The emergence of blockchain-based Non-Fungible Tokens (NFTs) has transformed digital asset ownership by introducing unique, immutable, and verifiable digital representations of assets across various sectors. Despite their growing popularity, NFTs have sparked significant debates in Islamic finance due to their novelty, economic implications, and potential conflicts with Shariah principles. This study illustrates the existing landscape of NFTs and provides an in-depth Shariah analysis, exploring their fundamental characteristics, operational mechanisms, and economic dynamics.
What are NFTs?
NFTs are a type of digital asset, which are electronically stored data possessing value, ownership, or rights that can be transferred digitally. An NFT is a unique digital certificate stored on a blockchain, proving ownership of digital or physical assets (Opensea, 2022). While their uniqueness primarily relates to the NFT’s metadata rather than the underlying asset (Qin Wang et al., 2021), they enable exclusive ownership rights over various assets, predominantly in digital art, music, gaming, virtual real estate, and intellectual property rights.
NFTs differ from fungible assets, which are interchangeable and divisible, like currency notes (termed mithli in Islamic jurisprudence). Non-fungible assets are unique and cannot be replaced by identical equivalents, such as a specific cow (ghayr mithli). NFTs are non-fungible, meaning each one is distinct and non-interchangeable, unlike cryptocurrencies such as Bitcoin, which are fungible.
Key features of NFTs include their uniqueness, indivisibility (though fractional NFTs now exist), transferability via blockchain, provable scarcity, potential for automated royalty payments to creators from resales, integration with smart contracts, and programmability. Essential components include the blockchain ledger, smart contracts, a unique token ID, metadata describing the asset, the digital asset itself, and ownership managed through blockchain wallet addresses.
The process typically involves choosing a blockchain, creating a crypto wallet, funding it for fees, minting the NFT by uploading the asset and metadata on a marketplace, listing it for sale (fixed price or auction), and executing the transaction where buyers receive the NFT and sellers receive cryptocurrency.
NFT Market Evolution and Applications
NFTs first gained attention in 2014, but widespread adoption began in 2017 with CryptoKitties. The market saw rapid expansion between 2020 and 2022, boosted by the COVID-19 pandemic and platforms like OpenSea and Rarible, reaching peak growth in 2021 with high-profile sales like Beeple’s artwork for $69 million, pushing the total market valuation beyond $41 billion. However, 2022 saw a downturn, with notable value declines. Despite setbacks and declining transaction volumes, the number of NFT buyers rose in 2024, although some major platforms discontinued offerings (Cointelegraph, 2024).
Common NFT categories include Digital Art (e.g., Beeple’s “Everydays,” CryptoPunks), Gaming Items (e.g., Axie Infinity, virtual land in Decentraland), Music & Audio (e.g., albums released as NFTs, direct monetization), Virtual Real Estate within metaverse platforms, Sports Memorabilia (e.g., NBA Top Shot highlights), and miscellaneous items like virtual fashion or event tickets.
Shariah Analysis of NFTs
NFTs have generated considerable debate among Islamic scholars regarding their permissibility under Shariah law. Some scholars prohibit NFT transactions, while others permit them under strict conditions. For an NFT transaction to be valid under Islamic law, it must fulfil fundamental conditions applicable to an object of sale (mabīʿ). These include:
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Māliyah (Asset Recognition): Is the NFT commonly recognised as valuable?
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Taqawwum (Legitimacy in Shariah): Does it provide lawful utility and comply with Shariah?
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Existence (Wujūd): Does the asset exist at the time of the transaction?
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Ownership (Milkiyyah): Does the seller own the NFT, and is ownership absolute and unconditional?
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Transferability (Qābiliyyat al-Naql): Can the NFT be transferred to the buyer?
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Clarity in Description (ʿIlm wa Bayān): Is the NFT clearly defined?
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Seller’s Possession (Qabd): Does the seller have possession, either physical (ḥaqīqī qabḍ) for physical assets or constructive (ḥukmī qabḍ) for digital assets? Physical possession is challenging for NFTs linked to physical assets where the NFT is only a digital certificate without control over the physical item, raising concerns. Constructive possession is generally achieved for digital assets linked to NFTs as blockchain ensures secure control and verifiable ownership.
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Avoidance of Isrāf (Wasteful Spending): Does purchasing NFTs constitute extravagance?
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Compliance with Other Shariah Regulations: Does the transaction violate other principles? (Uthmani, 2015. And Faraz Adam, n.d).
Critical Shariah Concerns
Several issues pose significant barriers to Shariah compliance for NFTs:
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Wastefulness (Isrāf): Islam prohibits extravagant expenditure beyond genuine necessity or tangible benefits. Many expensive NFT transactions are seen as wasteful due to disproportionate prices relative to practical utility.
