The Crypto industry is prone to manipulation and exposed to fraudulent activity. Due to the unregulated nature of such markets at present, there is much more useless tokens and junk being sold to naive investors. Further, fraudsters are using several techniques and strategies to create an artificial hype and demand for junk tokens. This article looks at some of these practices found in the crypto markets and reflects on the Shariah guidance in relation to such practices.
- Pump and Dump
The crypto market’s most prevalent offender is the pump and dump, which involves a group of people working together to artificially inflate a coin’s value. Pump and dumps usually target low-market cap coins that are available on limited exchanges. The group’s insiders will buy a coin early and dump it once there is enough attention from traders and investors buying in. In recent years, pump and dumps have become more accessible via social media communities like Reddit, Telegram and Discord.
In essence, they will buy an asset for a low price all at once, prompting the price to rise. This sudden and rampant increase in an assets nominal value will prompt unknowing traders to jump in and purchase the asset as they hope to ride a bull market. The original buyers then sell (dump) the assets to make a quick profit. This shift in supply and demand often causes many users to make a significant loss.
- Whale Wall Spoofing
Spoofing was a common tactic used during Bitcoin’s early days and still happens on less-regulated exchanges. This strategy involves a whale placing large orders to create fake buy or sell walls in the order books, hence the name spoofing. For example, if they wanted to create a bearish sentiment and drive a coin’s price down, a whale will set large sell orders to trick investors into panic selling. Once the selloff occurs, the whale removes their sell orders and proceeds to buy more at a discounted price.
- Wash Trading
Wash trading is similar to whale wall spoofing because they both feed misleading information to the market. This strategy involves a person or group rapidly buying and selling the same cryptocurrency to inflate the volume artificially. The asset’s increased activity gains attention from traders and investors, which distorts the price even more. Smaller, unregulated exchanges will typically perform wash trades to inflate trading volume, generate more commission and entice more users.
- Stop Hunting
Stop hunting involves whales driving a cryptocurrency’s price to a level where market participants have set stop-loss orders. Most people set their stop orders around the same key technical levels. The whale executes multiple sell orders to drive the price down and trigger the stops, which causes high volatility and an opportunity to rebuy the asset at a lower price.
The Economic Problems with the Above Practices
An economy is said to exist when there are interactions between groups of people for the purpose of trading or exchanging goods and services. Their interdependence on each other for goods and services will be mutually beneficial for everyone if they are able to meet the demand for and supply of goods and services. Since there are many suppliers and consumers of products and services, such economic activities are coordinated through a market where price acts as the instrument to direct economic activities. In an efficient market, the demand for and supply of goods and services reflects the price. This point is known as equilibrium, and with all else being equal, is arguably the fairest price. This price in the efficient market would be reflective of all market dynamics, variables and factors. Hence, the price discovery is a huge barometer for the health of the economy and market. The entire price discovery system is in reality a manifestation of the power of Allah. Hence, the prophetic narration states:
“Verily, it is Allah who regulates the price; Allah is the one who contracts, expands and provides.” [Sunan Abu Dawud]
When people adopt a command economy, regulate the price of every commodity, hoard, manipulate pricing mechanisms, they are distorting supply and demand, and impacting the natural order regulated by Allah. Hence, Mulla Ali al-Qari (d.1014 AH) states that any economic agent who attempts to manipulate the price is in fact challenging Allah and setting themselves as a rival to Allah. Such a person is trying to intervene in divine affairs and the divine allocation of resources. Allah regulates markets through price mechanisms whereby His power and His force of supply and demand helps the market to achieve equilibrium.
In fact, if such practices go unchecked, a false economy is created where commodities are mispriced, assets are overvalued, deception is rife, competition is stifled, resources are not allocated based on efficiency, risk and reward ratios are skewed, capital flows to junk and garbage, genuine projects lose out; all this leads to market failure, with an eventual market correction, whilst the wicked earn a fortune through the perfect storm they created.
