How does the loss in the LBRY case affect the crypto industry?

by | Nov 19, 2022

The Securities and Exchange Commission won a ruling against LBRY, a blockchain-based file-storage protocol when a federal judge ruled that the company illegally sold its native LBC tokens in violation of U.S. securities laws.

This ruling could prove to be very problematic for other cryptocurrencies as they could just as easily be labeled securities under the same ruling. If this becomes true and it sets a precedent, it could create a problem going forward for the development of new projects that need to worry about how they produce and offer their utility tokens.

LBRY offers its LBC token to miners who help support its platform, which operates similarly to a decentralized alternative to YouTube, and stores videos that can be watched anywhere and spread everywhere. As it is a decentralized blockchain technology it cannot be censored.

It’s clear that the SEC is continuing to extend its regulatory reach over crypto, but this decision adds extra weight to that mission. And there are a number of industry experts who have already said as much.

On Twitter, Gabriel Shapiro, general counsel at the crypto incubator Delphi Labs, said that LBRY’s “premine” and hold of its own LBC tokens indicated that the decision that the company itself was motivated to improve the value of its own blockchain and not just invest.

“It’s dicta, but here the LBRY judge reasons that even if team is completely silent about efforts — no promises, no contracts — but premines tokens, that alone creates a sufficient expectation of profits from their efforts in common enterprise to pass the Howey test,” Shapiro said.

The Howey test is used to determine if a tradable asset is a security and thus must be registered with the SEC. Under the test, it is security if an investor expects a profit from the efforts of others.

“Very bad result,” Shapiro concluded.

Under this result, every blockchain under development could fall under this category, including Ethereum, especially if Ethereum developers happen to hold tokens. A sentiment echoed by Jeremy Kauffman, founder of LBRY.

Without clear, obvious regulatory guidelines, companies working in the crypto space can easily run afoul of these lines that are being drawn out and tumble over them. Certainly, even utility tokens are bought and purchased by some that they will gain value because there are teams working on the underlying projects, and if this turns every utility token into security this may chill future creators from launching their own.

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