The Securities and Exchange Commission has won its case against LBRY, Inc., the company behind the LBRY protocol announced Monday along with a published copy of the ruling.
“We lost. Sorry everyone,” LBRY wrote on Twitter. “We’re going to lick our wounds for a little bit but we’re not giving up.”
“Because no reasonable trier of fact could reject the SEC’s contention that LBRY offered LBC as a security, and LBRY does not have a triable defense that it lacked fair notice, the SEC is entitled to judgment,” U.S. District Judge Paul J. Barbado wrote in the conclusion of the ruling.
We're going to lick our wounds for a little bit but we're not giving up.
We've got a bright team, tens of millions of pieces of content, hundreds of thousands of creators, and one of the most popular web3 apps in the world.
The best is yet to come 🚀
— LBRY 🚀 (@LBRYcom) November 7, 2022
According to the ruling’s memorandum, the SEC argued in its complaint that LBRY “offered and sold unregistered securities in violation of Section 5 of the Securities Act of 1933.” But LBRY does not believe it is selling securities, and countered that its LBC token “functions as a digital currency that is an essential component of the LBRY Blockchain.”
While LBRY says it isn’t throwing in the towel just yet, it does believe the ruling could affect the entire crypto industry.
“The language used here sets an extraordinarily dangerous precedent that makes every cryptocurrency in the US a security, including Ethereum,” LBRY wrote on Twitter in response to the ruling.
The SEC has not yet published a press release regarding the case. The agency initially charged LBRY for selling unregistered securities in March 2021.
“Going to allow myself one scream,” LBRY CEO Jeremy Kauffman tweeted Monday in response to the ruling, followed by an extended, fully-capitalized version of the word “fuck.” He then added, “Alright, now back to work.”
going to allow myself one scream
alright now back to work https://t.co/pPEH2uZIoz
— Jeremy Kauffman 🦔 (@jeremykauffman) November 7, 2022
At the Mainnet conference in September, during an interview with Decrypt, Kauffman wore a t-shirt that said “Fuck the SEC.”
“The facts in this case apply to basically every company in this room,” Kauffman told Decrypt. “The SEC has very much demonstrated that they are out to damage or destroy the cryptocurrency industry in the United States.”
Kauffman is running for Senate in New Hampshire, because in his view, crypto proponents getting into politics is “the only way we can make blockchain legal.”
Andrew Rossow, an attorney and adjunct law professor, told Decrypt that while the court’s ruling incorporated the Howey Test, which helps define what is and isn’t a security in the United States, it “missed the mark” in a key area.
“The Court missed the mark in identifying a distinction that possibly speaks to a further clarification of what a ‘reasonable expectation of profits’ means under Howey, as it applies to projects such as LBRY,” Rossow said.
“That distinction separates what I believe to be LBRY’s recognition that it is a ‘work in progress,’” Rossow added, “and while it does want to see its investors make a return on their investment, that the only way that will happen is if others believe the project to have the utility as the company has presented it.”
“I believe that distinction is fairly visible in that investors were encouraged to hold onto their LBC—despite the unlikelihood for them to make a ‘quick buck,’” he continued.
LBRY’s token in question, LBC, is down 35% in the past day and 49% over the past 30 days, according to CoinGecko data.
Per the ruling, a “status conference” is to be scheduled to further settle “any remaining issues” regarding the SEC vs. LBRY case.
As Kauffman and LBRY have speculated, the ruling may very well set a precedent and be applied to other existing and future SEC cases involving cryptocurrencies. Ripple could be among those impacted, Rossow suggested to Decrypt, as the company has been engaged in an ongoing battle against the SEC since 2020.
“[It adds], in my opinion, an interesting distinction that speaks to further clarifying what a ‘reasonable expectation of profits’ means in today’s landscape, as it pertains to projects that hold themselves out as a ‘work in progress,’” he said, “and the frequency by which that message is communicated to investors prior to and throughout their investment.”
“Whether or not the SEC sees or understands that distinction is another question entirely,” Rossow concluded.
The SEC and Kauffman have not yet responded to Decrypt’s requests for comment.