Shariah governance is beyond just the validity and compliance of a particular asset. In fact, there are several layers to Shariah governance as follows:
- Sale item and payment – this considers the Shariah compliance and validity of the subject matter and payment.
- Contractual terms – this considers the fairness, validity, justice, balance, and equilibrium in the contractual terms.
- Contracting parties’ actions – this considers the transparency, honesty, justice, fairness, and good practice of the contracting parties themselves throughout the entire exchange.
- Market participants – this considers any malpractice by economic participants such as one market participant imposing themselves on others, unfair enrichment, embezzlement, fraudulent activity etc.
- The market – this seeks to regulate the way the market operates as a whole, insofar as barriers to entry are concerned, control on supply chains, control on prices, power over markets, demand manipulation, so on and so forth.
It is not sufficient to just review individual tokens from a Shariah compliance perspective and be silent on the other four layers, rather the entire industry end-to-end needs Shariah guidance to ensure a Shariah-based market experience. When a regulator is not actively involved in providing regulatory oversight, then it becomes all the more important for scholars to voice unlawful and problematic practices. These areas are not there just to control transactions, but ultimately ensure human behaviour is controlled and maintained. The greatest loss is the loss of humans, and the greatest gain is the development of human beings. Humans are the ultimate resource and hold the most potential to steer productivity, goodness and welfare, but it is humans when they slip, can cause ultimate corruption, harm and destruction.
The above five areas have all been addressed in Shariah which clearly indicate that intentional and known manipulative activity is prohibited when it causes harm to other market participants at any level and layer described above. Of course, the more macro the harm, the greater the problem as more people are exposed to the harm. The level of prohibition and severity will be correlated to the degree of harm caused to others, the more harm, the more severe. Some of the supporting Shariah principles on this matter are as follows:
- Najash (Artificial inflation of prices)
It was narrated from Sayyiduna Abdullah ‘ibn Umar (Radiallahu anhu) that the Prophet ﷺ forbade artificially inflating prices. [Sunan an-Nasa’i]
The Arabic word in the above narration is Najash, which linguistically refers to inciting game and making it flee, as well as deception. Technically, it refers to artificially inflating prices to deceive others into buying the item without an intention to purchase the asset oneself. The Maliki scholars agree that it is not permissible to increase the value above its market worth. Ibn Abd al-Barr, Ibn al-Arabi and Ibn Hazm (Rahimahumullah) understood the level at which artificial price inflation occurs is when it surpasses the fair value of the item.
The problem with Najash is that the practice is artificial, the person raising the price is not doing it with an intention to buy the item, rather they are either inflating the price so they benefit monetarily from others or are colluding with other parties to help them enrich themselves or are simply harming the potential buyers. This falls into the remit of extracting wealth from others deceptively. The inflated amount paid is not a justified source of income as it has come in lieu of deception.
The underpinning theme of Najash is deception. Deception is prohibited in all its forms and whichever transaction it manifests in. In pump and dump, wash trading and other manipulative practices, the idea is the same; the goal is to deceive the market into making it “appear” on face value that this asset is of promise, that it has fundamentals driving its value and that the asset has a positive outlook and growth potential; but in reality it is the opposite; it’s just trash that a group of traders are colluding on to distort its price for their own gain. Such activity is deception, and deception is not permissible in Shariah. The harm is clear; one group wins at the expense of others when they trigger the dump, eventually driving the price down and causing loss to others.
- Talaqqi al-Jalab (interception of supply chains)
Another example of market manipulation prohibited by the Prophet ﷺ is insider trading and intercepting supply chains designated for the market. This was a commercial practice in early Arabia. Traders would, on hearing of a merchandise caravan, proceed out of the city to meet the caravan on the way for buying the entire merchandise. They would then sell in the city market at a higher price. This practice is disliked and discouraged when it economically harms the people in the city market. If this practice is not economically harmful but brings benefit, then such a practice is not disliked.
