In a dispute against a decentralized publishing platform, the U.S. Securities and Exchange Commission (SEC) won.
In a victory for the Securities and Exchange Commission, a federal judge ruled on Monday that video-hosting platform LBRY Inc. sold its native token to American investors in an unlicensed manner. This decision could open the door for other, more well-known digital assets to be classified as securities and subject to the same regulations as stocks and bonds.
LBRY is a protocol that allows users to host video and other content and charge viewers to stream or download it. It is based on the blockchain technology that underpins bitcoin BTCUSD, -9.99%.LBRY, a blockchain company, aims to unite the industry against the SEC while others accuse it of having a “cryptocurrency suppression program”.
The service, which is marketed as a decentralized substitute for websites like Alphabet’s GOOG, -0.67% YouTube, is run by its native coin LBC, which is given to miners in exchange for their assistance in maintaining the network.
Federal judge Paul Barbadaro gave the SEC more ammunition in its quest to regulate digital assets in the same way it controls traditional financial instruments by declaring that LBC tokens are securities. Some commentators viewed the decision as a significant loss for the sector. The Howey test is a set of guidelines used by federal courts to assess whether a tradeable asset qualifies as a security and needs to be registered with the SEC.
According to the Howey test, a transaction turns into an investment contract if the investor anticipates a gain from the labor of others in a “common enterprise”. Gabriel Shaprio, general counsel of cryptocurrency incubator Delphi Labs, tweeted, “Very poor result,” noting that LBRY’s choice to “premine” a number of LBC tokens showed Barbardaro that the firm was driven to try to enhance the value of its blockchain for both itself and outside token buyers.
The creator of LBRY, Jeremy Kauffman, contended on Twitter that the criteria used by Barbadaro in his decision meant that “nearly every cryptocurrency,” including ether (ETHUSD, -14.40%), Dogecoin (DOGEUSD, -20.34%), and Ripple (XRPUSD, -0.20%), are securities.
“Under the logic advanced by the SEC…every actively developed blockchain is at risk, especially Ethereum,”
Kaufmann told MarketWatch last year after the SEC initiated the legal action. “As long as Ethereum developers are coordinating in some way while holding the token, they are in danger”. The SEC’s action against Ripple Labs Inc. and its digital coin, XRP XRPUSD, -13.53%, could be affected by the ruling because it is the most well-known cryptocurrency case now under consideration.
Former SEC Chairman Jay Clayton, the forerunner of the current chairman Gary Gensler, brought the complaint in the closing weeks of the Trump administration. The lawsuit claimed that by selling XRP coins without filing an offering with the SEC, Ripple fraudulently raised $1.4 billion.
Since XRP tokens are used to make international payments and are not securities, according to Ripple, the SEC is applying a double standard by targeting XRP tokens while leaving the ethereum network free to grow. The company and its supporters have claimed that this is a case of enforced double standard.
The LBRY ruling, according to lawyer and XRP owner John Deaton, “is a total success for the SEC,” and he cautioned his followers to be ready in case Gary Gensler and the SEC use this case as an example to go forward against cryptocurrency.