The cryptocurrency trading revolution exploded more than ten years ago and led to an almost unprecedented economic and financial earthquake. As a result, people are learning to change their approach to payment and investment systems, pushing up the price of many cryptocurrencies. Such a rapid change has not gone unnoticed on the boards of the world's major central banks. In fact, in an increasing number of countries, central banks are working on launching centralized digital currencies, known as CBDC. This…
There exist many ways to invest in the crypto market, and while some may appear straightforward, a few alternatives are purposely designed to attract professional investors. One may mention the so-called Simple Agreement for Future Tokens (or SAFTs) among the latter category.
By joining a SAFT, investors can put their money into a crypto start-up, converting a stake into future equity. This article will review the topic, and we remind you to keep in mind that investing is a risky operation that requires financial knowledge and experience.
What is a SAFT?
To better understand the way SAFTs work, we have summarized its main features in the following sections:
The first time the market heard about SAFTs was in October 2017. In those days, every time a promising crypto project entered the market, investors would buy their tokens as if they were a part of the company’s equity. The process famously developed through Initial Coin Offerings (ICOs), which impacted the crypto industry enormously.
Obviously, after noticing this behaviour, regulators in the U.S. started worrying about it and introduced investors’ protections. The SAFT framework can be seen, in a certain way, as a natural response to the ICO proliferation on the market. SAFTs work to provide better flexibility in the tax management of investments, with a certain protection level for both consumers and investors.
Analyzing how SAFTs work
At this point, it is clear how investors can see a SAFT as security. First, however, it is essential to understand that ICOs on new unknown tokens present several apparent risks. First, no one knows whether actual tokens will be distributed after the offering.
We can sum up SAFTs by saying that:
- they are agreements between token-based networks and the market
- they are negotiable only by accredited investors
- in the U.S., the SEC requires companies to file a specific SAFT template
- the money collected by the developers through the SAFTs sale go to the actual development work
- all the tokens that accredited investors receive once the project’s network is completed can be freely sold on the market
A SAFT is a contract stating that the new tokens will be delivered whenever the functioning network of a crypto project goes live. In other words, SAFTs reduce the annoying doubt of whether new ICOs can be trusted or not, and we will develop the subject in the next section.
Is SAFT different from ICO?
The short answer is that yes, it is. The main difference between SAFTs and ICOs is that while retail investors can access the latter, they won’t negotiate the former. It would help if you were an accredited investor to deal with SAFTs.
Being an accredited investor implies possessing a series of legal permissions to deal in securities. In addition, other requirements are involved in the process, mainly connected to the professional experience, annual income, net worth, etc.
While ICOs, as of today, do not fall into the generation of legal securities (following the SEC definition), the opposite is true for SAFTs.
While SAFTs have a specific utility in the newly born crypto industry, it would be wrong to expect them to solve all the market issues. So instead, owning a SAFT can be seen as the tokenized version of a company’s equity, making it actual legal security.
However, because of its exclusive access granted to accredited investors, SAFTs generally fail to provide guarantees to the retail traders, at least in a direct way. Furthermore, as of today, SAFTs do not exist out of the U.S. market, covering only a part of the crypto industry.
SAFTs positive aspects
Among the positive aspects of SAFTs, one may quote:
- an increase in the confidence of accredited investors towards the crypto industry
- theoretically, a company offering SAFTs may appear more secure than those who don’t, gaining potentially more accessible access to the credit market
- SAFTs are perfectly legal, as they work in a compliant way to the U.S. federal laws
- implicitly. Only professional investors risk a crypto project failure in the SAFT framework. Prominent investors are expected to have better financial resilience than retail ones.
SAFTs negative aspects
At the same time, it is also possible to find several negative aspects of the SAFT framework, such as:
- SAFTs only aim to guarantee the token emission, with no promises on the actual value of the tokens. Therefore, one must be careful when claiming that SAFTs reduce the investment risks on crypto projects.
- A company that prefers to avoid using SAFTs can quickly launch its token offering abroad. This risk is aligned with the IMF call for a global crypto policy.
- SAFTs are exclusive agreements that do not involve retail investors, who face considerable risks when investing in non-SAFT projects.
Overall, it is probably safe to assume that SAFTs bring a certain guarantee level to the market. But, most importantly, going beyond their limitations, SAFTs are a portion of essential food for thought in the regulatory world.
In the future, we will likely see the birth of new attempts to introduce higher protection for investors, just as we did in the traditional finance sector.