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Gambling (Qimar) and Uncertainty (Gharar): The speculative nature of NFT trading closely resembles gambling due to inherent uncertainties, reliance on potential future profits, lack of intrinsic utility, and extreme price volatility. This exposure of wealth to risk and uncertainty aligns with the Islamic prohibition against gambling (maysir), even with partial uncertainty. NFT buyers risk substantial sums for uncertain outcomes, a characteristic acknowledged by platforms themselves.
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Cryptocurrency Usage: NFT transactions use cryptocurrencies like Ether. Some prominent Islamic institutions consider many cryptocurrencies non-compliant due to volatility, speculative nature, and uncertain intrinsic value, compounding Shariah issues for NFT transactions.
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Ownership Ambiguity and Royalty Mechanisms: Owning an NFT typically provides a digital certificate but often does not grant copyright or intellectual property rights to the underlying asset, limiting practical benefits primarily to resale potential. Perpetual royalty mechanisms, where creators benefit from future sales, are contentious as they contradict principles of full ownership transfer. Ambiguity (jahalah) and uncertainty (gharar) around valuation also present significant challenges.
Shariah Opinion Summary
Considering these issues, NFTs currently face significant barriers to Shariah compliance. Until critical concerns regarding lawful utility, wastefulness, speculative nature, gambling elements, ownership rights, royalty mechanisms, and cryptocurrency compliance are systematically addressed, NFTs cannot be deemed fully permissible within Islamic jurisprudence.
Challenges and Risks of NFTs
Despite the potential, NFTs face numerous challenges.
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Regulatory Uncertainty: A lack of clear legal frameworks for NFTs and cryptocurrency creates investment risks and discourages participation.
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Investment Volatility: The speculative nature and unpredictable valuations can lead to significant financial losses for investors, especially given the economic vulnerability of parts of the population.
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Technological and Knowledge Barriers: Limitations in digital literacy, internet access, cybersecurity, and infrastructure hinder widespread adoption.
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Taxation and Legal Complexities: Undefined tax implications and ambiguous legal recognition complicate transactions and can lead to instability.
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Risk of Fraud and Money Laundering: Insufficient oversight increases susceptibility to fraudulent activities like “rug pulls” and financial crime.
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Shariah Compliance: Concerns regarding Shariah compliance are an additional barrier for Muslim investors.
Potential Applications in Islamic Social Finance
NFTs could potentially innovate Islamic social finance areas like Waqf (endowments).
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Waqf: Blockchain-based NFTs can digitally register Waqf assets, improving transparency and accountability by documenting ownership, usage, and transactions. Digital asset endowments linked to NFTs can fund charitable activities, and issuing NFTs can serve as a modern, transparent fundraising tool, enhancing donor trust. Smart contracts can automate income distribution.
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Zakat: NFTs intended for trade are subject to Zakat as business assets. However, determining their Zakatable value is complex due to volatility; initial issuance cost is suggested as a pragmatic approach. NFTs bought purely for personal enjoyment are exempt.
Due to their speculative nature and uncertain value, NFTs are unsuitable for discharging Zakat obligations themselves, as Islamic law mandates using stable, widely recognized assets for that.
Recommendations:
To integrate NFTs positively and ethically, we recommend for policy holders:
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Regulatory Framework Development: Establish comprehensive regulations covering ownership, taxation, and anti-money laundering to foster stability and protect consumers.
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Public Education and Digital Literacy: Implement initiatives to raise awareness about NFTs, blockchain, and risks to enable informed participation.
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Ethical and Shariah-Compliant Framework: Develop clear guidelines for compliant transactions, ensuring lawful underlying assets, transparency, avoidance of speculation/waste, and oversight by Shariah review boards. A practical example is establishing a Shariah-compliant marketplace for Islamic art NFTs.
Conclusion:
NFTs offer transformative potential, enabling secure transactions and novel revenue streams but also pose challenges like volatility, speculative pricing, and regulatory uncertainty, which are intensified by existing infrastructure and literacy gaps. From a Shariah perspective, concerns like gambling elements, unclear ownership, and problematic royalty structures present significant conflicts. Nevertheless, potential applications in Waqf and Zakat offer benefits. A balanced approach with effective regulation, education, and Shariah-compliant platforms is crucial to responsibly leverage NFTs for innovation and sustainable growth in Bangladesh.
References
Adam F, (2021) NFT Shariah Compliant. Amanah Advisory
Cointelegraph. (2023). Crypto phishing scams took almost $300M from 324K victims in 2023: Report. https://cointelegraph.com (Retrieved February 15, 2025)
Taqi Usmani, M. (n.d.). Fiqh al-Buyu’. Ma’ariful Qur’an.
Opensea (2022). What is an NFT? https://opensea.io/learn/nft/what-are-nfts (Retrieved August 26, 2022)
Wang, Q., Li, R., Wang, Q., & Chen, S. (2021). Non-fungible token (NFT): Overview, evaluation, opportunities and challenges. SSRN Electronic Journal.
