NFTs Recap
An NFT is a secure, blockchain-based certificate that represents an entitlement its owner has to a (usually) digital or physical asset (eg artwork or music) or licence and permit for something. NFTs are indivisible and can store significant amounts of data, including unique information, which is what makes a particular token non-fungible, and is stored in a Smart Contract, a computer code that automatically executes upon the occurrence of a set of preconditions. When a purchaser buys an NFT, the purchaser owns the NFT itself which is a record of ownership of the unique digital version of the underlying asset[1]. Thus, When you buy an NFT, what you are really buying is a smart contract (your certificate of ownership) that points to a set of metadata which among other things, includes a link to your NFT file. This is why NFT marketplaces usually display token metadata on the buying page – so that buyers can see exactly what their purchase entitles them to. The smart contract which governs an NFT could specify how proprietary rights, including copyright, are transferred upon sale of the NFT. Further, or alternatively, standard terms and conditions can apply to the sale of NFTs. The following article explains an NFT from a Shariah perspective: Anatomy of NFTs from a Shariah Perspective
Potential ownership scenarios in NFTs
When it comes to the underlying asset – whether physical or digital – the NFT does not always transfer copyright and propriety rights of the underlying. As such, the sale of an NFT can potentially have the following scenarios:
- The sale of all rights of the underlying asset, including propriety rights, copyright, and rights of disposal of the underlying, as well as trading and economic rights of the NFT itself.
- The sale of some rights connected to the underlying asset but not proprietary rights and copyright. In addition to that, the economic rights connected to the NFT itself.
The terms and conditions are pre-determined by the creator of NFT and may include benefits for buyers such as:
- Outright ownership of the asset (digital or physical transfer included)
- Exclusive access to the digital location where the asset is hosted (creative works, e.g. picture, audio, poem, tweet, GIF)
- Resale right
- Access to receive a percentage of bounty from a further resale
Shariah Ownership and Possession in NFTs
From a Shariah perspective, the transfer of ownership is distinct from possession, and both are necessary to transfer all rights in the underlying and ensure a complete sale. Milkiyyah (Ownership) is transferred by an offer and acceptance, which is the transaction itself, and in the case of NFTs, a buy/sell execution. Qabd (possession) on the other hand is not automatically ascertained by just the transaction, rather by the ability to receive, access or use the sale item. The key distinction between the two is that the risks associated from the sale item and the ability to gain economically from the sale item is only transferred with possession, not just ownership. For further details on possession, the following article discusses the wisdoms and reasons for the necessity of possession: The Obsession with Possession in Islamic Finance
The sale of an NFT which transfers all rights in the underlying asset is akin to a standard sale of any asset from a Shariah perspective. When bidding and confirming a purchase, the transaction is completed once validated on the chain. The validation confirms the transfer of the ownership (Milkiyyah) of the NFT.
If you are purchasing an NFT on a marketplace and have linked your wallet with the marketplace, the NFT is transferred to your wallet and typically shows in your collection. Receiving the token in your wallet ascertains possession (Qabd) of the token and the metadata of the token
This is similar to the case in Fiqh where the Hanafi jurists consider the transfer of the keys to a property as possession of the property[2]. It makes sense to analogise the transfer of NFTs with real estate and land insofar as possession is concerned because just as land does not move physically from one person to another, the data and underlying asset typically does not move – they are held in a repository or generally off chain. Thus, by transferring the NFT which holds the metadata and links to the underlying asset, and on condition that all barriers are removed to access the data, that will suffice for the Shariah requirements of possession (Qabd).
Similarly, if an NFT does not transfer proprietary rights to the underlying asset but there are other rights connected to the underlying asset that are being sold, then the transfer of these rights and acquisition of these rights through receiving the token ID in one’s wallet suffices possession of these rights from a Shariah perspective. Of course, an NFTs should represent Shariah compliant assets. For a further discussion on the Shariah compliance of the underlying asset, this article can be read: NFTs: Shariah Compliant?
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[1] https://www.penningtonslaw.com/news-publications/latest-news/2021/non-fungible-tokens-legal-issues
[2] (المادَّةُ ٢٧١) إعْطاءُ مِفْتاحِ العَقارِ الَّذِي لَهُ قُفْلٌ لِلْمُشْتَرِي يَكُونُ تَسْلِيمًا
لَيْسَ المَقْصُودُ مِن العَقارِ المُقْفَلِ حَقِيقَةً حِينَ عَقْدِ البَيْعِ بَلْ المُعْتادُ إقْفالُهُ فَعَلى هَذا إذا بِيعَ عَقارٌ مِن هَذا النَّوْعِ وسَلَّمَالبائِعُ إلى المُشْتَرِي مِفْتاحَ بابِ ذَلِكَ العَقارِ الخارِجِيِّ الَّذِي يَتَمَكَّنُ بِهِ المُشْتَرِي مِن فَتْحِ البابِ بِلا كُلْفَةٍ ولا اسْتِعانَةٍ وأذِنَالبائِعُ لِلْمُشْتَرِي فِي قَبْضِهِ فَذَلِكَ تَسْلِيمٌ لِلْعَقار (درر الحكام شرح مجلة الأحكام)
