…in the absence of any market quotation or other evidence as to value, the value of shares…must be taken to be the nominal value at which they are issued.
These directives by the courts seem intuitively acceptable and reasonable,
however their usefulness in practice may be somewhat curtailed under s 35(2)
of the Companies Act 71 of 2008.
1836 CHAPTER VI: FINANCIAL ANALYSIS
184It is common cause that the crypto asset class has been the best performing asset of the last decade with the top three posting five-year returns per the table below.
185Crypto Asset Opening Price 01/03/2016
Closing Price
28/02/2021 % Change Bitcoin $ 436.7500 $ 45 261.5600 10263.27%
Ethereum $ 6.3400 $ 1 424.2900 22365.14%
XRP $ 0.0079 $ 0.4167 5174.68%
Stellar Lumens $ 0.0019 $ 0.4065 20757.93%
Table 1186
Further, the asset class in comparison to the stock or bond market is still in its infancy. While historic data does not indicate future performance, as asset prices become more driven by fundamental utility, and less by speculation, further significant growth may be anticipated; financial giant JP Morgan opine market capitalisations could increase in excess of 100 per cent.
187At the early stages of a project,
188the value potential is not readily reflected in a demand-driven price as the fruits of the Network Effect, otherwise known as Metcalfe’s Law, take time.
189According to research undertaken, blockchain networks do present with a strong adherence to this principle.
190Consequently, the rationale for airdrops is based on this observation, ie increasing the number of users through artificial growth stimulation, rather than organic adoption over a broader time scale, or public sale.
191Furthermore, projects would likely stagger their airdrops
184 See addendum B for financial models, and data.
185 This is measured in absolute return, not on a risk-adjusted basis.
186 Data sourced from tradingview.com
187 Times of India ‘JP Morgan predicts Bitcoin to reach $146,000 in long run and $73,000 in short- term’ available at https://timesofindia.indiatimes.com/ accessed on 28th November 2021.
188 Refer to Annexure B.
189 The ‘network effect’ is a theory in Economics which determines the value derived from a good or service has exponential positive correlation to the total number of users making use of said good or service. The typical example is the telephone. cf Gallaugher op cit note 12.
190 Ken Alabi ‘Digital blockchain networks appear to be following Metcalfe’s Law’ (2017) 24 Electronic Commerce Research and Applications at 23.
191 As noted above, public sale of tokens risks falling foul of laws governing financial securities offerings, most notably in the US.
for the reasons noted in the Flare Network white paper,
192or otherwise place a restriction on their immediate sale in the open market.
In terms of the receipt-accrual principles, the Treasury would be in the position that they would be compelled to tax at the accrual stage (low price), whereas what a taxpayer may receive over the distribution period may embody significant value growth. Three projects have been selected: Polkadot and Solana, which are similar in ambit as Flare Network, and TerraLuna. Using actual pricing data from these three projects, an airdrop was simulated in terms of the following parameters:
Effective tax rate: 35% with the assumption of a revenue nature.
Distribution schedule: 25% upfront, valued at daily closing price;
75% evenly over the observation period, valued at monthly average price.
Investment return rate: 6% NACM
193The instrument performance is detailed below.
Crypto Asset (Obs. Period)
Accrual Price
(Daily Close) End Price Nom. Growth (%)
Avg. Growth (%)
Polkadot (14) $ 6.29 $ 38.99 519.88% 37.13%
Solana (19) $ 0.73 $ 172.40 23555.41% 1239.76%
TerraLuna (28) $ 1.28 $ 41.09 3110.48% 111.09%
Table 2194
A differential analysis of taxation under the legislated accrual method against a theoretical receipts-based approach yielded the following results.
Crypto
Asset Accrual-based Revenue Receipts-based Revenue Differential (%) Polkadot $ 3 999.1124 $ 10 635.4286 165.94%
Solana $ 928.1081 $ 10 630.1975 1045.36%
TerraLuna195 $ 1 505.2800 $ 740.3600 -50.82%
192 If users receive a full distribution upfront, there is a high probability they would offload their holdings in full immediately on the open market leading to price instability; alternatively, if distribution is incremental, as the project grows and demonstrates value, users would be more inclined to participate in the project through governance or staking than to sell outright.
193 The assumption is that the airdrop is of a revenue nature, however an investment rate of return, as per Nexo crypto bank, is used to reflect the effect of the preservation of units at accrual date.
194 Data sourced from www.coinmarketcap.com.
195 Currently there is no option to investment this asset at a crypto bank; returns may be generated by staking, but vary. 6 per cent is assumed to have been possible.
Table 3196
While it is acknowledged the models used to evaluate these simulated scenarios are rudimentary, and that more detailed models could be constructed, table 3 does illustrate the increases in revenue collection which would have been possible. TerraLuna was selected specifically on account of it being characterised by negative price performance in the early stages. From the point of view of risk management however, given the assumption airdrops would accrue at relatively low prices, it is asserted that ratio of potential upside against potential downside represents excellent return for government coffers relative to risk.
197In general, the other possible benefits are:
The South African Reserve Bank has an inflation-targeting mandate, which precludes management of the external value of the currency. Application of taxation of airdrops on a receipt basis effects a pseudo currency hedge, and may realise additional ZAR tax revenue as the local currency depreciates against other major currencies in the short-medium term.
Without any investment return, it is a mathematical certainty that taxpayers would be indifferent to either method with reference to the nominal value of their asset portfolios at the end of the observation period, ceteris paribus. Real value can be maintained through investment, which necessarily secures additional recurrent revenue for the treasury, as opposed to holding the asset with a negative carry.
196 Data sourced from www.coinmarketcap.com
197 The TerraLuna project experienced a massive software attack during May-22, losing nearly 100% of value.