A Serious Setback For The Issuance Of Crypto Tokens As SEC Wins Case Against LBRY

Following an argument that its token was subject to regulatory monitoring, the Securities and Exchange Commission (SEC) won a court battle with the decentralized publishing platform LBRY, according to the court’s filing published on November 7th.

In March 2021, LBRY, a cryptocurrency company, was accused by the SEC of marketing unregistered securities. The decentralized publishing platform LBRY, which claims to have 10 million members, runs on currencies built on the blockchain called LBRY Credits. For the right to see published material, users must pay authors in LBRY Credits.

However, the SEC claims that before creating the network, it offered the tokens as investment contracts, assuming that their value would increase. In all, according to the SEC’s lawsuit, which was submitted to a US District Court, LBRY earned more than $11 million from investors who took part in its offering in the form of US dollars, Bitcoin, and services.

The Securities Act of 1933 was violated, according to the SEC, and it amounted to an unregistered sale of securities. Under the SEC’s complaint, LBRY utilized the money they made by selling off their currency (LBC) to pay for operating expenses related to growing their network – which would eventually lead to growth within investor-owned coins (LBC). 

Moreover, it was assumed that as the largest shareholder of LBC, they could profit because they were anticipating seeing a rise in its value when it increased due to consumers’ needs in the marketplace.

LBRY CEO Jeremy Kauffman said in the statement:

The SEC complaint against LBRY reflects an outdated view of the economy that stifles innovation, accessibility, and creativity. LBRY is a blockchain enabled-network that allows creators to publish digital content and consumers to explore and buy content using LBRY Credits.

He further said that the allegation disregards LBRY’s strenuous efforts to follow the law and run its operations openly and transparently. The majority of blockchain tokens would be regarded as securities under the overbroad criteria established by the SEC complaint, placing the market in a state of ambiguity and confusion.

However, the SEC seeks a lifetime injunction against the business and its employees along with civil fines and disgorgement at that time.

Court’s Decision In Favour Of SEC

Based on the New Hampshire District Court’s ruling, LBRY is wrong on both the law and the facts. As a result of Judge Paul Barbadoro’s decision to grant the SEC’s move for summary judgment, the matter that started last March has been resolved.

The decision was a significant blow to both crypto issuers and regulators alike. Many of these companies had been begging for some guidance from the US Securities and Exchange Commission but were told that they would instead be subject to ‘regulatory enforcement.’ Defenders argue that this did not warn enough about how future regulation would function.

The SEC’s application of current rules, in particular the Howey Test, which relates to a US Supreme Court decision involving whether a transaction may qualify as an investment contract, has been praised by SEC Chair Gary Gensler. Gensler has openly challenged this defense in recent months.

The court said in the statement:

What the evidence in the record discloses is that LBRY promoted LBC as an investment that would grow in value over time through the company’s development of the LBRY Network.

According to the Howey Test ruling, the SEC’s claim is based on a precise application of a venerable Supreme Court precedent that several federal courts across the nation have used for more than 70 years.

In addition, the court said that LBRY is in no position to argue that it did not have adequate notice that its behavior was prohibited, even if this may be the first instance it has been applied to a digital coin issuer who did not undertake an ICO.

LBRY tweeted in response to the court’s decision, “We lost. Sorry, everyone.” Following sharp increases during bull markets in 2017 and 2021, the token and the project as a whole have slowed down.

We lost. Sorry everyone.

— LBRY 🚀 (@LBRYcom) November 7, 2022

The LBRY mentioned in the tweet’s comment section:

We’re going to lick our wounds for a little bit but we’re not giving up. We’ve got a bright team, tens of millions of pieces of content, hundreds of thousands of creators, and one of the most popular web3 apps in the world.