Background
The United States Security Commission (SEC) won its case against blockchain-based file-sharing and payment network LBRY in the district court in New Hampshire on November 7 2022. The case was closely watched by many in the cryptocurrency space and garnered lots of commentary on its own and also in relation to the ongoing SEC v Ripple Labs case.
By way of background, LBRY operates a digital content network. The video-sharing website is its best-known app. The network uses LBRY Credit (LBC) to reward users for performing tasks, referring new users, contributing to projects and publishing content, according to the LBRY website. LBC can also be mined or purchased.
The Case
In brief, The SEC sued LBRY in March 2021, alleging that LBC tokens were securities and that the start-up had violated securities laws by selling them without registering with the agency. LBRY defended the matter by claiming the LBC tokens were not securities, and the SEC did not give it fair notice that its sale of LBC was subject to US securities laws, thus violating the company’s right to due process.
The Federal Court Judge ruled 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 defence that it lacked fair notice.”
The outcome of the case could have sweeping implications for the wider crypto industry. Speaking at Messari’s Mainnet conference in September this year, LBRY founder Jeremy Kauffman said the facts in LBRY’s case would “basically apply to every company” in the crypto industry.
In a reported emailed statement, Kauffman reiterated his claim that the case can have a broader impact on the industry.
"The SEC vs LBRY case establishes a precedent that threatens the entire US cryptocurrency industry. Under the SEC vs LBRY standard, almost every cryptocurrency, including Ethereum and Doge, are securities. The future of cryptocurrency in the US now rests in with an organization even worse than the SEC: the United States Congress," he said.
One significant case the LBRY ruling could impact is the SEC’s suit against Ripple Labs and two of its executives, who have been charged with selling $1.3 billion in unregistered securities. In a similar defence, Ripple Labs’ argument is based on its claim that its native token XRP is not a security, and that, by failing to provide clarity on whether XRP was a security, the SEC did not provide fair notice that Ripple Labs’ conduct was unlawful.
There are several major companies and associations in the crypto industry, including Coinbase and the Blockchain Association that have filed amicus briefs in support of Ripple Labs, arguing that the securities laws have been inconsistently applied by the regulator, creating “uncertainty” for the entire industry.
While there may be several distinct facts in the Ripple case, the SEC's win against LBRY has certainly created a level of fear in the crypto industry and, coupled with the recent downfall of FTX, and other centralised digital exchanges, that fear has only been exacerbated.
Further updates regarding the Ripple case and commentary on the LBRY case will be provided by The Minted Brief in due course.
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