A federal judge ruled Monday that video-hosting platform LBRY Inc. illegally sold its native token to U.S. investors, in a win for the Securities and Exchange Commission that could pave the way for other, more popular digital assets to be labeled securities and regulated similarly to stocks and bonds.
LBRY is a protocol based on the blockchain technology underlying bitcoin
which enables participants to host video and other content and charge users to stream or download it.
Promoted as a decentralized alternative to platforms like Alphabet’s
YouTube, the service is powered by its native token LBC, which is granted to miners in exchange for helping maintain the system.
In ruling that LBC tokens are securities, federal judge Paul Barbadaro gave the SEC more ammunition in its fight to regulate digital assets in the same fashion it does traditional financial instruments. The decision was seen as a major loss for the industry by some observers.
Federal courts use a set of rules called the Howey test to determine whether a tradeable asset is a security and therefore must be registered with the SEC. The Howey test states that a transaction becomes an investment contract if the investor has an expectation of a profit derived from the work of others on a “common enterprise.”
“Very bad result,” tweeted Gabriel Shaprio, general counsel at the crypto incubator Delphi Labs, pointing out that LBRY’s decision to “premine” a number of LBC tokens indicated to Barbardaro that the company was motivated to work to improve the value of its blockchain for itself and outside purchasers of the token.
Jeremy Kauffman, founder of LBRY, argued on Twitter that the standard put forward by Barbadaro in his ruling means that “almost every cryptocurrency” including ether
are also securities.
“Under the logic advanced by the SEC…every actively developed blockchain is at risk, especially Ethereum,” Kaufmann told MarketWatch last year after the SEC initiated the legal action. “As long as Ethereum developers are coordinating in some way while holding the token, they are in danger.”
The decision could have implications for the most high-profile crypto case being litigated by the SEC — it’s lawsuit against Ripple Labs Inc. and its digital token, XRP
The lawsuit was filed in the final weeks of the Trump administration by former SEC Chairman Jay Clayton, predecessor to current chairman Gary Gensler. The lawsuit argued that that Ripple illegally raised $1.4 billion by selling XRP tokens without registering the offering with the SEC.
Ripple says XRP tokens are used for making international payments and are therefore not securities, and the company and its supporters have argued that the SEC is enforcing a double standard by going after XRP tokens while allowing the ethereum network to continue to develop unhindered.
Attorney and XRP holder John Deaton tweeted Friday that the LBRY decision “is a total win for the SEC” and warned his followers to prepare for “Gary Gensler and the SEC using this case as an example to move forward against crypto.”