is this right to the claim being purchased considered an acceptable form of wealth from a shariah-based perspective?
• Is the value proposition one which the majority of sensible traders today consider a sensible transaction?
• Is the price acceptable in nature to the value proposition being advertised? Or is the transaction one of extravagance or a gamble?
• All these questions need to be answered.

So with images for example, we have to consider what image the token represents is it permissible to create, like an image of an unanimated object for example, or the image of something which one is allowed to look at from an Islamic perspective? If so, then we would go on and look at the other threshold questions I just mentioned in terms of token purchases and trade, such as value proposition and price, and determining if the transaction is a branch of israf and extravagance, which is ?aram.

So assume, for example, if a .jpeg image normally sells for 10 US dollars on a stock website, but then after it is tokenised all of a sudden a bidding war happens on it and it sells for hundreds or thousands given that the purchase of this token is not a requirement for one to take care of their living needs, and just represents a mere want, this would fall under israf, and would be forbidden from this angle.

If the fuqaha allowed a person to perform tayammum (dry ablution) due to water being sold above its normal price, on what grounds are they going to allow something of no important value in your life being bought for prices that the majority of sensible people consider abnormal and unnecessary?

Also, and Allah knows best, but it seems that people are trading in this space not for the patent claim predominantly, but for the chance to invest and make money and they do this with no investment metrics to base their specific purchase on, but rather on a hunch. Again, I do not want to present a stereotyped opinion, but I am just speaking here from personal observation.

And if this is the case, then this form of trade would be closer to a form of gambling than an investment and thus would be forbidden.

In all cases – like we said with tokens – do not transact until a scholar has studied the proposition at hand from a Shariah perspective and gives you the green light.

Which opinion should we adopt if there are many?

U: This brings us to the end and we have gone almost an hour over our original plan! Before we close: we have many from an industry background with us sharing their appreciation of your treatment of the topic today, and a recurring question is with regards to how to deal with the difference of opinion. If the views in this space are respectable and should not be quickly dismissed, and as you have presented there is so much more to the discussion, which view should a person adopt and follow?

S: This is an important question. In matters such as these, the scholars of u?ul al-fiqh lay a systematic process for the mustatfti – the one who is asking and requires an answer – to follow in the event of there being two Islamic views on a matter.

They say that a person should follow the view of a scholar that is known to be specialised on the subject matter, and thus considered to be more knowledgeable.

In the event of both being at the same level of knowledge, then the one who is considered to be the more pious between the two should be followed in that matter, as greater piety would entail them having a better chance to be guided to what is most correct in that matter in terms of the Islamic ruling.

And finally, in the event of both being considered to have the same level of piety, then the view of the scholar that matches the view of the majority of the scholars on the subject should be followed.

With this diligence, the person seeking knowledge and guidance on a matter would have absolved themselves from the liability that would have been upon them, had they acted based on their desires. And Allah knows best.

Reproduced with permission from A Master Class on Decrypting Cryptocurrency