Many regulators around the world are shifting their focus to cryptocurrencies. As is known, the most recent lawsuit won by the US Securities and Exchange Commission (SEC) was against altcoin project LBRY. So, what is the impact of this result on the industry? What’s next?
SEC won against altcoin project
cryptocoin.com As we reported, in November, the legal battle between the United States Securities and Exchange Commission (SEC) and blockchain development company LBRY is over. The court ruled that the LBRY Credits (LBC) altcoin project is an unregistered security. The court’s decision in this case sets a precedent that could affect not only the regulatory perception of blockchain-based platforms, but cryptocurrencies as well.
Old standards do not always apply when it comes to regulating new technologies. The LBRY case was mostly centered on the Howey Test, a framework that emerged as a result of a US Supreme Court case in 1946 to determine whether a transaction qualifies as a security. While assets such as Bitcoin and most stablecoins are not considered securities in this test, the decision varies based on the token’s volatile properties. The SEC claimed that LBRY was aware of its “possible use” of LBRY Credits as an investment. This view was supported by the court.
The ruling, delivered by New Hampshire District Court Judge Paul Barbadoro, determined that LBRY explicitly assumed the increase in the value of its tokens, leading to an expectation for the tokens to act as a “probable investment.” According to Barbadoro, LBRY’s holding of the tokens for itself, as well as giving them to its employees as “compensation incentives”, meant that it was intended to show investors that it intended to increase the value of the company. In addition, the staking function came to the fore at this point. The judge argued that with the staking feature, an expectation of an increase in price will be created.
No precedent for staking
According to comments Patrick Araugherty, head of digital assets at Foley & Lardner LLP, to Bloomberg Law, the judge’s decision is in unknown legal territory, as it is based on the assumption that shareholders see staking as a form of value enhancement or promise. “The court did not show any legal precedent for this view, perhaps because there was none,” Daugherty said. James Gatto, who leads the blockchain and fintech team at Sheppard Mullin Richter & Hampton LLP, said many of the legal issues found in the LBRY case could be replicated in other projects, advising crypto companies to adopt different rather than general legal methods.
Also, Jeremy Kauffman, founder and CEO of LBRY, explained what happened as a result of the trial. The outcome of the trial certainly had a financial impact. Because the company was declared “almost certainly dead” directly by its CEO. To begin, Kauffman underscored the incredibly high expenses of the trial, pointing out that the company had to pay millions in legal fees and “lost tens of millions of dollars in investment money.” Kauffman says that beyond the financial cost of the proceedings, the biggest consequence of the decision is the slow adoption of LBC tokens. Kauffman used the following statements:
LBRY is a decentralized protocol used by tens of millions of people to share content without interruption despite legal challenges. LBRY as a company is almost certainly dead. But Odysee, the most popular way to use LBRY, and the protocol itself has a bright future.
What’s next?
According to experts, the court’s decision regarding LBRY could also affect an existing case in development. The SEC’s two-year lawsuit against Ripple Labs has similar elements in that the company’s arguments relate to those used by Kauffman’s team. Daugherty said it’s important to put this argument in the right context, as the LBRY case has been active since 2016. “Six years ago, very little was known about the relevant time frame, what was legal and what was not. “You should have judged by what you knew at the time, not by the time the court ruled against them,” he said.
The decision on the Ripple case will most likely be made by March 2023. A U.S. Treasury official said that regulators are currently in the very early stages of understanding cryptocurrencies and are largely focused on user protection. Daugherty said his advice to companies and projects in the blockchain industry is to take LBRY as an example for their legal strategy. When asked what regulators should focus on to understand blockchain and cryptocurrencies, Kauffman said they need to “get out of the way”.
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