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The LBRY case highlights a new wave of regulatory pressure that could affect both blockchain token issuers and their investors.
In November, a year-long legal battle between the U.S. Securities and Exchange Commission (SEC) and blockchain developer LBRY and its LBRY Credit (LBC) token resulted in an unregistered security, despite the company’s claims. culminated in a token judgment in Use as a product within the Platform.
The court’s ruling in this case sets a precedent that could affect not only regulatory perceptions of blockchain-based platforms, but also cryptocurrencies.
old howie
When it comes to regulating new technologies, old standards do not always apply.
LBRY’s case was based on the Howey Test, a framework that resulted from a 1946 United States Supreme Court case. Assets such as Bitcoin (BTC) and most stablecoins are not considered securities for the purpose of this test, but decisions will depend on the characteristics of the token and are subject to change.
The SEC argued that LBRY was aware of the “potential use” of LBRY credits as an investment, which was fully acceptable to the court’s evaluation.
The ruling, handed down by New Hampshire District Court Judge Paul Barbadoro, ruled that LBRY openly presumed an increase in the value of its tokens and set expectations that the tokens would serve as a “possible investment.”
According to Barbadoro, the fact that LBRY owns the token and offered it as a “reward incentive” to its employees is intended to show investors that the company intends to increase the value of the blockchain. means that there was In other words, LBRY hoped that token holders would understand the company’s staking as a form of increasing the value of LBRY credits.
The judge’s ruling places it in uncharted legal territory, according to comments made to Bloomberg Law by Patrick Daugherty, head of digital assets at Foley & Lardner LLP. Regarding.
“The court did not cite case law for this opinion, presumably because there is no case law,” Daugherty said.
In the same post, James Gatto, who heads 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. , offering cryptocurrency companies “another approach to avoid copying common legal methods used in token projects”. “Too many people don’t do it and everyone just follows what they’ve done,” he said.
Regulatory impact
LBRY founder and CEO Jeremy Kaufman explained to Cointelegraph the consequences of the court ruling.
The outcome of the trial had significant financial implications for a company that had already been declared “almost certainly dead” by its CEO.
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First, Kaufman stressed the incredibly high cost of litigation, with the company having to pay millions in legal fees and “lost tens of millions of dollars in investment capital.” pointed out.
Beyond the financial cost of the trial, Kaufman says the biggest consequence of the ruling is slowing adoption of the LBC token.
“Perhaps worst of all, [we’ve] Adoption from third parties, such as exchanges that fear the SEC, has been rather difficult,” he said.
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 share content without confusion, despite legal issues,” Kaufman said. “LBRY as a company is almost certainly dead. But he Odysee, the most popular way to use LBRY, and the protocol itself have a bright future,” he added.
Mr. Kaufman was unsatisfied with the outcome of the SEC complaint, blaming the company’s ultimate fate on the government’s lack of transparency.
“One thing I have definitely learned is that you can’t trust governments and be transparent. let’s,” he said.
Enforcement around digital assets is uneven and uncertain, so the goal of current blockchain services is to anticipate every possible scenario of illegal activity, learn as it goes, and escalate potential problems. to deal with it before it happens.
what’s next?
The court’s ruling regarding LBRY may also affect ongoing litigation. His two-year-old lawsuit in the SEC against Ripple Labs has similar elements, as the company’s claims relate to what was used by his Kauffman team.
Dougherty told Cointelegraph that the LBRY lawsuit has been active since 2016, so it’s important to put the debate in its proper context.
“Six years ago, very little was known about what was legal or not in the relevant time frame. “You have to judge,” he said.
A ruling on the Ripple case will most likely be decided by March 2023.
Speaking to Cointelegraph on condition of anonymity, a US Treasury official said regulators are in the very early stages of understanding cryptocurrencies and are focused on protecting users.
“Right now, the focus is on fraud reduction and consumer protection. But aside from that, I would say we are in the very early stages of understanding and defining the industry,” they said.
Daugherty said his advice for companies and projects in the blockchain industry is to keep LBRY as an example of a legal strategy.
“Teams preparing protocols and token projects need to take into account the LBRY ruling and work with lawyers who understand the ruling and what it did not govern,” he said. .
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Daugherty also recommended that token issuance projects should take two major precautions to avoid LBRY’s mistakes.
“One way is to decentralize the tokens before they are sold in the US, and the other way is to avoid promoting a secondary market for the tokens. A home attorney can complete the picture.”
When asked for his views on what regulators should focus on to understand blockchain and cryptocurrencies, Kaufman said they need to “get out of the way.”
“Regulators need to focus only on stopping fraud and criminal activity. Blockchain could be a big part of America’s future if it got out of the way and let entrepreneurs build it.” ‘ he said.
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