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US Securities and Exchange Commission Issues Case Against LBRY

Summary

The US Securities and Exchange Commission has filed a case against LBRY Inc., who are the company behind the LBRY decentralized network protocol. 

The case states LBRY Inc.'s sales of LBRY Credits (LBC) to third parties should be considered a digital security, alleging that buyers did so with expectation of receiving a return on their investment.

This reasoning is based on the fact that LBRY owned the majority of LBC at the time of sale, and were expected to grow because they were a startup.

Since LBC was not registered as a digital security with the SEC at the time of this sale, they are pursuing legal action.

 

(In layman's terms, the US SEC believes that by issuing these tokens, they were actually issuing stock without proper registration)

To be clear, it is LBRY the company which is facing legal action, not the LBRY network.
 

Quotes

From the SEC Filing

Quote

he Securities and Exchange Commission today charged LBRY, a blockchain company, with conducting an unregistered offering of digital asset securities.

 

According to the SEC's complaint, from at least July 2016 to February 2021, LBRY, which offers a video sharing application, sold digital asset securities called "LBRY Credits" to numerous investors, including investors based in the US. The complaint alleges that LBRY did not file a registration statement for the offering, and that the offering failed to satisfy any exemption from registration. The complaint further alleges that by failing to file a registration statement, LBRY denied prospective investors the information required for such an offering to the public. As alleged, LBRY received more than $11 million in U.S. dollars, Bitcoin, and services from purchasers who participated in its offering.

The SEC's complaint, filed in the federal district court in New Hampshire, charges LBRY with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The SEC seeks permanent injunctive relief, disgorgement plus prejudgment interest, and civil penalties.

 

The SEC's case is being handled by Peter Bryan Moores, Sofia Hussain, Eric Forni, Marc Jones, and Amy Gwiazda of the Boston Regional Office.

Quote

image.png.eb1725036cca46249a32fb7e3017e98d.png
(pdf was copy protected, so screenshot it is!)

 

LBRY's Response

Quote

Today, the Securities and Exchange Commission filed a complaint against LBRY Inc alleging that all distributions of LBRY Credits by LBRY Inc are unregistered securities offerings. This claim is a tremendous threat to the entire cryptocurrency industry. The LBRY network is decentralized and not at risk. For users of the LBRY protocol and apps, your channels, content, and token holdings are not at risk. Even in an unlikely scenario in which LBRY Inc loses, the LBRY protocol will live on and work on it will continue. LBRY Inc has been preparing to fight this case for three full years, which is how long the SEC has been investigating this matter. We wanted to tell you sooner, but transparency in ongoing investigations is not welcomed by the SEC. There is a standalone website for this case at https://helplbrysavecrypto.com

Quote

We do not believe that the LBRY token is a security subject to SEC regulation. The LBRY Credit is a commodity that facilitates the LBRY protocol which thereby allows individuals to publish content, purchase content, tip creators, and boost content on the decentralized LBRY protocol. The SEC claims that the LBRY Credits lack sufficient utility and are not purchased for reasons of usage, which contradicts the facts and history of experience on the LBRY platform. The SEC’s position is that if something has value and someone buys it and the market sets the price, then it’s an investment contract and hence a security.

...

We repeatedly asked the SEC for guidance on how it would be possible to run the company legally. The SEC said that they could not tell us how to operate legally, but could only tell us that we were breaking the law.

 

My thoughts

 

Basically, it sounds like an attempt to crack down on cryptocurrencies and further regulate them. I only have cursory knowledge of how LBRY Credits are used, but I believe they are primarily a utility token. This, combined with the technological incompetence of most government agencies makes this case not make a lot of sense. It would have made much more sense if LBC was closer to a Bitcoin type of crypto, but it seems like the US SEC disagrees on that front.

 

It does, however, have major implications for the future of cryptocurrencies. If this is implemented, I imagine there will never be another US based cryptocurrency company. And those which are might face further regulations and fines regarding the issuing of their cryptocurrencies, NFTs, or anything else that may have any value.