Again, the key themes underpinning this practice is interfering and imposing oneself on the natural supply chain, distorting the pricing mechanism and causing economic harm to the market participants. Whenever the pricing mechanism is distorted which results in economic harm, then it is not permissible. This practice adds an unfair premium to the interceptor. Considering the earlier statement of Mulla Ali al-Qari (Rahimahullah), interfering with market dynamics and artificially imposing oneself in the value chain, either on the supply side or demand side is in reality interfering with Allah’s system and order for the markets.
- Ihtikar (hoarding of goods)
Another principle that exposes the problematic nature of pump and dump, wash trading, spoofing and stop hunting is Ihtikar. The Messenger of Allah (ﷺ) said:
“Whoever hoards food away from the Muslims, Allah will afflict him with leprosy and poverty.” [Sunan Ibn Majah]
In another narration, he said, “Whoever hoards food is a sinner.” [Sahih Muslim]
Sayyiduna Umar ibn al-Khattab (Radiallahu anhu) said, “There is no hoarding in our market, and men who have excess gold in their hands should not buy up one of Allah’s provisions which he has sent to our courtyard and then hoard it up against us.” [al-Muwatta]
Hoarding becomes problematic when the intention is to resell later and profit from creating an artificial shortage and panic buying in the market.
- Ihtikarul Amal (restricting services)
Whilst hoarding of foodstuff is commonly discussed, the scholars have mentioned other forms of hoarding too. Imam al-Kasani (Rahimahullah) and other Hanafi jurists, as well as Ibn al-Qayyim (Rahimahullah) discuss the dislike of forming cartels and creating an artificial shortage of services, thereby dictating prices artificially. Scholars discuss how it is impermissible for a group of valuers, distributors, and those who wash the deceased to form cartels to control prices of such services.
The underlying theme again is raising prices artificially, to enrich themselves at the expense of others. This leads to harming other market participants and stifling competition.
- Ihtikarul Sinf (supply chain control)
Imam Ibn al-Qayyim (Rahimahullah) mentions another artificial activity which stifles the market, which is where goods are traded and supplied through selected suppliers and supply chains only. This type of controlled activity is manipulation in the supply side. This empowers the suppler as the gatekeepers of such assets, giving them power to dictate prices without consideration of supply and demand, thereby distorting the real value and market dynamics.
- Urbanite intervention
The Prophet ﷺ said:
“An urban dweller must not impose himself to sell on behalf of the rural dweller. Let people move freely, Allah will sustain people through each other.” [Sahih Muslim]
Shaykh al-Islam Mufti Muhammad Taqi Uthmani (Hafidhahullah) states:
“This means that Allah sustains and provides for the buyer through the seller, and the seller through the buyer. Hence, it is not permissible for anyone to impose themselves within this divine system of resource distribution and dictate pricing dynamics. The Hadith indicates to the fact that Islam recognises market dynamics, in particular the forces of supply and demand. It is necessary for the market to be left to function naturally without any artificial intervention, just like it is not permitted to have monopolies and cartels overseeing the market operations and regulating prices autonomously. This is the system of Islam which is distinguished from Capitalism and Socialism.” [Takmilat Fath al-Mulhim]
As such, these types of manipulative schemes and market abuse should be abstained from altogether. Market manipulation, price distortion and deception are all forms of interference with the system of Allah, and any such interference is vying with Allah for control and power, and there is no match or equal to the power of Allah. Those who initiate and promote these types of activities will be liable for the wrong. Shariah is a complete system of governance which extends across the value chain horizontally, and vertically across the market from the participants to the market itself.
 Mulla Ali al-Qari, Mirqat al-Mafatih. Beirut: Dar al-Kutub
 Hashiyat al-Dasuqi
 Dhakirat al-Uqba
 Sahih Muslim
 Umdat al-Ri’ayah ‘ala Sharh al-Wiqayah
 Al-Kasani, Bada’i al-Sana’i
 Al-Turuq al-Hukmiyyah