Crypto startup LBRY violated securities laws by selling its native LBC tokens without registering with the U.S. Securities and Exchange Commission (SEC), a New Hampshire judge ruled on Monday.
The SEC sued LBRY in March 2021, alleging that LBC tokens were securities and that the startup had violated securities laws by selling them without registering with the agency. LBRY pushed back, claiming that LBC tokens were not securities, and that the SEC did not give it fair notice that its sale of LBC was subject to securities laws, thus violating the company’s right to due process. The LBRY protocol is a blockchain-based file-sharing network.
Federal Judge Paul Barbadoro, of the District Court for the District of New Hampshire, ruled Monday that “no reasonable trier of fact could reject the SEC’s contention that LBRY offered LBC as a security, and LBRY does not have a triable defense that it lacked fair notice.”
LBRY founder Jeremy Kauffman has long maintained that the outcome of the case could have sweeping implications for the wider crypto industry. Speaking at Messari’s Mainnet conference in September, Kauffman the facts in LBRY’s case would “basically apply to every company” in the crypto industry.
In an emailed statement, Kauffman reiterated his claim that the case can have a broader impact on the industry.
"The SEC vs LBRY case establishes a precedent that threatens the entire US cryptocurrency industry. Under the SEC vs LBRY standard, almost every cryptocurrency, including Ethereum and Doge, are securities. The future of cryptocurrency in the US now rests in with an organization even worse than the SEC: the United States Congress," he said.
One significant case the LBRY ruling could impact is the SEC’s suit against Ripple Labs and two of its executives, who have been charged with selling $1.3 billion in unregistered securities. Much like LBRY, Ripple Labs’ defense has hinged on its claim that its native token XRP is not a security, and that, by failing to provide clarity on whether XRP was a security, the SEC did not provide fair notice that Ripple Labs’ conduct was unlawful.
Several major players in the crypto industry including Coinbase and the Blockchain Association have filed amicus briefs in support of Ripple Labs, arguing that the securities laws have been inconsistently applied by the regulator, creating “uncertainty” for the entire industry.
In its initial complaint against LBRY, the SEC asked the court for a permanent injunction to prevent LBRY from selling more LBC tokens, disgorgement of its “ill-gotten gains, plus prejudgement interest,” and other civil monetary penalties.
The judge’s ruling on Monday means that LBRY’s case will not go to trial. A status hearing to determine next steps is slated for Nov. 21.
UPDATE (Nov. 7, 2022, 17:08 UTC): Adds additional context, adds statement from Kauffman.