 

 

Sources

https://odysee.com/@lbry:3f/helplbrysavecrypto:b

https://www.sec.gov/litigation/litreleases/2021/lr25060.htm

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It's infuriating that even as cryptocurrencies are somewhat getting accepted/adopted by governments and major financial institutions it's being done so out of necessity and they're still treating cryptocurrencies as investments rather than it's own unique thing that's a blend of currencies, data structures, distributed computing networks, and much more. Considering cryptocurrencies to be investments is like considering gold in a p2w mmo "investments". I guess it's technically not wrong but it's completely missing the point.

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2 hours ago, Artikfal said:

Basically, it sounds like an attempt to crack down on cryptocurrencies and further regulate them.

That's not what's happening; the SEC isn't cracking down on cryptos. The reason LBRY is in this situation is that they raised capital without conforming to US securities law which requires any company raising capital to disclose certain information to perspective investors, register with the SEC, and undergo audits. LBRY raised capital by selling cryptocurrency, that's essentially an IPO. It's not the same scenario as Bitcoin or Etherium.

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Dot your i's and cross your t's, and also have good security lawyers if you're in the space.

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3 hours ago, Beskamir said:

It's infuriating that even as cryptocurrencies are somewhat getting accepted/adopted by governments and major financial institutions it's being done so out of necessity and they're still treating cryptocurrencies as investments rather than it's own unique thing that's a blend of currencies, data structures, distributed computing networks, and much more. Considering cryptocurrencies to be investments is like considering gold in a p2w mmo "investments". I guess it's technically not wrong but it's completely missing the point.

Let's be honest they basically are just investments. They are about as volatile as stocks and for the most part you can't use it as an actual currency because of the volatility. So it ends up being something that is primarily used to exchange for actual currency so it ends up being the same as stocks in a practical sense. Does it do other stuff? Yeah but honestly none of it is really noteworthy to governments. All they care about is the fact that it is currently unregulated when it should be. I wish they would ban cryptocurrency personally but I guess that probably won't happen so regulating it a ton sounds good as well. Granted it really should be as there were a ton of stuff that would be considered fraud in stocks and securities being done in cryptocurrency but because it wasn't classified as anything it was technically legal. It was kinda ridiculous tbh. 

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43 minutes ago, Brooksie359 said:

Let's be honest they basically are just investments. They are about as volatile as stocks and for the most part you can't use it as an actual currency because of the volatility. So it ends up being something that is primarily used to exchange for actual currency so it ends up being the same as stocks in a practical sense. Does it do other stuff? Yeah but honestly none of it is really noteworthy to governments. All they care about is the fact that it is currently unregulated when it should be. I wish they would ban cryptocurrency personally but I guess that probably won't happen so regulating it a ton sounds good as well. Granted it really should be as there were a ton of stuff that would be considered fraud in stocks and securities being done in cryptocurrency but because it wasn't classified as anything it was technically legal. It was kinda ridiculous tbh. 

LBRY, Arweave, functional NFTs, Golem, and many other really cool applications of decentralized computing would disagree on it being an investment. As for it being regulated by governments, I don't agree with that. A lot of what cryptocurrencies stand for is essentially abolishing centralized oversight.

 

Arweave is a decent example of that, where their goal is creating a decentralized permanent storage network that where removing stuff from the network is essentially impossible. Obviously this will be misused for horribly unethical purposes, but then that's true of every technology including technologies that literally save lives (for instance the haber process has made warfare far deadlier cause easy to make explosives but it's also drastically increased food production due to fertilizers thereby saving billions from starvation despite contributing to the deaths of millions). So while yes, cryptocurrencies definitely can and constantly are being used for evil I don't think that's a valid reason to desire centralized regulation of them as I think that's an even worse outcome. Refer to the fantastic novel 1984 for examples of where that kind of centralized regulation goes really terribly badly. Alternatively just look at China, their social credit score, the great firewall, censorship in general, etc. and if you're think "oh but that'll never happen in the west" then refer to section 127 of the 2003 communications act in England where literally anything someone posts online can be made illegal under the vague label of "gross offense".

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6 hours ago, Beskamir said:

 Considering cryptocurrencies to be investments is like considering gold in a p2w mmo "investments". I guess it's technically not wrong but it's completely missing the point.

