crypto strategy

The Consequences of LBRY: Consequences of Crypto’s Ongoing Regulatory Process

The LBRY case highlights a renewed wave of regulatory pressure that could affect both blockchain token companies and their investors.

In November, more year-long legal battle between the United States Securities and Exchange Commission (SEC) and blockchain development company LBRY and its token LBRY Credits (LBC) resulted in the token being decided as unregistered securitydespite the company’s argument that its use is a commodity 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

Old standards don’t always apply when it comes to regulating new technologies.

The LBRY case centered primarily on the basis of the Howey test, a framework resulting from a 1946 United States Supreme Court case, which determines whether a transaction qualifies as a security. While assets like Bitcoin (BTC) and most stablecoins are not considered titles in 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 the court fully embraced in its assessment.

The decision rendered by New Hampshire District Court Judge Paul Barbadoro determined that LBRY openly assumed the increase in value of its tokens, leading him to expect the tokens to act as a ” possible investment.

According to Barbadoro, the fact that LBRY kept tokens for itself and also gave them as “compensation incentives” to its employees meant that there was an intention to show investors that the company intended to increase the value of their blockchain. In other words, the conclusion was that LBRY would rely on token holders to understand corporate staking as a form of increasing the value of LBRY credits.

According to comments made to Bloomberg Law by Patrick Daugherty, head of digital assets at Foley & Lardner LLP, the judge’s decision is in uncharted legal territory, as it was based on the presumption of stakeholders viewing staking as a form of increasing value – or a promise of such – in relation to the tokens issued by the company.

“The court cited no legal precedent for this opinion, perhaps because there is none,” Daugherty said.

In the same post, James Gatto, who leads the blockchain and fintech team at Sheppard Mullin Richter & Hampton LLP, said many of the legal issues encountered in the LBRY case could also be replicated in other projects, and said recommended that crypto companies “take a different approach” to avoid copying the general legal methods used by token projects. he declared.

Regulatory consequences

Speaking to Cointelegraph, Jeremy Kauffman, Founder and CEO of LBRY, outlined the implications of the court’s decision on the case.

The outcome of the lawsuit had a significant financial impact for the company, which has already been declared “almost certainly dead” by its CEO.

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To begin with, Kauffman pointed to the incredibly high expenses of the lawsuit, pointing out that the company had to pay millions in legal fees and “lost tens of millions of dollars in investment.”

Beyond the financial cost of the lawsuit, the main consequence of the decision is slowing the adoption of LBC tokens, Kauffman said.

Kauffman in an interview with Reuters. Source: Reuters/Brian Snyder

“Perhaps worst of all, [we’ve] encountered substantial difficulties in adoption by third parties like exchanges who are terrified of the SEC,” 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 any interruptions despite legal challenges,” Kauffman said. “LBRY as a business is almost certainly dead. But Odysee, the most popular way to use LBRY, and the protocol itself, has a bright future,” he added.

Kauffman made no secret of his frustration 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 not to trust the government and not be transparent. We would have been in much better shape if we had acted more secretly and less honestly,” he said.

With uneven and uncertain application of digital assets, the goal of blockchain services is now to anticipate all possible scenarios that could be considered illicit movement – ​​learn as you go – and deal with potential issues before they happen. they only get worse.

And after?

The court’s decision regarding LBRY could also affect a developing case. The SEC two-year-old lawsuit against Ripple Labs has similar elements, as the company’s arguments relate to those used by Kauffman’s team – such as not receiving fair notice of their token being subject to securities laws.

Daugherty told Cointelegraph that it was important to take this argument in proper context, as the LBRY case had been active since 2016.

“Six years ago, the relevant period, very little was known about what was legal or not. You would have to judge it based on what they knew at the time, not when the court ruled against them,” he said.

The decision on the Ripple case will be most likely be decided by March 2023.

A US Treasury official who spoke to Cointelegraph on condition of anonymity said regulators are currently in the very early stages of understanding cryptocurrencies, with a particular focus on protecting users.

“Right now, the focus is on reducing scams and protecting consumers. But, other than that, I can say that we are in the very early stages of understanding and defining the industry,” they said.

Daugherty said his advice to companies and projects in the blockchain industry is to consider LBRY as an example for their legal strategy.

“Teams preparing draft protocols and tokens need to consider the LBRY decision and work with attorneys who understand the decision and what it didn’t decide,” he said.

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Daugherty also recommended that tokenization projects take two main preventive measures to avoid LBRY errors:

“One way is to decentralize the token before it is sold in the United States and another is to avoid promoting the token’s secondary market. This may not be enough on its own, but expert lawyers can complete the picture.

When asked 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 combating fraud and criminal activity. Blockchain could be a big part of America’s future, if it steps aside and lets entrepreneurs build,” he said.