In a move that could have serious consequences for Ripple and other cryptocurrency companies, a federal judge has ordered crypto startup LBRY to end its unregistered security offering while selling LBC, the protocol’s original token.
The summary judgment, which prevents the case from going to trial, ends LBRY’s attempted legal battle that began last year.
The SEC sued LBRY in March 2021 for offering the token without first registering with the agency. Although the LBRY team does not offer tokens to the community Initial coin offering (ICO) or similar mechanisms, they keep tokens for themselves in ‘pre-mine’, which are then released on secondary exchanges to finance their operations.
In a summary judgment, a federal judge stated that the token provided an incentive to the team to build the network, suggesting to investors that LBC would be a profitable investment in the secondary market.
“LBRY has – at an important moment and despite the protests – been very aware of the potential value of LBC as an investment,” summary judgment submitted to the reader. “And make sure potential investors do too.”
The judgment cited a Reddit thread in which LBRY’s community manager told potential investors that the token could have “future value.” It also states that the token has both consumptive and investment uses – the latter making it a security, as it fails the Howey Test.
The Howey Test, which determines what qualifies as an “investment contract” under securities law, has become a hot topic in the crypto industry as the SEC ramp up independent enforcement action to projects and tokens. Monday’s news didn’t come as much of a surprise, said Mike Selig, of counsel at Willkie Farr and Gallagher LLP.
“The summary of the decision gives support to the SEC’s longstanding view that a very narrow band of cryptoassets outside the scope of the federal securities law is based only on the grounds that tokens have consumptive use (or utility),” Selig said.
What does this mean for Ripple’s landmark SEC case?
The ruling could be very bad for other companies or organizations related to utility tokens, including Ripple, which is currently fighting. self The legal battle over the XRP token (down 3.3% in the past 24 hours), and projects such as Filecoin (FIL), Selig said. Ripple’s offering is also not an ICO, which based on Monday’s decision, may not be a good defense.
“The SEC has made its position on ‘utility tokens’ clear through dozens of enforcement actions over the past five years,” he said.
“The great irony of the SEC’s enforcement actions against utility token projects is that they have pushed the crypto industry in a positive direction toward decentralization,” he said.
When the SEC sued LBRY, the protocol said it was not given fair notice and due process, a point Monday’s judge quickly rejected.
“In pressing this argument, LBRY has abandoned any broad claim that it lacks fair notice of how the Howey test applies to digital tokens in general,” the judgment read.
LBRY admits the setback but can choose to appeal the decision on Monday, in this case the parties can fight out in the trial.
The Protocol acknowledged the decision on Twitter Monday, but stressed that the team “didn’t give up.”
“We have a brilliant team, tens of millions of pieces of content, hundreds of thousands of creators, and one of the most popular web3 apps in the world,” said the company’s Tweet.
LBRY did not immediately respond to Blockworks’ request for further comment.
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