- Law firms
- Related documents
(Reuters) – Digital media company LBRY Inc said in a series of tweets Monday that the entire cryptocurrency industry is now at risk, after a federal judge in New Hampshire ruled that its digital tokens are securities that must be registered with the United States Securities and Exchange Commission.
“The language used here sets an extremely dangerous precedent that makes every cryptocurrency in the United States a security,” LBRY tweeted. “Even after five years of fighting and a court ruling, we honestly still don’t know how to legally launch a public blockchain in the United States”
Should the cryptocurrency industry panic?
There is no doubt that U.S. District Judge Paul Barbadoro of Concord’s decision to grant summary judgment to the SEC bodes ill for crypto token creators concerned about SEC regulation. The judge, as my colleague Jody Godoy reported on Monday, rejected LBRY’s arguments that its tokens are an actual cryptocurrency used primarily to pay for services on its blockchain-backed data network and that the SEC is not didn’t provide fair warning that she would sue unregistered. tokens that did not enter the market during an initial coin offering.
Barbados unequivocally argued that the LBRY tokens were investment contracts under the United States Supreme Court’s 1946 test in SEC vs. Howey. In the LBRY case, the judge said, the only disputed element of the Howey three-pronged test was whether token buyers were led to expect profits based on LBRY’s efforts. Barbadoro said the early investors and blockchain miners who received the tokens had such an expectation because they knew that LBRY’s operations relied on increasing the value of the tokens.
In perhaps the most consequential language of the ruling, Barbadoro said any reasonable buyer of the tokens would expect LBRY to use its own stake – hundreds of millions of tokens – to increase the value of the cryptocurrency. . This structure alone, the judge said, “would drive buyers of [LBRY tokens] to expect that they too will profit from their assets in [the tokens] thanks to the diligent efforts of LBRY.
This is worrying language, given that the LBRY model, in which blockchain developers keep a large amount of tokens that serve as currency on their platforms, is not at all unusual.
But I would suggest the industry wait for a decision in the closely watched SEC case against Ripple Labs Inc, before deciding the sky is falling.
In a summary of the judgment pending before U.S. District Judge Analisa Torres of Manhattan, Ripple made arguments that LBRY attorneys at Perkins Coie did not assert — including a position that appears ultimately designed to appeal to the Supreme Court’s current concern with historic practices.
Ripple, whose attorneys declined to provide me with a statement on the LBRY decision, also developed a much stronger case than LBRY to support its claim that the SEC failed to provide a fair opinion on crypto tokens than she would regard as titles.
The SEC, which declined to comment specifically on the LBRY or Ripple cases, said in an email that “digital assets that qualify as securities under the criteria set out long ago by the Supreme Court cannot be authorized by securities laws.
The Commission writ of summary judgment in the Ripple case is obviously filled with background facts about what the SEC claims was a $2 billion offering of unregistered one-year securities by a company that had amply warned that it was circumventing the law. Nevertheless, its legal arguments as to why Ripple’s tokens are considered securities under the Howey test are quite similar to those of the SEC affirmed in the LBRY case.
But Ripple (and its CEO, who are also defendants in the SEC proceeding) offered different defenses than LBRY. Ripple returned to the state law cases underlying the Supreme Court’s Howey decision to argue that an investment contract can only be considered a security if the promoter and investor have entered into a contract which obligated the promoter to take particular actions for the benefit of the investor and granted the investor a specific right to participate in the profits generated by the efforts of the promoter. Defense lawyer for Debevoise & Plimpton; Kellogg, Hansen, Todd, Figel & Frederick; Paul, Weiss, Rifkind, Wharton & Garrison; and Cleary Gottlieb Steen & Hamilton said there was no such contract between the Ripple defendants and the purported investors who received tokens through donations, gifts, and even sales.
Ripple’s brief argued that even after Howey, neither the 2nd U.S. Circuit Court of Appeals nor the Supreme Court considered the sale of an asset to be an investment contract unless the promoter and buyer have specific rights and obligations. Ripple drew an analogy between its tokens and its diamonds, saying that when DeBeers sells uncut diamonds, it does not enter into investment contracts with buyers, even if those buyers expect to profit from the diamonds they have purchased.
In the LBRY case, remember, Barbadoro said that LBRY’s control of hundreds of millions of tokens was a signal to investors that the company would act to support their value. Ripple once again pointed the finger at the diamond market to argue the opposite: the SEC does not regulate diamond purchases as securities transactions, Ripple said, despite marketing efforts by DeBeers.
Ripple also claims a much broader fair notice defense than LBRY, which simply argued that the SEC previously only acted when token issuers made public offerings. New Hampshire judge says LBRY failed to show SEC committed to applying Howey test only to tokens sold in ICOs and that the Howey test itself contained no restrictions of this type. (LBRY’s attorney for Perkins Coie declined to comment on the differences between their arguments and Ripple’s.)
Ripple argued in its answer to the SEC’s motion for summary judgment that the commission’s own filings reflect years of confusion and uncertainty within the agency over how or whether to regulate cryptocurrencies. “No wonder market participants don’t know what to think,” Ripple said. At the very least, she argued, the issue of notice must be determined at trial.
There are, to date, nearly 700 entries on file in the Ripple case, compared to only 86 in LBRY. If the SEC obtains summary judgment against Ripple, the industry will have real cause for concern.
US securities regulators win lawsuit against crypto firm LBRY
Coinbase joins crypto proponents alongside Ripple in SEC case
Ripple’s top lawyer slams SEC for ‘offensive’ use of unsealed legal memos
Our standards: The Thomson Reuters Trust Principles.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.