What are NFTs?
One of latest hypes in the crypto-space is Non-Fungible Tokens (NFTs). NFTs are described as a special type of token that represents a unique asset. The term fungible means something that can be replaced by something similar. It is a type of token that can’t be replaced by another similar token as what is represented is unique and non-interchangeable. NFTs represent scarcity of digital content. The Ethereum blockchain allows artists, content creators and even gaming companies to attach attribution to their creations through NFTs. In essence, non-fungible tokens open the door to the digitization of assets and data. NFTs work as a database entry for any type of good.
While both NFTs and cryptocurrencies operate on blockchain technology, NFTs are not interchangeable the way one Bitcoin is the same as another. They each represent unique digital files that live on the blockchain. It is argued that it this makes it easier to establish rightful ownership or the origin of a piece of digital art. It is also argued that its benefits extend to copyright and royalty protection, which is key for the art and collectibles space.
Considering the above, two NFTs are not interchangeable; each represent something different. Ethereum made it possible for developers to begin decentralizing more complicated data.
Just as ERC20 standardized fungible tokens, The vast majority of NFT tokens are built using one of two Ethereum token standards (ERC-721 and ERC-1155) – blueprints created by Ethereum that enable software developers to easily deploy NFTs and ensure they’re compatible with the broader ecosystem.
To read our views and thoughts on crypto-assets in general, see here.
Fungibles and non-fungibles
The concept of fungibles and non-fungibles has been addressed at length by the Islamic jurists and schools of Islamic law. In summary, fungibles are called Mithliyyat in Fiqh, whilst non-fungibles are called Qimiyyat.
A fungible (Mithliy) is that property or asset which has an identical or near-identical asset available in the markets, such that its units are generally considered interchangeable and therefore the pricing between the units have very little discrepancy and variance if any[i]. Examples of this include all standardised products such as cars of the same make, model and year, laptops of the same make, model and year, mobile phones of the same make, model and year etc. In essence, a fungible has another identical in form (surah) and substance (Ma’na)[ii]; the appearance, the utility and the underlying value are found in several units of this genus, hence making it fungible. Mithliy has also been translated as homogeneous property.
A non-fungible (Qimiy) is that property or asset which does not have an identical or near-identical asset to it in its form (surah). Examples of this include animals of same genus, unique items such as a dress designed and made for one person, a painting or calligraphy which is unique. Qimiy has also been translated as heterogeneous property[iii].
If a person’s fungible item is destroyed by a third party, the first remedy is a like-for-like replacement, because a near-identical is present in the markets. Whereas, if a non-fungible item is destroyed by a third party, only the market value of the item is paid as damages, as an identical replacement is not possible.
Fiqh of NFTs
Whilst this is a developing field and the Fiqh will evolve as more NFTs are introduced, the following are basic Fiqh principles which highlight some of the considerations that will go into analysing NFTs.
In principle, the permissibility or impermissibility of an NFT will rest upon what the NFT is composed of; what is the non-fungible? If the non-fungible is Shariah compliant in and of itself, then assuming no other issue is found, the NFT would be considered compliant. However, if an NFT was composed of something non-compliant or there were potential extrinsic issues which could risk Shariah non-compliance, then such an NFT may be classed as non-compliant. An NFT must represent an acceptable form in Shariah.
When reviewing NFTs, scholars will generally be considering the following principles:
- Maliyyah – something which reasonable people have an inclination towards and can be retrieved when needed.
- Taqawwum – something which has a lawful utility and benefit.
- Manfa’ah Maqsudah – In the discussion of services, the jurists stipulate that the utility of something must be such that it is sensible and commonly sought after by people. It should not be something that the Shariah objects to or reasonable people would not seek such utility[iv].
- Extravagance (Israf) and wastefulness (Tabdhir).
- Any potential wider Shariah infringements.
- The Impact of investing in such assets, and how it impacts the remaining wealth of a person to fulfil their Islamic duties and obligations in particular to maintaining oneself and their family.
The most well-known and common NFTs have been produced in the following industries, and therefore, we will focus on these industries in terms of Shariah principles.
- In-game items
- Data and Licencing
The most common type of NFT art that’s available is programmable art – a blend of technology and creativity. Art has utility. It brings colour to walls, beauty to the eye and captures the delights of the heart. Art inspires, paints a thousand words, is an expression of vision and captures what eyes generally do not see.
