Cryptocurrencies have become a buzzword across the world. The potential financial returns from cryptocurrencies have attracted Muslim investors, whilst the opportunity to raise funds by issuing tokens has attracted Muslim entrepreneurs and developers. The key question which is continuously being asked is the Shariah compliance of cryptocurrencies and token sales. This research analyses the nature of cryptocurrencies and tokens from a Shariah perspective. The research finds that there are different types of cryptocurrencies and tokens. It would be inaccurate to give one ruling for all cryptocurrencies when tokens sales and projects on blockchains can be structures in various ways. The issued tokens can vary widely in their design and function. Some of the common types of tokens include: work tokens, utility tokens, asset-backed tokens, revenue tokens, equity tokens, buy-back tokens. In theory, a token holder can gain a share in equity, have rights to access as service or utility, have a claim on an asset or have entitlement to cash flow. It is concluded that some tokens are actual trading of rights (Huquq), whilst other tokens – equity tokens – are similar to trading shares. Asset-backed tokens are like Sukuk structures and include trading an asset or a share of an asset. In conclusion, tokens possess an innovative way to raise capital and can be Shariah compliant if structured correctly.
As a Shariah advisor and research analyst at Shariyah Review Bureau, Bahrain, I have authored this paper.
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