Public memory is notoriously short. Initial Coin Offerings (ICOs) made their appearance in the year 2017. Over the next two years, about 2150 projects raised over $14 billion funds through this mode. The ICO boom petered out towards the end of 2018 when regulators stepped in. The findings of a study undertaken on the 2018 ICOs surprised many. Over 80 percent of these ICOs were scams! This is why, I have every reason to be sceptical with offerings that build a pyramid a lies and deception through media manipulation in the run-up to their token sale. This is why, I feel, we must stick to the basic norms of Shariah. They appear to be simple, yet have the ability to strike at the roots of most sophisticated lies and deceptions.
A review of latest ICO offerings in the Islamic space suggests that several of them use the “Shariah-compliance” tag more as a marketing and promotional tool than anything else. This tag coexists with all the tricks of the game — the stage-managed webinars, ask-me-anything events with paid anchors and information seekers (who end their queries with great appreciation for the team), promise of blue-sky returns in the aftermath, portfolio of product ideas that promise to sweep the markets without having a single prototype in place, use of fake mathematics and technical jargons in the white papers that are not downloadable (and hence the terms can be conveniently changed at will later, if needed), liberal promises of non-existent tokens in abundance to “remunerate” reluctant stakeholders, bulk purchase of member-addresses to create large social media groups (that signal a vertical increase in traction) and active management of such groups via instant banning of people who tend to ask the right and often unpalatable questions and allowing the comfortable questions to flood in by sympathetic or “inside” members. In external groups, the doubting toms are confronted by the same members who are now hostile trolls seeking to discredit them in full public view. In some cases, one witnesses frequent change in names of companies, websites, and core team members (drop the dissenting and raised eyebrows) until the game finally clicks. Tokens that are to be minted in millions/billions at no marginal cost and without any asset-backing are able to oil the giant engine of deception very easily.
The list of such deceptions and bad practices is unfortunately quite long. While the entire ICO process has many other bad practices, as a casual observer I have cited just a few of the pre-sale bad practices in this blog. I feel most of the above bad practices can be curbed if a basic Shariah norm is adhered to: Do not sale what you do not have. This is what I believed in.
Recently a token issue claiming to be Shariah compliant has opened for private sale. The massive offer for private sale of millions of tokens is indicative of the Himalayan ambitions of the promoters perhaps, when not a single token has been minted. I was curious enough to send a query to the “official” Shariah scholar seeking his response to what is now labelled as a bai-salam in the tokens. After one round of exchange of views, the scholar withdrew (hence, I am able to share neither the name of the ICO nor the scholar).
Query by the Author:
To the best of my understanding: bai-salam was deemed permissible as an exception to the “Do not sale what you do not have” rule — a fundamental rule — on the ground of its performing an important social function in the context of farmers during the times of Prophet (peace be upon him) to finance their pre-cultivation expenditure. Fuqaha permit this with an important condition that the object of salam must be fungible. The rationale is: the gharar or settlement risk of the farmer (should he not be able to produce the crop that he has already sold) is reduced to tolerable level by ensuring the fungibility condition. The farmer on settlement date can always purchase the said crop from the market and settle his transaction by giving delivery of the crops.
Now does it apply to your ICO? I understand this ICO is selling one billion non-existent tokens that it plans to mint at a later date. Is this token a fungible commodity? What if the promoter (unlike the proven farming record of our farmer above) which does not have prior track record of minting this token fails to deliver this in future? Can it buy similar tokens from the market and meet its obligation with the buyers?”
Here is answer from the learned Official Shariah Scholar associated with the ICO.
“I agree that bai-salam was allowed to as an exception to the prohibition of sale of unowned objects. However, bai-salam was allowed in its entirety. We need to understand that the structure of a Salam contract is useful for farmers in securing funds to grow crops, and that was the triggering event to allow such sale. But the social aspect in the farmers’ case should be deemed as the wisdom/benefit rather than the effective cause of the shariah ruling of its permissibility. The fiqh / shariah rulings are derived based on the effective cause and not based on wisdom/advantages, because such wisdom or advantages may change due to change in time and even region. That is why fuqaha have never restricted the usage of salam to cultivation or crops only. Look at the Islamic Banks, how they are using Salam and Parallel Salam contracts for even financing purposes. Look also at the AAOIFI’s Shariah standards.
Moreover, ‘Selling something which is not owned at the time of sale’ is also applicable to an Istisna (manufacturing)-based sale, though there is no such wisdom as has been referred for Salam.
Second, our token is a utility token, and it is a fungible token. For an item to be fungible it means it is also available in the market. However, doing salam in something that is available is not an issue that is agreed upon by the all the Islamic jurists. As for their differences regarding whether it is a condition of salam that the genus of the subject matter of salam be present at the time of the salam contract: Malik, al-Shafii, Ahmad, Ishaq, and Abu Thawr did not stipulate that, and they said: Salam is permissible at a time other than the time of its conclusion. Abu Hanifa and his companions, Al-Thawri, and Al-Awza’i said: Salam is not permissible except during its presence.
Since our token is a utility token, the utility can be translated as future benefit (manaafi’). Salam in manaafi’ is permissible according to most of the scholars beside the hanafis.”
I must admit, I was not very satisfied. I shared the reasons in the following words:
“I fully agree with the first para of your above reply — salam is not restricted to farming. At the same time you would agree that we should not ignore the wisdom dimension when we start thinking in terms of the objectives of Shariah. Bai-salam in anything to be permissible cannot be discussed in complete isolation from what value it brings in. Now the pertinent question is: what value your tokens bring to the society/ economy.
