In a blow to token issuance models and the overall crypto industry, the SEC has won another case where it has considered a token to be a security.
On Nov. 7, a New Hampshire district court ruled against the decentralized publishing platform LBRY.
LBRY is a decentralized video-sharing platform that enables viewers to earn for watching. Furthermore, creators can earn LBC tokens on its Odysee platform.
A Dangerous Precedent from SEC
The LBRY team apologized to its users and investors with a stark warning about the ruling:
“The language used here sets an extraordinarily dangerous precedent that makes every cryptocurrency in the US a security, including Ethereum.”
The SEC took action against the project in May 2021, accusing it of selling the LBC token as an unregistered security. It is very similar to the ongoing case and accusations made against Ripple.
According to the regulator, LBRY raised $11 million in crypto and cash from investors between 2016 and 2021. It found that this was considered an investment contract and, therefore a security even though LBRY did not hold an ICO (initial coin offering).
The outcome is a huge blow to token issuers, many of which argue that the SEC is regulating by enforcement.
LBRY denied that its token was a security, stating that millions of people were using the platform before any tokens were created or sold. A petition defending the project stated:
“We’ve acted in extremely good faith, attempted to follow all the rules, and complied with the SEC at every turn.”
Judge Paul Barbadoro thought the opposite, however, coming down hard on the project:
“No reasonable trier of fact could reject the SEC’s contention that LBRY offered LBC as a security.”
The case, therefore, will not go to trial, and the SEC has notched up another win. Last month SEC chair Gary Gensler said that the crypto industry was not decentralized.
The Ripple Effect?
The victory could have far wider implications if a precedent has been set as the majority of crypto assets could be considered securities under these conditions.
The Ripple case, which is unlikely to be resolved until mid-2023 sometime, will set a larger precedent and could result in the demise of crypto innovation in the U.S.
Support for the fintech firm is growing, however, with at least 12 separate individuals and organizations filing amicus briefs backing the firm.
These include Coinbase Inc., the Chamber of Digital Commerce, the Crypto Council for Innovation, Cryptillian, the Blockchain Association, Valhil Capital, I-Remit, Spend The Bits, Tapjets, the Investor Choice Advocates Network (ICAN), Veri DAO, and John Deaton on behalf of more than 75,000 XRP investors.