all about cryptop referances
(Reuters) – Digital media company LBRY Inc claimed in a series of tweets on Monday that the entire cryptocurrency industry is now under threat, after a federal judge in New Hampshire ruled that its digital tokens are securities that must be registered with the US Securities and Exchange. Commission.
“The language used here sets an extraordinarily dangerous precedent that makes every cryptocurrency in the United States a security,” LBRY tweeted. “Even after five years of fighting and a court decision, we still honestly don’t know how to legally launch a public blockchain in the United States.”
Should the cryptocurrency industry panic?
There is no doubt that the ruling by U.S. District Judge Paul Barbadoro of Concord, granting summary judgment to the SEC, bodes ill for crypto token creators concerned about SEC regulation. The judge, as my colleague Jody Godoy reported on Monday, rejected LBRY’s arguments that its tokens are a true cryptocurrency used primarily to pay for services on the blockchain-backed computer network and that the SEC failed to provide fair warning that it would sue unregistered tokens that did not enter the market in an initial coin offering.
Barbadoro unequivocally held that LBRY’s tokens were investment contracts under the US Supreme Court’s 1946 test in SEC v. Howey. In the LBRY case, the judge said, the only disputed element of the three-part Howey test was whether token buyers were led to expect profits based on LBRY’s efforts. Barbadoro said that early investors and blockchain miners who received tokens had such an expectation because they knew that LBRY’s business depended on the token’s increased value.
In perhaps the most consistent language in the ruling, Barbadoro said that any reasonable buyer of tokens would expect LBRY to use its own stake — hundreds of millions of tokens — to increase the value of the cryptocurrency. That structure alone, the judge said, “would lead buyers off [LBRY tokens] to expect that they would also profit from their holdings of [the tokens] as a result of LBRY’s persistent efforts.”
It’s ominous language, considering that the LBRY model, where blockchain developers keep a large stash of tokens that act as currency on their platforms, is not at all uncommon.
But I would suggest that the industry wait for a decision in the SEC’s closely watched case against Ripple Labs Inc, before deciding that the sky is falling.
In a brief sentencing brief pending before U.S. District Judge Analisa Torres in Manhattan, Ripple has advanced arguments that LBRY’s lawyers at Perkins Coie did not make — including a position that ultimately appears to appeal to the current Supreme Court’s preoccupation with historical practice.
Ripple, whose lawyers declined to provide me with a statement on the LBRY decision, has also developed a much more robust track record than LBRY to support its claim that the SEC failed to provide fair notice of which crypto tokens it would consider to be securities.
The SEC, which declined to comment specifically on the LBRY or Ripple cases, said in an email that “digital assets that qualify as securities under the criteria long ago established by the Supreme Court cannot be preempted by the securities laws.”
The commission’s summary judgment in the Ripple case is obviously filled with background facts about what the SEC claims is a year-long $2 billion offering of unregistered securities by a company that had plenty of warning that it was breaking the law. Still, its legal arguments for why Ripple’s tokens qualify as securities under the Howey test are quite similar to those the SEC argued in the LBRY case.
But Ripple (and its chairman and CEO, who are also defendants in the SEC proceeding) offered different defenses than LBRY. Ripple returned to state law cases underlying the Supreme Court’s Howey decision to argue that an investment contract can only be considered a security if the promoter and investor entered into a contract that required the promoter to take certain actions to benefit the investor and given the investor a specific right to share in profits generated by the promoter’s efforts. Defense counsel from Debevoise & Plimpton; Kellogg, Hansen, Todd, Figel & Frederick; Paul, Weiss, Rifkind, Wharton & Garrison; and Cleary Gottlieb Steen & Hamilton said there was no such contract between the Ripple defendants and alleged investors who received tokens through donations, giveaways and even sales.
Ripple’s brief argued that even after Howey, neither the 2nd US Circuit Court of Appeals nor the Supreme Court has held the sale of an asset to be an investment contract unless the promoter and buyer had specific rights and obligations. Ripple drew an analogy between its symbols and diamonds, arguing that when DeBeers sells rough diamonds, it does not enter into investment contracts with buyers, even though those buyers expect to profit from the diamonds they have purchased.
In the LBRY case, remember, Barbadoro said that LBRY’s control of hundreds of millions of tokens was a signal to investors that the company would act to increase its value. Ripple again pointed to the diamond market to argue otherwise: The SEC does not regulate diamond purchases as securities deals, Ripple said, despite DeBeers’ marketing efforts.
Ripple also asserts a much more comprehensive fair notice defense than LBRY, which simply argued that the SEC previously only acted when token issuers conducted public offerings. The New Hampshire judge said LBRY failed to show that the SEC promised to enforce the Howey test only for tokens sold in ICOs, and that the Howey test itself contained no such limitation. (LBRY counsel from Perkins Coie declined to comment on the differences between their arguments and Ripple’s.)
Ripple argued in its response to the SEC’s summary judgment motion that the commission’s own files reflect years of confusion and uncertainty within the agency about how or whether to regulate cryptocurrencies. “No wonder market participants were unsure what to think,” Ripple said. At the very least, it argued, the notice issue must hash out at trial.
There are almost 700 document entries to date in the Ripple case, compared to only 86 in LBRY. If the SEC wins summary judgment against Ripple, the industry will have real cause for concern.
Read more:
US securities regulators win case against crypto company LBRY
Coinbase joins crypto supporters supporting Ripple in SEC case
Ripple’s top lawyer criticizes SEC for “offensive” use of unsealed legal memos
Our standards: Thomson Reuters Trust Principles.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed under its fiduciary principles to integrity, independence and freedom from bias.