From a Shariah perspective, only Shariah complaint art is permissible such as calligraphy, inanimate objects, landscapes and abstract phenomena. Non-Shariah compliant art would not be permitted as an investment or production. In regard to animate art, there is a difference of opinion among scholars. Some scholars regard animate art which details every animate feature as non-compliant, and regard this to fall under the prohibition of Taswir (picture making). Whilst other scholars do not consider digital animate imagery and art to fall under the prohibition of Tasweer. Rather, they consider this prohibition more applicable to 3D animate objects and statues.
Therefore, any NFT art should not represent:
- anything unlawful to see in Shariah
- a vice or unlawful substance or object
- anything sacred in Shariah which it prohibited to portray such as the Allah, the Prophets etc.
- ridiculing or disfiguring of other people
- limbs and areas which the Shariah orders to be covered and concealed.
What would be most useful and encouraged is the representation of reminders and art which help people in their journey to Allah and in being good people.
The NFT collectibles’ world represents an entire suite of underlying assets from sports memorabilia to trading cards and more.
A definitive or generalised view on all collectibles is not possible nor accurate as collectibles differ and vary. Thus, some general principles for now seem to be the best course of action. Thus, an NFT collectible should:
- Represent something which is lawful and Halal.
- Not be something futile and mere amusement.
- Have a genuine utility which is of worldly benefit or spiritual benefit.
- Not be something which the Shariah would consider a waste of money, extravagance or wastefulness.
Something may have financial value, but it may not have utility from a Shariah lens. Shariah has a paradigm and framework when it comes to understanding value and utility. The utility and perceived value of something must align with the principles of Shariah, otherwise this risks being falling under the prohibition of squandering of wealth in useless and trivial things. The perfection of a person`s faith and obedience is in his abstinence from that which is useless and brings forth no goodness.
- In-game items
NFTs for in-game items, computer-generated avatars and other game-related NFTs are something which do not reflect nor seem to align with the Shariah vision for investment in value-adding services and assets.
The Islamic jurists state that actions fall into one of the following three:
- Reasonable purpose (Ghard Sahih) – anything beneficial for the worldly life or the afterlife. This is permissible and encouraged to perform.
- Unreasonable purpose (Ghard Fasid) – anything negative or unconstructive for one’s worldly life and has no benefit for the afterlife. This is referred to as Lahw in the Islamic legal texts. This should be abstained from.
- No purpose whatsoever (‘Abath) – anything done with no meaningful objective or reasonable outcome. This can be spurred by boredom, a lack of conscience and mental presence, or even ‘killing time’. This should be abstained from also[v].
The above principles apply to the gaming and entertainment industry. As such, for in-game NFTs, the following principles apply:
- Any game which has no reasonable purpose, NFTs should not be purchased for such games.
- Anything unlawful must be abstained from.
Individuals should consult local scholars about the different types of games and entertainment.
- Data and Licensing
NFTs are becoming popular in representing non-fungible or unique data and licences such as certificates, domain names and other such specific content. As long as the underlying data is Shariah compliant, then using NFTs for this purpose is permissible.
NFTs have recently appeared in the media industry. Audios, visuals and more have been represented through NFTs. For Shariah compliance, the key principles are as follows:
- The media should be lawful content.
- Content should not be a deception nor misrepresent the truth.
- The objective behind the media should be positive and beneficial.
NFTs have also been tested for ticketing purposes. These tickets can grant access to special content, live performances or even sports events. For Shariah compliance, the following applies:
- The event must not have anything unlawful or objectional in Shariah.
- The event should be something that is of benefit to people.
NFTs are still a developing concept. The above is by no means an exhaustive list of the use cases. As the industry grows, the knowledge around NFTs will develop and greater insights on the different use cases will emerge. What will be most interesting and fruitful is the NFTs for Shariah purposes; where non-fungibles that add value to people’s lives and afterlives are developed and invested in. That is really the ultimate success in NFTs, and it is in such areas investments should take place in from a Shariah perspective. Investing in futile and objectional areas serves no real purpose and can well fall into the purview of squandering, wasting the blessings of Allah.
