During one of the most tumultuous times in crypto history dominated by the collapse of FTX, a decisive victory by the Securities and Exchange Commission (SEC) against an illegal security offering appears to have gone completely under the radar.
The SEC’s recent successful court case against blockchain-based file-sharing and payments platform LBRY has managed to evade the attention of most in the space despite it having quite drastic potential implications for the entire crypto ecosystem.
What’s the dealio?
LBRY is a blockchain-based publishing platform that is said to have 10 million users. It facilitated operations via blockchain tokens known as LBRY Credits (LBC) which people use to pay creators to view uploaded content.
In March 2021, the SEC filed a complaint against LBRY for selling unregistered securities. According to the SEC, prior to developing the network, LBRY sold LBC as investment contracts with the implicit assumption that they would go up in value. The SEC noted that, “LBRY received more than $11 million in U.S. dollars, Bitcoin, and services from purchasers who participated in its offering”.
In short, the argument was that LBRY used the capital raised from the sale of LBC to “pay for the operational costs to grow the LBRY Network, which, as LBRY publicly represented, would cause the price of LBC held by investors to appreciate”. Further, it contended that, “Because LBRY was the largest holder of LBC, it also expected to profit from any appreciation in value of LBC.”
At the time, LBRY CEO Jeremy Kauffman described the complaint as an “outdated view of the economy that stifles innovation, accessibility, and creativity”. He criticised the actions further, saying that LBRY had taken “concerted steps” to comply with the law, however “under the overreaching standard set by the SEC complaint, most blockchain tokens would be deemed securities, leaving uncertainty and confusion in the industry”.
Some 20 months later and the results are in, LBRY has lost its case against the SEC. Shortly after, the CEO took to Twitter to air his frustration at the news.
LBRY had argued that it wasn’t selling securities, but that its LBC token functioned as a “digital currency that is an essential component of the LBRY Blockchain”. Furthermore, it contended that the SEC had not given it fair notice that its sales of LBC were subject to securities laws, and thus, the SEC had violated the company’s right to due process.
These arguments were rejected by Federal Judge Paul Barbadoro of the District Court for the District of New Hampshire who held that “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 defense that it lacked fair notice”.
In summary, the court found that the SEC had successfully argued that LBRY “offered and sold unregistered securities in violation of Section 5 of the Securities Act of 1933”.
At Messari’s Mainnet conference in New York in September, LBRY CEO Jeremy Kauffman didn’t mince his words as to what he thought about the SEC.
At the time he said that if the SEC were successful in its case, “The facts in this case would basically apply to every company in this room”. Not one to shy away from making bold allegations, Kauffman opined that, “The SEC has very much demonstrated that they are out to damage or destroy the cryptocurrency industry in the United States.”
To further illustrate the potential Ripple effects (pun intended) of the judgement, LBRY described the ruling as a “dangerous precedent” and that “[it] makes every cryptocurrency in the US a security, including Ethereum”.
The key takeaway here is that the SEC has clearly got a certain type of crypto company or blockchain in its sights – those that employed a token issuance model to fund their establishment and operations.
Whether the SEC continues to rule by enforcement or provide a definitive framework to which crypto companies can adhere, remains to be seen. In the interim, a significant degree of uncertainty persists.