themorningcrypto

    LBRY Vs SEC: Calling for Better Crypto Regulations

    Pathik Bhattacharya
    Pathik Bhattacharya
    Published on January 24, 2023 8:12 AM
    The language in the court's order, according to LBRY, may make "any cryptocurrency in the US a security, including Ethereum."
    LBRY Vs SEC: Calling for Better Crypto Regulations
    Source: Getty Images

    The Securities and Exchange Commission stated on Nov 7, that it had won its action against LBRY, Inc., the business behind the LBRY protocol, along with a public copy of the judgement.

    “We lost. Sorry everyone,” LBRY wrote on Twitter. “We’re going to lick our wounds for a little bit but we’re not giving up.” 

    “Because no reasonable trier of fact could reject the SEC’s contention that LBRY offered LBC as a security, and LBRY does not have a triable defence that it lacked fair notice, the SEC is entitled to judgment,” - In the ruling's conclusion, U.S. District Judge Paul J. Barbado wrote.

    The SEC contended in its complaint that LBRY "offered and sold unregistered securities in violation of Section 5 of the Securities Act of 1933," according to the ruling's memorandum. However, LBRY claims that it is not selling securities and that its LBC token "works as a digital currency that is an essential component of the LBRY Blockchain."

    Parties Arguments

    According to the SEC, LBRY sold LBC to multiple investors, including US-based investors, from at least July 2016 through February 2021. According to the lawsuit, LBRY conducted an offering and sale of securities in violation of federal securities laws without filing a registration statement or qualifying for an exemption from registration.

    The case also claimed that by neglecting to file a registration statement, LBRY withheld important information about the company and the investment from investors. According to the SEC, LBRY got roughly $12.2 million in revenues from the sale of LBC.

    The parties filed cross-motions for summary judgment on whether LBC is a security under the Howey test established by the United States Supreme Court. 3 The SEC contended that LBC is a security because (1) LBRY offered and sold LBC for money and other consideration; (2) LBC purchasers invested in a common enterprise because LBRY pooled the money raised from LBC sales and used it to fund the development and operation of its platform; and (3) a reasonable purchaser of LBC would expect to profit from LBRY's efforts.

    The SEC cited multiple claims made by LBRY officials to potential investors in blog postings, emails, and interviews, allegedly implying that the value of LBC would rise as the LBRY network matured. The SEC also noted that LBRY reserved 300 million "pre-mine" LBC tokens for itself, establishing LBRY as the sole owner of LBC.

    The SEC claimed that LBRY's ownership of the LBC coin "made clear to LBC purchasers LBRY's financial interest to build the LBRY Network" (thereby increasing the long-term value of LBC).

    Crypto Regulatory Consequences

    While LBRY claims it isn't giving up, it does feel the verdict will have an impact on the broader crypto market.

    Jeremy Kauffman, the founder, and CEO of LBRY explained the implications of the court's decision in the case.

    The outcome of the trial had a significant financial impact on the company, which was previously proclaimed "very probably dead" by its CEO.

    To begin, Kauffman emphasized the trial's exorbitant costs, stating that the corporation has had to spend millions in legal fees and "has lost tens of millions of dollars in investment money."

    Beyond the financial costs of the trial, Kauffman believes that the judgment has hindered the use of LBC tokens.

    "Perhaps worse, [we've] seen significant difficulty in adoption from third-party players such as exchanges that are scared of the SEC," he said.

    Despite the short-term impact on LBRY, Inc., the platform's blockchain protocol will survive this meeting with the SEC.

    “LBRY is a decentralized protocol used by tens of millions of people to share content without any disruptions despite the legal challenges,” Kauffman said. “LBRY as a company is almost certainly dead. But Odysee, the most popular way to use LBRY, and the protocol itself, have a bright future,” he added

    Kauffman did not hide his disappointment with the outcome of the SEC case, blaming the government's lack of transparency for the company's ultimate demise.

    With inconsistent and uncertain regulation of digital assets, the goal for blockchain services is now to anticipate any possible scenarios that could be interpreted as an illegal act — learning as they go — and deal with potential problems before they arise.

    LBRY Vs SEC FAQs

    Why is LBRY being sued?

    According to the SEC's complaint, LBRY engaged in an unregistered offering and sale of crypto asset securities. The SEC is requesting permanent injunctions, disgorgement with prejudgment interest, and civil penalties.

    Does the SEC have authority over crypto?

    The SEC has expanded its claim to power over the digital asset market. On September 19, for example, it issued a cease-and-desist order against Sparkster Ltd. for the unregistered offer and sale of crypto asset securities.

    When was LBRY sued?

    U.S. District Judge Paul J. Barbadoro ruled on November 7, 2022, that LBRY, Inc.'s blockchain token, LBC, is a security. The SEC charged LBRY with violating Section 5 of the Securities Act of 1933 by offering and selling unregistered securities.