The Linqto Collapse: Deception, Not Crypto, Was the Real Problem

The recent collapse of Linqto has exposed a troubling illusion at the heart of so‑called democratised investment. Thousands of retail investors believed they had acquired shares in prominent private companies like Ripple and SpaceX. In reality, they held no legal ownership at all. The platform’s structure offered exposure to vaguely defined investment vehicles, but without any enforceable rights. There were no share certificates, no dividends, no legal recourse, only the appearance of ownership.

In a statement on 7 July 2025, Linqto asserted that it continues to own 4.7 million Ripple shares and rejected claims these belong to a third party. Ripple’s CEO also confirmed that while Ripple has no business relationship with Linqto and stopped approving its secondary transactions in late 2024, Ripple has verified Linqto’s ownership of those shares. Yet this public claim of asset ownership does not resolve the key issue for investors: whether they themselves had any enforceable rights to those assets.

This was not a failure of blockchain or tokenisation. It was a failure of ethics, governance, and clarity. Technology was never the problem. The real issue was the deception, opacity, and lack of enforceable contracts behind the platform’s offerings.

The Shariah Problem: No Real Ownership

From an Islamic legal perspective, the central issue is straightforward. The investments lacked real, recognised ownership (milkiyyah) . In Shariah, a valid transaction requires that the buyer acquires lawful and clearly defined ownership of the asset. If this is absent, the transaction is void, regardless of how professionally it is marketed or how convincingly it mimics legitimate finance.

Islamic law prohibits transactions based on gharar (excessive uncertainty), fictitious subject matter, or deceptive appearances. In the Linqto case, investors were led to believe they had purchased equity. But they had no claim to underlying shares, no voting rights, and no legal instruments to assert ownership. What they received was a formalistic structure, a suri arrangement that imitates genuine equity but fails to deliver its substance. This is not only commercially risky, but also impermissible under Islamic financial ethics.

Tokenisation Can Restore Real Ownership—If Properly Structured

Linqto’s failure was not due to tokenisation. In fact, when applied properly, tokenisation offers a powerful solution to the very problems that caused the collapse. It provides a way to re-establish real, enforceable ownership of assets, recorded transparently on-chain and governed by smart contracts and legal infrastructure.

In the United States, platforms like Securitise have issued tokenised shares under SEC-approved frameworks, such as Reg A+ offerings. In these models, each token represents a genuine legal stake in the underlying company. In Europe, firms such as Swarm Markets and Tokeny have developed compliant structures for tokenising public equities, ensuring that the tokens are directly linked to actual shares held in custody.

In Islamic finance, similar advances are underway. Recent developments in the Gulf Cooperation Council, as noted in White & Case’s 2025 review of Islamic Finance 2.0, highlight the emergence of tokenised and fractionalised sukuk. These innovations aim to reduce issuance costs, increase transparency, and widen access to retail and institutional investors alike. They reflect a growing appetite for Shariah-compliant digital instruments that are asset-backed, ethically sound, and commercially efficient.

From a Shariah perspective, tokenised equity and sukuk are permissible as long as certain core conditions are met. The underlying asset must be halal, the token must represent real ownership, and the rules of trading must be followed, particularly the requirement that the seller actually owns the asset before selling it, and that the rights and obligations are clearly defined.

A Shariah-Friendly DeFi Alternative: Wakalah-Based Structure Without KYC

One potential alternative structure, better aligned with decentralised finance principles, would avoid requiring users to submit full identity documents through conventional KYC. A Shariah-compliant DeFi model could be built around the principle of wakalah.

In this model, a regulated platform would act as wakil, acquiring halal shares  on behalf of investors. Since no KYC is performed and no legal contract is signed off-chain between the investors and the platform, the token itself must be minted in a way that constitutes proof of ownership. In other words, the token is not merely a utility or claim, it must be structured to Islamically represent a share in the underlying asset pool. Token holders would therefore not only benefit from economic rights such as dividends or capital gains, but also be recognised, through the token structure, as beneficial owners of the assets. Revenues can be distributed automatically via smart contract, and the entire process can be governed transparently on-chain.

However, such a model introduces a new legal challenge. If the wakil is the sole legal owner of the assets, and no formal legal contract exists between the token holders and the wakil, what protection do the investors have in the event of insolvency or breach of duty? Without enforceable agreements or embedded protections, the arrangement may collapse into the same ambiguity that undermined Linqto’s credibility. A valid Shariah structure would need to address this by ensuring legal recourse and robust contractual clarity, either on-chain or off-chain.

A Privacy-Preserving Model Using Zero-Knowledge Proofs

A more advanced model, now under active development, goes a step further. It retains the principle of real ownership but allows compliance to be proven without identity disclosure. This is achieved using zero-knowledge (ZK) proofs.

In this system, the platform tokenises equity in a real investment pool. Users connect their wallet and submit a ZK proof to confirm they meet required conditions, such as being over 18, not from a sanctioned jurisdiction, or having passed a compliance check. These facts are verified cryptographically but without revealing any personal data.

This architecture was outlined in detail in a 2025 memo submitted to the SEC Crypto Task Force by Confusion Capital and the Digital Securities Initiative. According to the proposal, users first submit their ID to a regulated entity known as an Identity Keeper. This party verifies the document once and issues a verifiable credential. The credential is stored privately in the user’s wallet and can later be used to generate ZK proofs when interacting with regulated token contracts.

When the user buys a tokenised share, the smart contract accepts or rejects the transaction based on the ZK proof. If valid, the user receives a token representing fractional ownership in the underlying asset pool. Revenue is distributed proportionally and anonymously. The assets themselves are held by an SPV or custodian, ensuring that token holders retain legal and financial rights, even though their personal identity is never publicly revealed.

This model is already being explored by privacy-focused protocols such as Hinkal, zkPass, and Sismo. While still maturing, these platforms demonstrate that it is possible to build a compliant financial system that respects both privacy and regulatory standards.

From a Shariah standpoint, such models are acceptable as long as the tokens represent real ownership, the rights are enforceable, and the underlying activity is halal. If zero-knowledge credentials can replace traditional KYC without undermining asset linkage or investor protection, they could open the door to a new generation of Islamic digital finance, transparent, ethical, and decentralised.

Conclusion

The Linqto episode was not a failure of tokenisation or decentralised technology. It was a failure of trust, structure, and contractual clarity. In Islam, finance must be rooted in real ownership, transparency, and fairness. Tokenisation, when structured properly, can reinforce these principles rather than undermine them.

Whether through regulated tokenised equity, wakalah-based investment pools, or privacy-preserving ZK frameworks, Islamic finance has the tools to embrace innovation without compromising its core values. What matters is not the label on the product, but whether the rights are real, the assets halal, and the contracts just.