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LBRY Loses SEC Case, Calls Ruling 'Dangerous Precedent'

The Securities and Exchange Commission has won its case against LBRY Inc.’s cryptocurrency, LBC, with the ruling reflecting that the coin is a security under federal law. The SEC’s filings show that LBRY accumulated $12.2 million from the sale of its LBRY Credits token. LBRY argued that its Credits are utility tokens inherent to its blockchain, not separate assets.

What is LBRY?

Library Credit (LBRY) is a platform that streamlines the dissemination of digital content in a decentralized model. Content publishers use the platform to easily distribute their content and charge fees. 

The decentralized LBRY platform is free from the expenses and censorship that middlemen could impose, making it an ideal community for creators and consumers.

LBRY has a small market cap of $7.5 million with a fully diluted market cap of $12 million. The platform was launched in late 2018 and still has an active community.

SEC lawsuit

The SEC claimed that the LBC token was security being sold in violation of the Securities Act of 1933. The SEC referenced the so-called Howey Test, to ascertain whether a transaction is an “investment contract” or not. If there is an investment contract then the enterprise is subject to securities laws. 

However, LBRY countered that its utility token was sold to access its blockchain services – it was not sold as a separate asset. LBRY argued that the LBC utility token “functions as a digital currency that is an essential component of the LBRY blockchain.”

The ruling

The judge ruled that the LBRY token was sold as a security, per the Howey Test definition, to investors. Since LBRY did not declare its utility token as a security it is now in violation of the Securities Act of 1933. 

This could have a major impact on the company’s business model with and the way it sells and trades LBC. LBRY must now register with the SEC and comply with all applicable securities laws. LBRY addressed the ruling on Twitter saying, “We lost. Sorry everyone.”

<embed> https://twitter.com/LBRYcom/status/1589646012225757185 

This could easily impact the outcome of the ongoing lawsuit between the SEC and Ripple XRP. 

Extraordinarily dangerous precedent

LBRY responded to the court’s decision on Twitter saying, “the language used here sets an extraordinarily dangerous precedent that makes every cryptocurrency in the US a security, including Ethereum.”

The ruling has indeed set a precedent for the ongoing lawsuit between the SEC and Ripple XRP. The founder of Crypto-Law.us, John Deaton, said on Twitter that the ruling “read as if the SEC wrote it and the SEC will quote it … in the [Ripple] case.” 

Ironically, in a year of crypto market turbulence, the SEC did not actively sue grossly negligent crypto entities such as TerraLUNA and FTX. Instead, 2022 has seen the SEC sue smaller cap cryptos like LBRY and Ripple, the crypto research firm Tokenmetrics and even celebrities such as Kim Kardashian and Floyd Mayweather Jr