What are NFTs (Non-Fungible Tokens)?
To say something is “Non-Fungible” simply means it is one-of-a-kind.
Handmade sculptures are examples of Non-Fungible items since you would likely not be indifferent with regards to which of two different hand-made sculptures you would rather own.
U.S. dollars on the other hand are examples of things that are Fungible since you would be indifferent with regards to which of two different 1 dollars bills you would rather own.
The word “token” in the cryptocurrency world refers to the fact that something is hosted on a blockchain.
A blockchain is simply a digital public record that is supported by many distributed computers to ensure there is no single point of failure.
The difference between blockchain-hosted NFTs and cryptocurrencies is simply that an NFT is proof you own something that is one-of-a-kind whereas a cryptocurrency is as numerous as its supply.
So in the case of Bitcoin, if you own 1 Bitcoin, you own 1 of 21 million.
In the case of NFTs, if you own 1 NFT, you own 1 of 1.
Perhaps the most common use case for NFTs is to prove ownership of a digital work of art.
A famous example of this is Nyan Cat which is an NFT that sold for 300 ETH or about $700,000 based on the price of Ethereum on the day this article was published.
Much more powerful use cases for NFTs are being proposed such as using an NFT to prove ownership of a parcel of land, digital or physical.
Are NFTs Halal?
In my humble estimation, there is nothing inherently wrong with using an NFT to prove ownership of something.
Profiting from trading NFTs is halal or haram based on whether or not the item for which ownership is being proven using the NFT is halal or haram to own.
So let’s say there is an NFT featuring nudity. That would be haram to trade or profit from, but you didn’t need me to tell you that.
Are NFTs a form of wastefulness?
I’ve heard some argue that buying certain NFTs, especially the outrageously expensive rather unremarkable NFTs, like Nyan cat, is wasteful and a form of extravagance, therefore is haram.
They argue, what is ownership of Nyan Cat useful for other than to show off your ownership in front of others? After all, non-owners can still watch Nyan Cat and share it whenever they want.
All what the person who paid 300 ETH for Nyan Cat can use his ownership for is to brag in front of others.
My response to this is that buying something just to show off your wealth is certainly something Islam doesn’t support.
So I understand where the people making this argument are coming from.
However, if you buy an NFT with no utility whatsoever other than you think it is going to preserve its value or appreciate over time this is no different than buying a bar of Gold.
Furthermore, the motives of an NFT buyer are unknown to anyone but the buyer. Their purchase may be a marketing move to generate some buzz for their business or simply a hobby that brings the buyer joy or they may have some other legitimate reason.
Therefore, I think it is wrong to try to judge someone else’s purchase of something solely based on the price they paid for it.
What matters is the seller was transparent about what they were selling and the buyer knows what they paid for and how much they paid.
By the way, you can buy something that is objectively very reasonably priced, has very sensible and abundant utility, e.g. a luxury car, but if you buy it with the intention of showing off in front of others and making them feel envious then this too is frowned upon.
The prophet peace be upon him teaches us:
رَسُولَ اللَّهِ ﷺ يَقُولُ: إِنَّمَا الأَعْمَالُ بِالنِّيَّاتِ، وَإِنَّمَا لِكُلِّ امْرِئٍ مَا نَوَى
Deeds are judged based on the intentions behind them, and each person will receive based on what they intended.
This applies to NFTs and it applies to anything else.
So there is nothing inherently wrong with buying an NFT at any price. Islam does not put fixed limits on prices.
What matters is the buyer’s intention and this principle is not unique to NFTs, it applies to everything.
Al-Gharar in NFT sales
A common sharia violation I see happening in the NFT world relates to the NFT minting (creating) process and NFT sales.
In many cases NFTs are offered for purchase before the buyer can actually see them.
So when the buyer is making the purchase they don’t know all material information related to what they are buying.
If the buyer is not indifferent with regards to which particular NFT they end up receiving after their purchase then this sale involves Al-gharar.
Al-gharar is present in sales where there is reasonably avoidable material ambiguity in the object of sale.
Sales which involve Al-Gharar are prohibited in Islam.
This is because Al-Gharar can cause the purchaser to feel cheated and potentially creates animosity and ill-will between the buyer and seller.
A commonly cited example of Gharar is selling a calf in its mother’s womb.
This is because the buyer doesn’t know what the calf will actually give birth to.
Will the baby be dead, male, female, or maybe twins?
This type of ambiguity is present in NFT sales wherein the purchaser is not indifferent with regards to all the possible NFTs they may be given after their purchase.
That said, if the buyer is actually indifferent, even if there are many possible outcomes, then there is no Gharar in the sale.
I should also mention here that al-Gharar applies only when you’re actually paying for the item.
If the item is being given to you for free, then this is fine, no Gharar.
I find nothing inherently haram about NFTs.
To avoid Al-gharar in NFT sales, material ambiguity needs to be removed so that the buyer is not disappointed when their purchase is revealed to them.
As always, Allah swt knows best.