Crypto Updates

SEC wins LBRY case, but the victory may have little impact in the greater cryptoverse

SEC wins LBRY case, but the victory may have little impact in the greater cryptoverse

The United States Security Commission (SEC) won its case against blockchain-based file-sharing and payment network LBRY in district court in New Hampshire on Nov. 7 when that court decided to grant an SEC request for summary judgment filed in May. The case garnered lots of commentary on its own and in relation to the ongoing Ripple case.

LBRY operates a digital content network. The Odysee 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 against LBRY

The SEC filed a complaint against LBRY in March 2021, claiming that LBRY was selling an unregistered security. The SEC sought a permanent injunction against the sale of the tokens, disgorgement of all funds received with interest and civil penalties. It did not allege fraud or charge any individuals in the case, however.

LBRY argued that LBC was not intended for investment purposes, but had a use on the LBRY blockchain from the moment of its launch. Something with a function is a commodity, not a security. LBRY further argued that it was not given fair notice that its assets were subject to securities laws.

The court’s dismissal of the fair notice claim was simple and direct:

“The SEC has based its claim on a straightforward application of a venerable Supreme Court precedent that has been applied by hundreds of federal courts across the country over more than 70 years.”

In other words, LBRY should have been familiar with the Howey test, which is the standard for defining a security. Regarding LBRY’s claim about the token’s investment uses, the court found that:

“The SEC identifies multiple statements by LBRY that it claims led potential investors to reasonably expect that LBC would grow in value as the company continued to oversee the development of the LBRY Network. LBRY minimizes the significance of these statements, and points to its many disclaimers that it did not intend for LBC to be purchased as an investment, but the SEC is correct.”

That is to say that LBC does not pass the Howey test. And again, a disclaimer has been shown to be inadequate protection. The court takes the principle further, however, noting, “Nothing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract.” Not only that:

“But even if it…

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