Allah alone knows best
Mufti Faraz Adam
4th March 2021
[i] المِثْلِيُّ: ما يُوجَدُ مِثْلُهُ فِي السُّوقِ بِدُونِ تَفاوُتٍ يُعْتَدُّ بِهِ كالكَيْلِ والمَوْزُونِ والعَدَدِيّاتِ المُتَقارِبَةِ مِثْلِ الجَوْزِ والبَيْضِ (رَدُّ المُحْتارِ) راجِعْ المادَّةَ (١١١٩)؛ لِأنَّهُ وإنْ وُجِدَ تَفاوُتٌ فِي الكِبَرِ والصِّغَرِ بَيْنَ أفْرادِ البَيْضِ والجَوْزِ وآحادِهِما فَذَلِكَ التَّفاوُتُ لا يُوجِبُ اخْتِلافًا فِي الثَّمَنِ ويُباعُ الكَبِيرُ مِنهُما بِمِثْلِ ما يُباعُ بِهِ الصَّغِيرُ (رَدُّ المُحْتارِ)
هَذا ولْيَكُنْ مَعْلُومًا بِأنَّهُ لَيْسَ كُلُّ مَكِيلٍ ولا كُلُّ مَوْزُونٍ بِمِثْلِيٍّ فالقَمْحُ المَخْلُوطُ بِشَعِيرٍ والكَأْسُ المَصْنُوعُ مِن فِضَّةٍ وذَهَبٍ لَيْسا بِمِثْلِيَّيْنِ وإنْ كانَ الأوَّلُ مَكِيلًا والثّانِي مَوْزُونًا. (درر الحكام شرح مجلة الأحكام)
[ii] النَّوْعُ الأوَّلُ: المِثْلُ الكامِلُ وهُوَ عِبارَةٌ عَنْ المِثْلِ صُورَةً ومَعْنًى، والأصْلُ فِي ضَمانِ العُدْوانِ هُوَ هَذا.
النَّوْعُ الثّانِي: المِثْلُ القاصِرُ وهُوَ عِبارَةٌ عَنْ المِثْلِ مَعْنًى وهَذا هُوَ القِيمَةُ فَإذا كانَ القَضاءُ بِالأصْلِ مُمْكِنًا فالقَضاءُ بِالقاصِرِ غَيْرُ مَشْرُوعٍ، لِأنَّ القاصِرَ خَلَفٌ لِلْأصْلِ الكامِلِ وما لَمْ يَتَعَذَّرْ الأصْلُ فَلا يُصارُ إلى الخَلَفِ (الفَتْحُ القَدِيرُ) ويُطْلِقُ الأُصُولِيُّونَ عَلى ضَمانِ القِيمَةِ عَلى هَذا الوَجْهِ (القَضاءُ المَحْضُ بِالمِثْلِ المَعْقُولِ القاصِرِ) ويَكُونُ قاصِرًا لِأنَّ البَدَلَ أيْ القِيمَةَ هِيَ مِثْلُ المَغْصُوبِ مَعْنًى فَقَطْ ولَيْسَ مِثْلَهُ صُورَةً (درر الحكام شرح مجلة الأحكام)
[iii] القِيَمِيُّ: ما لا يُوجَدُ لَهُ مِثْلٌ فِي السُّوقِ أوْ يُوجَدُ لَكِنْ مَعَ التَّفاوُتِ المُعْتَدِّ بِهِ فِي القِيمَةِ كالمِثْلِيِّ المَخْلُوطِ بِغَيْرِهِ وهُوَ مِثْلُ الحِنْطَةِ المَخْلُوطَةِ بِشَعِيرٍ أوْ ذُرَةٍ كَما مَرَّ مَعَنا، والخَيْلُ والحَمِيرُ والغَنَمُ، والبَقَرُ والبِطِّيخُ وكَتْبُ الخَطِّ وما أشْبَهَ ذَلِكَ مِن الأشْياءِ الَّتِي يُوجَدُ تَفاوُتٌ بَيْنَ أفْرادِها بِحَيْثُ تَتَفاوَتُ فِي الأثْمانِ تَفاوُتًا بَعِيدًا.