An immediate issue is that of gharar or settlement risk. Fungibility of the object of the sale is a condition imposed to reduce settlement risk. This idea of fungibility (availability in market place with other sellers at the time of settlement/delivery) should not be confused with the fungible nature of your tokens (interchangeability and transferability among the token owners). My question remains. A farmer who fails to produce the crop that he has sold under salam can still deliver it (through purchase from the market). What happens to your stakeholders, if your principal fails to mint its “exclusive” utility tokens and deliver to the buyers? There are no similar tokens in the market being bought and sold that your company can buy and deliver in future on the settlement date (if there is one announced and shared with token buyers).
Some Islamic banks did try to configure a financial product based on short-selling through salam in securities; but only in the secondary market where these (fungible) securities are already being bought and sold. Even these products have not found wide acceptability or patronage of customers. And it is a basic idea in Islamic finance that you cannot do a salam sale in a “designated” and “differentiated” product, because of the high levels of gharar or uncertainty with the seller being able to deliver the same to the buyer. I would request you not to quote from poorly translated books of jurisprudence; it comes in the way of getting a good grasp over what is at stake here. Please make it easy for me to understand. Please help me understand that the transactions under consideration here are free from riba/ gharar/ deceit/unkept promises/ unfulfilled rights of buyers, sellers and other stakeholders in the society etc.
Now, as someone who knows the process of minting utility tokens, I am aware that there may not be high gharar or uncertainty with minting per se (assuming that your principal already has a lab and team for minting them; there are many in the market who sell tokens without acquiring any tech capabilities). However, in this case, the delivery of token does not imply minting and allocation alone. It is delivery of “value” or the manaafi that you are referring to. What is the probability of failure to deliver on the part of your principal? We can generate our own probability distributions. But for this, I would like to have a little more information about the tech capability of the production team to indeed come up with the products that they have promised, before I can look forward to receiving the benefits through the tokens. What is the track record of our farmer — the management team of your principal? It appears they have never produced the blue-broccolis or the golden-capsicums that may require high level of farming competencies. In fact, we know the answer. We are talking about a start-up and a first-generation entrepreneur.
If you drop the “wisdom” aspect since it is not discussed in the context of istisna (unlike salam), then I am afraid, we simply replace the farmer with a shoe-maker (an example). We have a situation here of buying/selling something against future (progress) payments. But who is the seller? It is the manufacturer who is constantly engaged in making shoes (or tokens) and you go and place an order for a customized shoe (or token) for yourself. I am afraid a start-up by a first generation entrepreneur does not fit into the description of the shoe-maker who is expected to make a good shoe for you [this is the definition of an Islamic shoe-maker] There are high levels of gharar or uncertainty with ability of your shoe-maker to make good shoes and deliver to you, since there is NO track record.
On a related note, prohibition of gharar is also related to ensuring accurate, verifiable and adequate information to a buyer about the value/ manaafi that he will receive when he parts with his hard-earned money in exchange. Do I, as a buyer understand what your token is going to offer? I am afraid the answer is in the negative. The DeFi products don’t make sense to me as having any value for the real economy except perhaps adding to volume of transactions at the private Exchanges. Can this be explained to the thousands and millions of your token holders? Do the white paper/ green paper explain the value? Do the numerous promotional events talk about value? Don’t your DeFi products (with intelligent brand names) talk about products that have never existed before? Well, one may say, this is innovation after all. But how do you create a wallet and or portfolio (with auto triggers and all that) to trade in Shariah-compliant tokens in the market? How many tokens will qualify to be in the portfolio? The irony is that you claim to be the first Shariah-compliant token; so we are talking about deep into the future when there will be enough Shariah-compliant tokens around. I am afraid, this is what gharar or uncertainty is.
You as well as I know it very well what these token holders are being offered — the potential of a meteoric price appreciation in the aftermath. We will be naive if we deny this as the key selling proposition.”
Since the said scholar withdrew from the discussion, and I wanted a satisfactory resolution of my query, I referred to other resources. And I was fortunate.
Views of another Learned Scholar
Here is another view from a well-known Shariah scholar Dr Sajid Umar that I find worth quoting that set my apprehensions to rest. The well-articulated views are self-explanatory.
“From a fiqh perspective I see two issues with the idea of ICOs and ITOs…
Firstly, are these tokens at this stage a form of wealth? And if so, then on what grounds? This is especially pressing given that at the early stage they do not normally possess a utility both within their ecosystem, as well as outside of their proposed ecosystem…
Secondly, if they do not possess a utility both within their proposed ecosystem, on what grounds are they being priced?
Now with this, we see that the issue of gharar (ambiguity) is naturally prominent, which makes the transaction at this stage closer to being forbidden than permissible…and let us not forget that through observation, we know of cases of people losing a lot of money jumping into these offerings before the actual idea matures…
And I use the term ‘matures’ here deliberately — as in relation to a tweet and LinkedIn message I put out around 6 months ago — regarding how the Messenger (peace be upon him) forbade fruits from being sold before they showed signs of ripening. Then I compared it to the idea of ICOs…
Why did the Messenger (peace be upon him) say and rule so? Because at that stage, the ambiguity is naturally high…and represents a gamble, in the event that the fruits are being purchased in order to be eaten and sold. Of course, if it was bought in as animal feed, then their price could be determined before they ripened, as they would have a purpose at that stage of existence. That would bring the gharar or ambiguity factor down…
And from this, we can derive an important precedent by ruling that the purchase of these tokens at the ICO stage for the sake of investment is impermissible. There may be exceptional circumstances, but those circumstances would need to be presented to me and the scholars for a more specific ruling. And Allah knows best.”