Spark and non-custodial holders

7.4 Airdrops, and the accrual-receipt principles

7.4.3 Spark and non-custodial holders

Analysis of accrual in the case of the FLR non-custodial distribution is more complex. In terms of the FN Whitepaper,

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…the XRP Ledger snapshot will be taken at a point in the future when a sufficient number of exchanges have articulated to their clients whether they will claim the Spark token on their behalf. [Emphasis added].

The contention that PCEs act merely as a conduit for the transaction is dismissed as incorrect. This presumes that acceptances emanate from principals, which cannot occur as the necessary form of the acceptance requires access to an XRP ledger address to which exchange customers do not have access by design; silence is typically not indicative of an acceptance;

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the exchanges take positive action to accept the offer, albeit for the benefit of their customers. Therefore, it is asserted the arrangement must be analysed within the law pertaining to stipulatio alteri.

In terms of the rules governing such contracts, the Mainnet (“stipulans”) agree with a centralised exchange (“promittens”) that the latter must offer a benefit, ie the FLR tokens, to the underlying XRP holder (“the beneficiary”). This requires one to examine the following issues:

241 The delay variable is based purely on the runtime inherent in the code required to execute the transactions, matched with the available compute power available. The intention, however, is that all transactions resolve simultaneously.

242 FN Whitepaper op cit 48 at paragraph 3.3.2.

243 Price v Price (696/89) [1990] ZASCA 87.

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What constitutes the offer by the promittens to beneficiary; and

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What constitutes a valid acceptance by the beneficiary?

It has been demonstrated no obligations in the first instance are created until the launch of the Mainnet.

If in practice the process were to be as transparent as the promittens communicating in writing to the beneficiary that in terms of an undertaking made to the stipulans, acceptance of an airdrop-offer is pending, to which the offeree need simply respond ‘yes’ or ‘no’, the tax consequences and timeline would be substantially more transparent. However, what has been observed of this process domestically, insofar as SGB is concerned (the Mainnet having not yet launched), is that there is no written communication of an offer, or verbal exchange; the airdrop tokens simply appear in the beneficiary’s exchange interface as accessible.

This is indicative of an underlying assumption that no objective rationale person would refuse a pure donation. While this may rest on sound logic in Economics, as a matter of law a donation is required to be accepted by the donee. Nevertheless, given the inherent nature of the subject matter, this is the paradigm under which PCEs would likely approach airdrops in general. Adapting to this process, it is suggested that the offer to the beneficiary by the promittens is constituted by making the crypto assets available for dealing,

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which is a question of fact. The more challenging question is what would constitute an acceptance of the offer, as this is the act triggering accrual for tax purposes.

In the matter of Price v Price,

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Kumleben JA is quoted as having cited as an authority Willston on Contracts, specifically,

When an offer has been rejected it ceases to exist….does not reject the offer… mere silence of the offeree, although inaction may be consistent with an intention not to accept.

This is consonant with the general principles of contract law, which necessarily require that an acceptance be a conscious act, performed with intent. Only in the most exceptional circumstances may the offeror

244 This may be the form of any of the following capacities: trading, investing, staking or even withdrawal to a custodial wallet, or other exchange.

245 Price supra note 243.

necessarily infer from silence that the offeree binds themselves.

Furthermore, the Legislature in the form of the Consumer Protection Act 68 of 2008 has made so-called ‘negative option marketing’ unlawful,

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which further indicates this construction best approximates prevailing bonos mores.

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Therefore, it is argued acceptance can only be constituted by evidence of some deliberate, positive act.

Notwithstanding the exclusion of inaction as a basis, this does not give the offeree licence to keep the offer in abeyance indefinitely. This observation is significant when considering a taxpayer playing the perilous game of intentionally deferring acceptance in order to minimise the accrual of a revenue amount (in a downward-trending market) to form part of their taxable income for calculation of normal tax,

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or to maximise the accrual of a capital amount (in an upward-trending market) to form the base cost of the asset, thereby minimising a contingent liability for capital gains tax without any adverse effects under normal tax.

