The LBRY case highlights a wave of renewed regulatory pressure that could affect both blockchain token issuing companies and their investors.
In November, more year-long court battle between the United States Securities and Exchange Commission (SEC) and blockchain development company LBRY and its LBRY Credits (LBC) token culminated in the token being ruled as a unregistered securitydespite the company's argument for its use as merchandise within the platform.
The court's decision in this case sets a precedent that could influence not only the regulatory perception of blockchain-based platforms, but also cryptocurrencies.
old howey
The old standards don't always apply when it comes to regulating new technology.
The LBRY case focused primarily on the Howey test, a framework that emerged as a result of a 1946 US Supreme Court case, which determines whether a transaction qualifies as a security. While assets like Bitcoin (BTC) and most stablecoins values are not considered Under this test, the decision varies depending on the characteristics of a token, which are subject to change.
The SEC asserted that LBRY was aware of the "possible use" of the LBRY Credits as an investment, which was fully accepted by the court in its evaluation.
He mistake made by New Hampshire District Court Judge Paul Barbadoro found that LBRY openly assumed the increase in value of its tokens, leading him to establish an expectation that the tokens would act as a "potential investment."
According to Barbadoro, the fact that LBRY kept tokens and also gave them as "compensation incentives" to its workers meant that there was an intention to show investors that the company intended to increase the value of its blockchain. . In other words, the conclusion was that LBRY would count on the token holders to understand the company's participation as a way of increasing the value of the LBRY Credits.
According to comments made to bloomberg law For Patrick Daugherty, head of digital assets at Foley & Lardner LLP, the judge's ruling lands in unfamiliar legal territory, as it was based on the presumption that stakeholders viewed participation as a form of increased value, or a promise of such, with respect to the tokens issued by the company.
"The court did not cite any legal precedent for this opinion, perhaps because there is none," Daugherty said.
In the same article, James Gatto, who leads the blockchain and fintech team at Sheppard Mullin Richter & Hampton LLP, said that many of the legal issues found in the LBRY case could also be replicated in other projects, and recommended crypto firms " take a different approach" to avoid copying the general legal methods used by token projects. "A lot of people don't do it, they just follow what everyone else has done,” he said.
regulatory consequences
Speaking to Cointelegraph, Jeremy Kauffman, founder and CEO of LBRY, outlined the fallout from the court's ruling on the case.
The outcome of the trial had a significant economic impact for the company, which has already been declared "almost certainly dead" by its CEO.
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For starters, Kauffman highlighted the unbelievably high costs of the lawsuit, noting that the firm has had to pay millions in legal fees and "has lost tens of millions of dollars in investment money."
Beyond the financial cost of the lawsuit, the biggest consequence of the ruling is the slower adoption of LBC tokens, Kauffman says.
"Perhaps worst of all, [we’ve] it faced substantial difficulties in adopting third parties like exchanges that are terrified of the SEC,” he stated.
However, despite the immediate impact on LBRY, Inc. as a company, the platform's blockchain protocol will survive this encounter with the SEC.
“LBRY is a decentralized protocol used by tens of millions of people to seamlessly share content despite 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 made no secret of his frustration with the outcome of the SEC complaint, blaming the company's eventual fate on a lack of government transparency.
“Something that I definitely learned is not to trust the government and not to be transparent. We would have been much better off if we had been more secretive and less honest,” she said.
With uneven and uncertain application regarding digital assets, the goal of blockchain services now is to anticipate any possible scenario that could be seen as an illicit move, learn as you go, and deal with potential problems before they escalate.
Whats Next?
The court's ruling regarding LBRY could also affect an ongoing case. the sec two year lawsuit Against Ripple Labs has similar elements, as the company's arguments tie in with those used by Kauffman's team, such as not receiving fair notice that their token is subject to securities laws.
Daugherty told Cointelegraph that it is important to take this argument in its proper context, as the LBRY case has been active since 2016.
“Six years ago, the relevant time period, very little was known about what was legal or not. I would have to judge him based on what they knew at the time, not on when the court ruled against him,” he said.
The ruling in the Ripple case will be most likely It will be decided in March 2023.
A US Treasury official who spoke to Cointelegraph on condition of anonymity said that regulators are currently in the early stages of understanding cryptocurrencies, with a primary focus on user protection.
“Right now, the focus is on reducing scams and consumer protection. But apart from that, I can say that we are in the early stages of understanding and defining the industry,” they said.
Daugherty said that his advice to companies and projects in the blockchain industry is to have LBRY as an example for their legal strategy.
“Teams preparing protocol and token projects should take the LBRY ruling into account and work with lawyers who understand the ruling and what it did not rule,” he said.
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Daugherty also recommended that token issuance projects should take two main preventative measures to avoid LBRY errors:
“One way is to decentralize the token before it is sold in the United States and another way is to avoid promoting the secondary market for the token. That may not be enough in and of itself, but skilled attorneys can complete the picture."
Asked for his opinion on what regulators should focus on to understand blockchain and cryptocurrencies, Kauffman said they need to "get out of the way."
“Regulators need to focus solely on stopping fraud and criminal activity. Blockchain could be a big part of America's future, if they get out of the way and let entrepreneurs build,” he said.
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