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SEC sues decentralized content platform LBRY over sales of its cryptocurrency, puts the entire industry at risk

LBRY has warned that the SEC's claims could "destroy the United States cryptocurrency industry."
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The US Securities and Exchange Commission (SEC) has filed a complaint against LBRY Inc, the company behind the open-source, decentralized, blockchain-based LBRY network and the growing video-sharing platform Odysee, which alleges that LBRY’s sale of the LBRY Credits (LBC) cryptocurrency constitutes an unregistered security offering under the Securities Act of 1933.

LBC is used to perform various functions on the LBRY network such as sending tips, publishing and boosting posts, and buying and selling digital content. It can also be bought and sold on several cryptocurrency exchanges.

The complaint won’t impact LBRY channels, LBRY content, or LBC token holdings, according to LBRY. LBRY adds that LBC will remain usable, regardless of the outcome of this complaint.

However, LBRY warned that if the complaint is successful, it would advance an “aggressive and disastrous new standard that would make almost all blockchain tokens securities.”

The complaint invokes the Howey Test (four criteria that were established by the Supreme Court in 1946 in SEC v. W.J. Howey to determine whether a transaction qualifies as an “investment contract” and is considered a security under US securities law) to allege that LBRY offered and sold investment contracts when it offered and sold LBC.

Under the Howey Test, transactions are deemed to be an investment contract when there’s an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

The SEC claims that the individuals and entities that purchased LBC from LBRY “invested in a common enterprise” because “the fortunes of LBC holders’ investments were also aligned with LBRY’s success or failure” and that “LBC holders reasonably expected a profit from LBRY’s efforts” because “LBRY led LBC holders to believe that the value of LBC would appreciate based on LBRY’s efforts.”

Based on these allegations, the SEC is seeking a permanent injunction that would restrain LBRY from selling LBC and any other “unregistered digital asset securities offering,” a “disgorgement of all ill-gotten gains,” and “appropriate civil monetary penalties.”

We obtained a copy of the complaint for you here.

“The implications of this case are extremely dire for the blockchain and technology industry in the United States,” LBRY wrote in response to the SEC’s complaint. “The SEC is alleging that any entity that transfers a blockchain token while simultaneously working or funding work on it is performing a security offering. Under that standard, every blockchain technology that is actively developed faces existential threat, so long as that development is either funded by a token holder, even if indirectly, or if the developers themselves hold the token.”

LBRY added that this standard would be a “bureaucratic nightmare for United States residents and businesses operating in the US” and “make it much harder for startups to form new blockchain companies, cause massive job loss, and stunt the development of a critical new technology.”

LBRY also argued that LBC shouldn’t be treated as a security that’s subject to SEC regulations:

“The LBRY Credit serves an integral function in our network. It allows individuals to create an identity, tip creators, and publish, purchase, and boost content in a decentralized way. Millions of people have used it this way, and many were using it well before we sold any tokens to anyone. The SEC is completely ignoring this.”

According to LBRY, the SEC has been investigating LBRY since May 2018 and it doesn’t expect the trial to be resolved this year. LBRY added that the SEC’s repeated document requests during its investigation were done in “overbearing and costly ways that seemed punitive” and that it has already “spent more than $1,000,000 on legal fees and several thousand hours of team member time (a similar or greater value) on this case.”

“This has been a substantial burden to bear as a small start-up and is extremely chilling to an innovative industry,” LBRY said. “If it takes several million dollars in legal fees just to begin, blockchain becomes much less accessible.”

Additionally, LBRY noted that its attempt to settle with the SEC was declined and that the SEC refused to provide guidance on how LBRY could comply with its regulations.

Attorney Gabriel J. Shapiro responded to the SEC complaint against LBRY by blasting the SEC’s failure to help cryptocurrency companies comply with US securities laws. “There is still no viable compliance path for launching a cryptonative token–truly unjust and unfair,” Shapiro tweeted. “Offering no viable path, and continuing to sue creators, was understandable at first while the SEC worked to figure out the space, but it is now inexcusable, unethical and violates core American jurisprudential principles of predictability and economic freedom.”

Users can sign this new petition to let the SEC know cryptocurrency is not a crime.

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