This may issue cause to consider the possible application of the anti- avoidance rules. In summarily dealing with this concern, it is asserted that a taxpayer may rely on the words of Lord Tomlin in Inland Revenue Commissioners v. Duke of Westminster that a taxpayer has the right to order his affairs to minimise taxation, albeit it lawful – there is nothing apparently unlawful in accepting an offer only when it suits one to do so, before which there cannot be any question of tax.

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Furthermore, the rules governing the doctrine of substance over form as per the ruling in Zandberg v van Zyl do seemingly not apply either – there is no apparent attempt to disguise the true nature of the agreement, being about to be.

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However, it is without the general scope of this research to consider this question in greater detail.

246 Consumer Protection Act, Act 68 of 2008.

247 As discussed in chapter 7.2, the airdrop may be argued to come with certain implied obligations, to which an offeree would need to bind themselves as a necessary requirement for accepting the benefit.

248 This may seem counter-intuitive, however it envisions a scenario where a taxpayer’s acquisition of the asset must necessarily be regarded as operating a business in carrying out a scheme of profit making, but his holding of the asset long term is characterised by a capital intention.

249 Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1.

250 Zandberg v van Zyl (1910 (AD) 302).

In order to establish the bounds of the taxpayer’s discretion, the following is considered. It could be argued, and not unpersuasively, that as the promittens is bound to make an offer (to the beneficiary) on the exact same terms as the offer made to it by the stipulans, that any provision in the agreement between those parties as to the time in which an offer must be accepted should, apply, mutatis mutandis. In the alternative where no specific time is referred to in the offer, the legal position as noted in Motor Vehicle Accidents Fund v Thabede should be highly regarded,

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As far as I am aware, the only implied or tacit term which the law reads into an offer is that it must be accepted within a reasonable time, failing which it will lapse.’

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The reasonableness test is one which is often found in law. Generally speaking, this test is objective, and as such should take a dispassionate view of the facts. In proposing a method for general use in the case of airdrops, it is noted that Baur and Dimpfl regard BTC, and by extension crypto assets, to be highly volatile.

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Therefore, reasonableness ought to be contrived on the basis that time is of the essence.

Layton-McCann argues that while the Constitutional Court and SCA have not yet concretely infused the tenets of good faith and Ubuntu into the general application of contract law, the history of its decisions demonstrate an inclination to do so.

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As these ideals are not objectionable, and specifically that the promittens in the case of these airdrops does not stand to gain anything from the arrangement (other than by misconduct), it is reasonable to presume they would not deliberately act against the interests of the beneficiary for whom the contract was originally made; their conduct, as such, should approximate a reasonable time.

251 Motor Vehicle Accidents Fund v Thabede 1994 (2) SA 610 (N) at 614C.

252 Cf Markram v Scholtz and another (2000) 4 All SA 452 (NC).

253 Dirk G. Baur & Thomas Dimpfl ‘The volatility of Bitcoin and its role as a medium of exchange and a store of value.’ (2021) 61 Empirical Economics 2663–2683.

254 Keryn Layton-McCann, The Role of Good Faith and Fairness in Contract Law: Where Do We Stand in South Africa, and What Can Be Learnt from Other Jurisdictions? (2017) University of Cape Town.

On account of this, it is submitted as practical in such cases that a reasonable time for acceptance be equivalent to the time elapsed between the stipulans’ performance and the promittens’ performance, ie an offer to the beneficiary. This is in keeping with the ‘mirror image’

principle.

These deliberations only establish a means to identify beyond which point accrual of the right is no longer possible. Now it becomes necessary to establish within that time limit, what should constitute an acceptance by the offeree in the prescribed form. It is asserted this should be the offeree interacting with the asset in terms of any of the facilities used to constitute the offer, having been made. Alternatively, any appropriate written communication to the centralised exchange noting acceptance of the offer, albeit a more traditional approach, would nonetheless be adequate. Electronically communicated acceptances in terms of the ECT Act would specifically be subject to the Reception Theory. Accrual, therefore, takes place at the time of the acceptance is able to be retrieved, and is likewise unconditional. This, however, cannot be determined in general, as timing of acceptance would vary among cases.