 

No, "mmo gold" is used as a way to launder money in a very crude way. Pretty much, it seems like the only purpose gacha/loot-box mechanics are still tolerated. 

 

Step 1, buy gacha/loot boxes with stolen cards/accounts

Step 2. transfer items to a second throw away account

Step 3. sell items rewarded from said gacha/loot boxes for real money/gift cards

Step 4. disappear.

 

All bitcoin and similar does is solve the chain-of-custody part. That still requires someone to actually look at it.

 

If you break up a large transaction into hundreds of small ones and send them through multiple accounts, that makes things incredibly hard to trace, even with regular banking.

 

The best thing that could happen is cryptocurrencies being regulated to death, and only ever being used as a form of world-wide ACH network between banks to see the entire transfer ledger rather than the existing "disappears into a rogue bank in a hostile/non-cooperative country" problem.

 

But even that, is unlikely to be any existing crypto currency. Something new would be made that only banks are permitted to deal in.

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1 hour ago, Kisai said:

 

No, "mmo gold" is used as a way to launder money in a very crude way. Pretty much, it seems like the only purpose gacha/loot-box mechanics are still tolerated. 

 

Step 1, buy gacha/loot boxes with stolen cards/accounts

Step 2. transfer items to a second throw away account

Step 3. sell items rewarded from said gacha/loot boxes for real money/gift cards

Step 4. disappear.

 

All bitcoin and similar does is solve the chain-of-custody part. That still requires someone to actually look at it.

 

If you break up a large transaction into hundreds of small ones and send them through multiple accounts, that makes things incredibly hard to trace, even with regular banking.

 

The best thing that could happen is cryptocurrencies being regulated to death, and only ever being used as a form of world-wide ACH network between banks to see the entire transfer ledger rather than the existing "disappears into a rogue bank in a hostile/non-cooperative country" problem.

 

But even that, is unlikely to be any existing crypto currency. Something new would be made that only banks are permitted to deal in.

I don't see the potential for money laundering as a valid reason to regulate cryptocurrencies any more than i see it as a reason to regulate in game currencies that can be converted to real life currencies. Yes it's illegal but I'm okay with some criminals being able to do that if it means we have a future where decentralized finance, hosting, computing, etc exist as I believe the good/ethical applications of dapps far outweight the bad/unethical applications.

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7 hours ago, Beskamir said:

LBRY, Arweave, functional NFTs, Golem, and many other really cool applications of decentralized computing would disagree on it being an investment. As for it being regulated by governments, I don't agree with that. A lot of what cryptocurrencies stand for is essentially abolishing centralized oversight.

 

Arweave is a decent example of that, where their goal is creating a decentralized permanent storage network that where removing stuff from the network is essentially impossible. Obviously this will be misused for horribly unethical purposes, but then that's true of every technology including technologies that literally save lives (for instance the haber process has made warfare far deadlier cause easy to make explosives but it's also drastically increased food production due to fertilizers thereby saving billions from starvation despite contributing to the deaths of millions). So while yes, cryptocurrencies definitely can and constantly are being used for evil I don't think that's a valid reason to desire centralized regulation of them as I think that's an even worse outcome. Refer to the fantastic novel 1984 for examples of where that kind of centralized regulation goes really terribly badly. Alternatively just look at China, their social credit score, the great firewall, censorship in general, etc. and if you're think "oh but that'll never happen in the west" then refer to section 127 of the 2003 communications act in England where literally anything someone posts online can be made illegal under the vague label of "gross offense".

Them wanting to not be regulated doesn't make them immune to regulation. Also pointing out that regulation can be bad when taken to the extreme doesn't warrant the need for things to have no regulation. There are so many wonderful things that have come out of regulations alot of which is preventing companies and people screwing you over. Things like the FDA which makes it so that the food and drugs we take are actually safe rather than anyone being able to sell tainted meat or drugs with lethal side effects. Then there is the EPA which prevents companies from just screwing up the environment however they like. I could list alot of regulations that are not only not bad but also really good things to have. The fact that cryptocurrency believes they can escape regulation is actually laughable.

