SAFTs: some legal framework hypotheses

Introduction

SAFT stands for “Simple Agreement for Future Tokens,” which literally means a simple agreement for future tokens.

It is a negotiation tool that involves a commitment to transfer tokens of future issuance in exchange for consideration: apparently, it is an extremely functional negotiation scheme for the development of businesses operating in the digital sector, but, at the moment, it is only potentially so.

The relatively limited use of SAFT depends, to a large extent, on the difficulty of providing it with a legal framework that is both theoretically solid and (consequently) certain in terms of its application.

New Technologies and the Law: A Methodological Premise

Before delving into the problem, a general premise is necessary.

Legal thought is essentially categorical: a legal expert applies legal categories to turn a fact into a legal fact.

In this way, the exchange of an item for money becomes a sales contract, with all the related rights or obligations, cases, exceptions, and subtypes that follow.

When a new object appears in the world, the legal expert faces a choice: first, they can apply existing categories.

This operation may require either extending the reference categories or, alternatively, re-conceptualizing the object to adapt it to existing legal paradigms.

As an example of this type of operation, consider that it is possible to register the code of software with the Italian Society of Authors and Publishers (SIAE) as if it were a text of any other kind.

The expansion of existing categories, on the other hand, can occur either through the extensive application of existing laws or through the introduction of new laws.

Furthermore, in general, all objects in the digital world – which are colloquially referred to as “virtual” for a reason – are difficult to classify within the real-obligatory dichotomy that is inextricably woven into the discipline of contracts contained in our Civil Code.

This is even more true in so-called civil law systems, where the primary source of law is legislation, lacking the flexibility and adaptability characteristic of common law systems, where the primary source of law is judicial authority interpretation.

It is no coincidence that the only discipline related to SAFT that can be found today is American: the SEC has clarified that, because these contracts must be treated as securities due to their suitability for circulation, they fall within the scope of the 1933 “Securities Act.”

However, when attempting a legal classification of these negotiation instruments under Italian (and necessarily, European Union) law, reference must be made to the methodological framework mentioned above.

The Fungible Token and Its Functions

The first step to take is, therefore, to clarify, as much as possible and within the limits necessary for the purpose at hand, the nature and function of the object of the investigation.

SAFT is a negotiation tool that falls within the realm of so-called Initial Token Offerings (ITOs).

The offer of fungible tokens takes place within a blockchain and typically serves as funding for startup activities.

As for the overall regulation of this type of operation, reference should be made to the final report of the Italian Securities and Exchange Commission (CONSOB) dated January 2, 2020, on “Initial Offerings and Crypto-Asset Exchanges.”

Regarding SAFT specifically, it poses two problems: the first concerns the legal nature of the token, and the second relates to the applicable contractual regulations.

To investigate the legal nature of the token, a preliminary definition is required: a token is a type of crypto-asset or crypto-activity that consists of an alphanumeric code representing various rights, transferred cryptographically through a blockchain ¹.

The rights associated with the token are specified in a document called the whitepaper, which contains the presentation of the entrepreneurial project and all related information; tokens are transferred in exchange for consideration, which can be denominated in fiat currency or cryptocurrencies.

Finally, it should be noted that tokens can be used as payment instruments (payment tokens), investment vehicles (investment tokens), as credit instruments related to goods or services (utility tokens), or in a hybrid form combining the previous categories (hybrid tokens).

From this, it follows that the token can be classified in various ways.

First, it can be considered sic et simpliciter as an object, i.e., a movable asset capable of forming the subject matter of rights like any other physical object.

In this case, however, there would be an interesting peculiarity compared to other movable assets: these can be registered, like automobiles or boats, whose changes of ownership are certified by public registries, or unregistered, in which case the rule summarized by the phrase “possession is title” applies, meaning that the possessor of a movable asset is considered its legal owner until proven otherwise.

Since token ownership is transferred via the blockchain, the consequence would be to have a hybrid movable asset, i.e., one whose ownership would be attested to with certainty, even if not through a legally determined instrument.

This is true, at least, until legal value is attributed to the certification of transactions made through a blockchain, but this will be addressed on another occasion.

