The Securities and Exchange Commission sued blockchain company LBRY Inc. last week for allegedly selling unregistered securities in a case that could threaten Americans’ ability to buy and sell popular cryptocurrencies, including bitcoin and ether, experts say. . LBRY is a protocol based on the blockchain technology underlying bitcoin BTCUSD, -2.53% that allows participants to host videos and other content and charge users for streaming or downloading them. The decentralized network is powered in part by so-called miners, who are rewarded for helping to maintain the system with a bitcoin-like token called LBC.
According to the SEC’s complaint against LBRY Inc., the startup working to improve the LBRY network, the company violated securities laws by selling LBC tokens to fund its work, without registering those tokens with the SEC as collateral. Read more: Bitcoin, crypto investors will be on the lookout for these 5 questions facing Biden‘s management Jeremy Kauffman, CEO of LBRY denies that LBC tokens are securities at all, given that he did not make an initial coin offering to fund the business , and the tokens were being mined and used on the network long before the company sold tokens to invest in the network. “Under the logic advanced by the SEC … every actively developed blockchain is at risk, especially Ethereum,” he said in an email to MarketWatch. “As long as Ethereum developers somehow coordinate while holding the token, they are in danger.” Ether ETHUSD, -5.63% is the second most valuable cryptocurrency after bitcoin. with a market capitalization of more than $ 230 billion, according to Coindesk, and Ethereum is a popular platform for developing decentralized applications and smart contracts. William Hinman, former director of the SEC’s Division of Corporate Finance, said in a 2018 speech that “the current offers and sales of ether are not securities transactions,” but did not say whether past sales were. Meanwhile, Hinman no longer leads this division and the SEC has never issued any formal guidance on the matter. Federal courts use a set of rules called the Howey test to determine whether a marketable 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 expects to make a profit from the work of others in a “joint venture.” David Croft, who leads the blockchain and cryptocurrency practice at law firm Meyers Roman, told MarketWatch that LBRY is unlikely to convince the courts that LBC is not a security. “I think a lot of these offerings could be construed as securities and the courts probably will,” because LBC buyers had a reasonable expectation that the value of the digital token would increase as LBRY Inc. continued to improve the network and attract more users , He said. Kauffman, however, has engaged in a public relations campaign to rally supporters of blockchain technology and private cryptocurrencies, arguing that the SEC is misinterpreting the law by labeling LBC as a security. “If LBRY loses this case, it will cripple the cryptocurrency industry and create huge disincentives to build these businesses in the United States,” he said. “Any cryptocurrency that is actively developed is likely to require substantial, costly, and intrusive regulatory compliance every time it is traded.” See also: PayPal launches crypto payment feature in the US The Blockchain Association, an industry group that filed an amicus brief in a similar case the SEC filed against Kik Interactive, declined to comment for this story. The Coin Center, a think tank advocating for pro-blockchain regulation, refused to defend crypto firm Ripple when it was sued in December for selling unregistered securities and also declined to comment for this story. Adriaen Morse, a former SEC attorney and partner at Arnall Goldan and Gregory, told MarketWatch that it would be a mistake for the industry and cryptocurrency investors not to see the LBRY lawsuit as a threat, because under the logic of the case both bitcoin and ether could conceivably be considered securities. Along with his colleague and fellow SEC veteran Cory Kirchert, Morse is in the process of publishing a series of articles explaining why the crypto industry has been taking the wrong approach in their fights with the SEC, which they allege is participating in a “cryptocurrency suppression program”, which is actually motivated by the desire to protect the financial interests of established banks and other financial institutions from the threat that cryptocurrencies pose to their businesses. Cryptocurrencies “threaten banking products, such as checking and savings accounts, banks ‘loanable fund inventories, and consequently banks’ earnings, “they wrote, adding that financial regulators are also concerned with protecting the supremacy of the US dollar from the threat that posed by digital currencies. The SEC declined to comment for this article. The problem with the SEC’s analysis, according to Morse and Kirchert, it is that they are not using the correct definition of the term “joint venture” as defined in the Supreme Court case that generated the Howey test. “The term ‘common enterprise’ does not mean that people simply share the same goal and participate in the same effort,” Morse said. “The operative word is ‘company’.” Morse and Kirchert argued that, under the SEC’s definition of a joint venture in the LBRY case, a baseball card company that used the proceeds from the sale of its cards to organize displays of souvenirs across the country. country or to create a website that facilitates the sale of cards in the secondary market, you could be accused of selling unregistered securities. A reasonable person can expect that creating a strong secondary market infrastructure for baseball cards will increase the value of baseball cards overall, but the SEC would never label baseball cards as a security, they said. Kauffman said he is “eager for a judge to resolve our case and believes that our facts clearly demonstrate what is wrong with the SEC’s approach,” and that this would count as a victory for both his company and the industry as a whole . But it is also open to establishing itself. “Since our first discussions in 2018, this has been our constant position, he said. “We will be pragmatic in the terms of the agreement that allow us to leave the litigation behind if the SEC can provide us with practical guidance that allows us to stay in business and follow the law in the future.”