فَفَرَسٌ مِن الخَيْلِ قَدْ يُساوِي مِائَتَيْ جُنَيْهٍ وآخَرُ قَدْ لا يُساوِي مِعْشارَ ذَلِكَ كَذَلِكَ الغَنَمُ مِنها ما يُساوِي خَمْسَةَ جُنَيْهاتٍ ومِنها لا يُساوِيَ أكْثَرَ مِن نِصْفِ جُنَيْهٍ، والبِطِّيخُ يُوجَدُ مِنهُ الكَبِيرَةُ الَّتِي تُساوِي خَمْسَةَ قُرُوشٍ والصَّغِيرَةُ الَّتِي لا تُساوِي القِرْشَ الواحِدَ، وكِتابٌ بِخَطٍّ جَيِّدٍ لا يَسْتَوِي بِكِتابِ رَدِيءِ الخَطِّ. فالأوَّلُ قَدْ يُساوِي العَشَرَةَ جُنَيْهاتٍ أمّا الثّانِي رُبَّما كانَ لا يُساوِي عُشْرَ مِعْشارِ هَذِهِ القِيمَةِ. (درر الحكام شرح مجلة الأحكام)
[iv] اسْتَأْجَرَ إنْسانٌ حِصانًا لِيَرْبِطَهُ أمامَ دارِهِ، أوْ لِيُجَنِّبَهُ، أوْ اسْتَأْجَرَ ثِيابًا لِيَضَعَها فِي بَيْتِهِ لِيَظُنَّ النّاسُ أنَّ لَهُ حِصانًا، أوْ ثِيابًا نَفِيسَةً لِيَراها النّاسُ ويَظْهَرَ بِها بِمَظْهَرِ الأغْنِياءِ فالإجارَةُ فاسِدَةٌ ولا تَجِبُ الأُجْرَةُ فِيها؛ لِأنَّها مَنفَعَةٌ غَيْرُ مَقْصُودَةٍ مِن العَيْنِ فِي الشَّرْعِ ونَظَرِ العُقَلاءِ.
ولا يَكْفِي لِصِحَّةِ الإجارَةِ أنْ تَكُونَ المَنفَعَةُ مَقْصُودَةً لِلْمُسْتَأْجِرِ، بَلْ لا بُدَّ أنْ يَكُونَ فِيها مَنفَعَةٌ مَقْصُودَةٌ فِي الشَّرْعِ ونَظَرِ العُقَلاءِ. (درر الحكام شرح مجلة الأحكام)
[v] الكَراهَة فِي الدَّوابّ وتضرب الدّابَّة على النفار دون العثار وركض الدّابَّة ونخسها للعرض على المُشْتَرِي أو للهو مَكْرُوه وللجهاد وغَيره غَرَض صَحِيح مُباح (تحفة الملوك)
ولأنه ليس بعبث لما فيه من الغرض الصحيح، وهو التذكر عند النسيان) ش: والفعل إذا تعلق بغرض صحيح لا يكره ولا يمنع، وقد جرت بذلك عادة الناس من غير نكير والله أعلم. (البناية)
وإنَّما يَكُونُ هَذا فِي مَعْنى تَسْيِيبِ أهْلِ الجاهِلِيَّةِ إذا لَمْ يَكُنْ غَرَضٌ صَحِيحٌ، فَأمّا إذا كانَ فِيهِ غَرَضٌ صَحِيحٌ، وهُوَ إضْجارُ الرّاهِنِ، فَلا يُؤَدِّي إلى ذَلِكَ المَعْنى (المبسوط للسرخسي)
قالَ بَدْرُ الدِّينِ الكَرْدَرِيُّ: العَبَثُ الفِعْلُ الَّذِي فِيهِ غَرَضٌ لَكِنَّهُ لَيْسَ بِشَرْعِيٍّ، والسَّفَهُ ما لا غَرَضَ فِيهِ أصْلًا. وقالَ حُمَيْدُ الدِّينِ: العَبَثُ كُلُّ عَمَلٍ لَيْسَ فِيهِ غَرَضٌ صَحِيحٌ ولا نِزاعَ فِي الِاصْطِلاحِ، (العناية)
ونَخْسُ الدّابَّةِ ورَكْضُها لِلْجِهادِ وغَيْرِهِ مِن غَرَضٍ صَحِيحٌ لا بَأْسَ بِهِ، ولِلتَّلَهِّي مَكْرُوهٌ، ورَكْضُ الدّابَّةِ بِتَكَلُّفٍ (الاختيار)