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12 hours ago, Beskamir said:

LBRY, Arweave, functional NFTs, Golem, and many other really cool applications of decentralized computing would disagree on it being an investment. As for it being regulated by governments, I don't agree with that. A lot of what cryptocurrencies stand for is essentially abolishing centralized oversight.

Being regulated doesn't stop them from being decentralised. 

 

You may have misinterpreted what being decentralised actually means. 

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Judge the product by its own merits, not by the Company that created it.

 

Don't dilute <good thing> by always trying to focus on, and drag conversation back to, <bad thing>.

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13 hours ago, Brooksie359 said:

Them wanting to not be regulated doesn't make them immune to regulation. Also pointing out that regulation can be bad when taken to the extreme doesn't warrant the need for things to have no regulation. There are so many wonderful things that have come out of regulations alot of which is preventing companies and people screwing you over. Things like the FDA which makes it so that the food and drugs we take are actually safe rather than anyone being able to sell tainted meat or drugs with lethal side effects. Then there is the EPA which prevents companies from just screwing up the environment however they like. I could list alot of regulations that are not only not bad but also really good things to have. The fact that cryptocurrency believes they can escape regulation is actually laughable.

True, regulation can be good but it's worth noting that cryptocurrencies actually have their own approach to community oversight which I think kind of negates the necessity for regulation by a centralized authority https://en.wikipedia.org/wiki/Decentralized_autonomous_organization

8 hours ago, Arika S said:

Being regulated doesn't stop them from being decentralised. 

 

You may have misinterpreted what being decentralised actually means. 

Well yea, obviously no amount of regulation will be able to stop a decentralized network although I think it still interferes with it. Kind of like how no amount of regulation/laws can fully stop piracy, drugs, illegal immigration, etc but it still tends to get in the way. That said, even when regulation get in the way of illegal acts, I'm not sure if they're actually worth the effort.

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13 minutes ago, Beskamir said:

True, regulation can be good but it's worth noting that cryptocurrencies actually have their own approach to community oversight which I think kind of negates the necessity for regulation by a centralized authority https://en.wikipedia.org/wiki/Decentralized_autonomous_organization

Well yea, obviously no amount of regulation will be able to stop a decentralized network although I think it still interferes with it. Kind of like how no amount of regulation/laws can fully stop piracy, drugs, illegal immigration, etc but it still tends to get in the way. That said, even when regulation get in the way of illegal acts, I'm not sure if they're actually worth the effort.

Having community oversight doesn't mean much to governments as its not like they are asking. Its like saying a company has its own internal environmental board so they don't need to be regulated by the EPA or that a food processing company has its own QA so they don't need to be regulated by the FDA. Thats not how that works. You can't just say you want to regulate yourself. 

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9 hours ago, Beskamir said:

but it's worth noting that cryptocurrencies actually have their own approach to community oversight which I think kind of negates the necessity for regulation by a centralized authority

LOL, what?  Are you talking about the exchanges?  Where coins just vanish because "hackers"?

 

I think it's lack of oversight is what people like about it.  

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On 4/4/2021 at 1:19 AM, Brooksie359 said:

Having community oversight doesn't mean much to governments as its not like they are asking. Its like saying a company has its own internal environmental board so they don't need to be regulated by the EPA or that a food processing company has its own QA so they don't need to be regulated by the FDA. Thats not how that works. You can't just say you want to regulate yourself. 

Considering basically anyone can get a say in a DAO and nobody can just get ride of voters they disagree with it'd be more akin to telling a fully democratic country that they cannot govern themselves. Which is definitely still valid since that is the entire premise of international treaties, agreements, organizations, etc but there are limits to the level of oversight those organizations can do.

On 4/4/2021 at 10:31 AM, Heliian said:

LOL, what?  Are you talking about the exchanges?  Where coins just vanish because "hackers"?

 

I think it's lack of oversight is what people like about it.  

Usually exchanges are not cryptocurrencies or even decentralized apps so I'm not sure why you're bringing them up? Besides, I'm pretty sure there are dozens of ways to verify an exchange isn't scummy/bad without the need for government oversight.

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