The token can also be classified as a credit instrument, according to the regulations in Articles 1992 and following of the Civil Code – this seems particularly appropriate for so-called utility tokens but also for payment tokens, where the possibility of conversion into money is provided.

Furthermore, the token could be classified as a certificate: a document certifying ownership of a certain legal position.

Finally, the token could be classified as a contractual document, i.e., as a unilateral or reciprocal manifestation of will to establish a specific regulation of legal relationships with economic content.

Now, it should be noted that the list of hypothetical classifications formulated here does not necessarily exhaust all the possibilities, as it cannot be excluded that the creativity of each interpreter may allow for further classification possibilities.

Moreover, although none of the imagined possibilities show drawbacks or critical issues that would require their exclusion, none appears so evidently convincing as to clearly prevail over the others.

Of course, the hope is that, as CONSOB has done, the legislature will also intervene in the field of crypto-assets with necessary definitional and classificatory activities.

SAFT as a Contract: Hypotheses for Classification

n any case, the various possibilities for classifying the token lead to the following hypotheses regarding SAFT, all of which start from the premise that it is certainly a contract, as the term “agreement” confirms with certainty.

The question, however, is what type of contract is involved.

First, it seems appropriate to consider the possibility that it is a preliminary contract, i.e., an agreement to conclude a contract that transfers token ownership once issued.

In the author’s opinion, this is an interesting hypothesis, especially due to the particular regulation of preliminary contracts contained in Article 2932 of the Civil Code, which authorizes the creditor, in case of non-performance, to obtain a court judgment that produces the effects of the contract that was supposed to be concluded based on the preliminary contract.

This would mitigate, at least in part, the difficulties in enforcing obligations related to virtual objects.

However, SAFT could also be qualified simply as a contract sic et simpliciter: in this case, it would be necessary to clearly identify its subject matter in order to determine the relevant contractual type.

Indeed, the token, considered as an object that has not yet come into existence, could be the subject of a contract for the sale of a future item.

In this case as well, there do not appear to be any particular legal obstacles: even the hypothesis of the token considered as a contract cannot be entirely incompatible, given the transferability of contracts as well.

In this case, the only problematic scenario is that of tokens with uncertain issuance, because realistically, in this case, the consequences in terms of restitution or compensation should be predetermined, unless SAFT is to be considered as a purely aleatory contract, an hypothesis that is mentioned but not extensively explored in this context.

The alternative is to consider the act of transferring the token itself as the unmediated object of SAFT.

In this case, SAFT would be a contract that obligates the issuer to undertake a specific action upon the occurrence of the specified condition – i.e., the issuance of the token.

This hypothesis, while abstractly acceptable, appears to be practically problematic.

If the tokens in question are fungible, as well as the associated legal certainty, the action of transferring a specific quantity of that particular type of token is not.

This makes this option severely dysfunctional in terms of application.

SAFT as a Derivative

The last issue to consider is the suitability of SAFT to circulate, i.e., to become the subject of contractual transfer acts itself.

It is worth mentioning this aspect because, in the document mentioned earlier, CONSOB stated that, if certain conditions are met, the issuance and subsequent offering of tokens take on the characteristics of a public offering of investment instruments and must therefore be subject to the regulations contained in the Financial Market Consolidation Act (TUF) ².

If SAFT defines the allocation of tokens in this context, it should obviously be classified as a derivative contract, and its regulation should consequently be assimilated to that of the financial instrument – in this case, the token – underlying the derivative contract.

The breadth of the implications and the current legal uncertainty require not going further in this initial attempt to systematize the matter. Nevertheless, it must be reiterated that in this, as in all other areas of economic activity, greater legal certainty in the reference framework, to be pursued with the contribution of interpreters and industry operators, but also – hopefully – with the intervention of the legislature, can unleash energy and creativity in a field as exciting as that of blockchain and its almost limitless potential applications.

¹ CFR. Michele De Mari, ‘First hypotheses for an Italian regulation of Initial Token Offerings (ITOs): token crowdfunding and cypto-asset exchange systems’, in Orizzonti del Diritto Commerciale, fsc. 2/2019, pp 267 ff.

² Consolidated Law on Financial Intermediation, Legislative Decree 24/2/1998, No 24