Are NFTs Your Next Halal Investment?
Investing has become THE go-to topic, dominating group chats and financial choices across the globe. Unlike the 2008 recession, we’re seeing a rise in retail investors dictating market performance. More than 15 million Americans downloaded a trading app during the pandemic - with 6 million Americans downloading a trading app in January 2021 alone (Deloitte, 2021).
For the first time, we’re witnessing the democratization of finance, through the advancement of technology. Real people are about to make real financial choices, all through the tap of a screen.
But as we’re just getting to grips with stocks and shares, a whole host of new investment options lie ahead.
Alternative investments such as cryptocurrencies and Non-Fungible Tokens (NFTs) have certainly climbed the ranks as viable investment opportunities during the pandemic - but how far can we say we really understand what they are and whether they’re a viable halal investment?
Where it all began…
NFTs have become serious business over the last year. So much so, as of Jan 15, 2022, the aggregated sales value of NFTs on the blockchain was estimated at $150M USD (Statista, 2022).
Sounds pretty insane for a new and, often regarded, complicated investment.
Nothing screams hype economics more than the rise of NFTs (let’s forget the Supreme era - please.) But what is an NFT?
In order to explain what an NFT is, we need to begin by explaining what an NFT isn’t…
The primary difference between a fungible token and a non-fungible token is that a fungible token is readily interchangeable with an asset of the same kind.
So for example, Ahmed is able to go to the bank and swap his 100g gold bar with another 100g gold bar. That’s because they weigh the same and hold the same value.
A non-fungible token (NFT) however, is more commonly described as a digital token that represents a digital asset. To be more specific, an NFT is the record of said token on the blockchain. So any information regarding the asset - THAT'S the NFT.
The information itself consists of who created it, who bought it and who’s owned it throughout its history.
As it lives on the blockchain, all changes are public and computers work to validate it, thus making it difficult to hack and a safer investment. It cannot be changed or replaced and it is perfectly unique, thus enabling it to hold value (in theory).
NFT creators are able to provide value as they represent scarcity of digital content. For example, if you were to buy one of six Bored Ape Yacht Club artwork NFTs, you would be one of a maximum of six people in the world to own a unique piece of art that cannot be replicated.
The Ethereum blockchain allows artists, content creators - pretty much anyone, to attach value to their creations through NFTs. In essence, NFTs spur an open economy where digitization of assets and data is the norm.
While both NFTs and cryptocurrencies operate on blockchain technology, NFTs are not interchangeable in the way one Bitcoin is the same as another Bitcoin.
Rather, each NFT represents a unique digital file that lives on the blockchain. Before the blockchain, digital assets could be easily replicated and distributed.
One major pro of an NFT being supported by blockchain technology is that it makes it easier to establish who the rightful owner is. This extends to copyright and royalty protection - a major plus if you’re investing in the art and collectibles space.
However, it is recommended that NFTs are stored on a cold hardware digital wallet. In doing so, it wards off hackers and keyloggers who are unable to gain access. In addition, each cold wallet comes with its own unique ID and password for added protection. This is, of course, an additional purchase, and therefore a spectrum of costs need to be considered when making such an investment.
Okay, so what’s the Islamic POV - Are NFTs halal or haram?
Naturally, as an evolving field, fiqh surrounding NFTs will become more nuanced with time. That being said, there are many scholarly views when it comes to whether an NFT is Shariah compliant or not. Here are some key consideration points:
- Theoretically, an NFTs permissibility relies on whether the components are Shariah compliant. In essence, what can be considered halal and non-fungible?
- Is the non-fungible Shariah compliant in of itself?
According to Mufti Ismail Desai, an NFT would be considered Shariah compliant (provided the non-fungible is halal). That’s because under the Shariah “Everything is permissible, so long as there is no proof that it is haram.” By virtue, an NFT is therefore permissible as it represents the use of a blockchain system.
However, if the NFT consisted of something non-compliant (i.e: haram) or there were potential extrinsic issues that could lead to Shariah non-compliance, the NFT would be considered non-compliant against Shariah values. Any NFT must represent a form acceptable in the Shariah.
Sheikh Joe Bradford, one of Zoya's shariah advisors, shares a similar view as explained in the Ask Zoya video below.
Further, Mufti Faraz Adam extends this with further consideration points, when exploring the investment potential of an NFT. Here are three key Islamic compliance points to consider:
- The presence of maliyyah - something which is considered of value to the average person, which can be retrieved when needed, is an important component of any key investment. Society should collectively determine the asset to be of value if it is to fall under Shariah compliance.
- Similarly, Taqawwum or ‘something which has a lawful utility and benefit’ needs to also hold. In the context of NFTs, where there is a societal consensus, such investments must possess credible value, whilst also pertaining to halal standards.
- Finally, the NFT should be positive in nature. That includes not being wasteful, extravagant as well as being objectively beneficial. Of course, this needs to be considered on a case-by-case basis.
Which industries can I invest in?
Some of the most popular NFTs have been produced across a plethora of industries, from art to data. We’re seeing a wave of emerging artists “digitize” their art on the blockchain and making considerable money from the venture.
Similarly, data is giving a lot of bang for its buck, as we now embrace Web3, Ethereum Naming Service (ENS) domains are becoming increasingly popular for consolidating your crypto under your chosen name. Such domains would be considered halal as the underlying data is Shariah compliant.
Overall, as mentioned earlier, so long as the NFT investment does not go against the Shariah, it will be deemed halal.
The future looks bright, the future looks technical
NFTs are an emerging trend amongst Islamic investment portfolios. The Islamic Finance industry continues to develop, further promoting a refined outlook on up-and-coming potential investments.
NFTs may be the latest shiny Pokemon card we’re obsessing over, but it’s important to consider the tangible value non-fungibles add to your life as an investor, in this life and the next.
It’s pretty easy to get sucked into the hype economics of it all, but do ask yourself: Is this investment purposeful or pointless?
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