Question:
Is the BITO ETF Shariah Compliant?
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
The Answer:
The ProShares Bitcoin Strategy ETF (BITO) is not Shariah compliant.
The Fiqh (jurisprudence of the answer):
The ProShares Bitcoin Strategy ETF is the first U.S. bitcoin-linked ETF designed to provide investment results that generally correspond to the performance of bitcoin. The fund seeks to provide capital appreciation primarily through managed exposure to bitcoin futures contracts. The fund does not invest directly in bitcoin. Instead, as per the prospectus, the fund invests in:
1. Bitcoin Futures Contracts – Standardized, cash-settled bitcoin futures contracts traded on commodity exchanges registered with the Commodity Futures Trading Commission (“CFTC”). Currently, the only such contracts are traded on, or subject to the rules of, the Chicago Mercantile Exchange (“CME”). The value of bitcoin futures is determined by reference to the CME CF Bitcoin Reference Rate (“BBR”), which is designed to provide an indication of the price of bitcoin across certain cash bitcoin exchanges. The Fund seeks to invest in cash settled, front-month bitcoin futures. While the Fund seeks to invest primarily in bitcoin futures contracts, the Fund also may invest in other instruments as described below.
2. Money Market Instruments — The Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles, for example:
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- U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the U.S. government.
- Repurchase Agreements — Contracts in which a seller of securities, usually U.S. government securities or other money market instruments, agrees to buy the securities back at a specified time and price. Repurchase agreements are primarily used by the Fund as a short-term investment vehicle for cash positions.
3. Borrowing – The Fund seeks to engage in reverse repurchase agreements and use the proceeds for investment purposes.
The above asset classes are not Shariah compliant. The majority of Shariah scholars are of the view that conventional Futures and Forward contracts are not Shariah compliant. This was the resolution of the International Islamic Fiqh Academy as well as the Islamic Fiqh Academy of Muslim World League. The AAOIFI Standard No.20 clearly states:
“5/1 Futures
5/1/1 A contract that is binding under law. It is concluded on the trading floor of the exchange for the sale and purchase of commodities or financial instruments for a period linked to the near future. The transaction is arranged with the mentioning of the quantity, type and category along with the statement of the date and place of delivery. As for the price, it is the sole element that varies, and it is ascertained in the trading hall.
5/1/2 The Shari’ah rule for futures contracts It is not permitted according to the Shari’ah to undertake futures contracts either through their formation or trading.”
The concerns with Futures are as follows:
- Trading before possession – Most buyers and sellers in futures and options transactions reverse out of their position before delivery or maturity. This means that physical delivery hardly ever takes place in futures and options; for example, 99% of all futures contracts are settled before maturity.
- The exchange of a debt for a debt also known as Bay’ al Dayn bil Dayn or Bay’ al-Kali bil Kali. The AAOIFI Shariah Standard No.10 on Salam states:
“Again, any delay in payment of the capital and dispersal of the parties renders the transaction a sale of debt for debt which is prohibited, and the scholars agreed on its prohibition. Ibn Rushd said: “As for sale of debt for debt, Muslim scholars are unanimous regarding its prohibition.”
This general prohibition has been prescribed to futures, where it is concluded that the sale of futures contracts, where the parties can offset their transactions by selling the ‘debts’ owed them to other parties before the delivery of the underlying asset, will amount to a sale of a debt and is therefore prohibited.
- The existence of Riba when there the countervalues are usurious or when there is no ownership of any asset and merely the settling of cash differentials.
Similarly, money market instruments accrue interest for the investor and therefore are not Shariah compliant. The borrowings of reverse repo agreements is also problematic due to the combination of two contracts in one, creating a paper transaction and therefore merely resulting in borrowing and lending with Riba.
And Allah Ta’ālā Alone Knows Best
Mufti Faraz Adam,
Shariah Advisor
Amanah Advisors
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