Regulators increase pressure on crypto companies
2023.01.15 09:17
Regulators increase pressure on crypto companies
By Tiffany Smith
Budriganenws.com – The LBRY case highlights a new wave of regulatory pressure that could have an impact on investors and blockchain token-issuing businesses.
In spite of the company’s claim that the LBRY Credits (LBC) token is used as a commodity within the platform, the United States Securities and Exchange Commission (SEC) declared the token to be an unregistered security in November after a court battle that lasted more than a year.
The court’s decision in this case sets a precedent that could affect how regulators view cryptocurrencies and blockchain-based platforms.
When it comes to the regulation of new technologies, old rules sometimes don’t apply.
The LBRY case was primarily based on the Howey Test, a 1946 U.S. Supreme Court case that established a framework for determining whether a transaction qualifies as a security. The ruling varies depending on the characteristics of a token, which are subject to change, even though assets like Bitcoin (BTC) and the majority of stablecoins aren’t considered securities under this test.
The court agreed wholeheartedly with the SEC’s assertion that LBRY was aware of the “possible use” of LBRY Credits as an investment.
Judge Paul Barbadoro of the New Hampshire District Court made the decision that LBRY openly assumed that the value of its tokens would rise, leading it to believe that the tokens would serve as a “possible investment.”
Barbadoro asserts that the intention of LBRY was to demonstrate to investors that the company intended to increase the value of their blockchain by keeping tokens for itself and giving them to employees as “compensation incentives.” To put it another way, the conclusion was that LBRY would rely on token holders to comprehend the company’s staking strategy as a means of increasing the value of the LBRY Credits.
According to remarks that Patrick Daugherty, head of digital assets at Foley & Lardner LLP, made to Bloomberg Law, the judge’s decision lands in uncharted legal territory because it was based on the assumption that stakeholders saw staking as a form of value increase — or promise of such an increase — with regard to the tokens issued by the company.
Daugherty stated, “The court did not cite any legal precedents for this opinion, possibly because there are none.”
James Gatto, who leads the blockchain and fintech team at Sheppard Mullin Richter & Hampton LLP, wrote in the same article that many of the legal issues found in the LBRY case could be replicated in other projects as well. He advised crypto companies to “adopt a different approach” so that they wouldn’t copy the general legal methods token projects use. He stated, “So many people don’t do it; they just do what everyone else has done.”
The ramifications of the court’s decision on the case were outlined by LBRY’s CEO and founder, Jeremy Kauffman.
The outcome of the trial had a significant financial impact on the company, whose CEO has already stated that it is “almost certainly dead.”
To begin, Kauffman emphasized the extremely high costs of the trial, noting that the business has had to pay millions of dollars in legal fees and “has lost tens of millions of dollars in investment money.”
According to Kauffman, the most significant effect of the ruling, in addition to the financial cost of the trial, is the slowed adoption of LBC tokens.
He stated, “Perhaps worse of all, we’ve faced considerable difficulty in adoption from third-party parties like exchanges that are terrified of the SEC.”
However, the platform’s blockchain protocol will survive this encounter with the SEC, despite the immediate impact on LBRY, Inc.
Kauffman stated, “Despite the legal challenges, LBRY is a decentralized protocol used by tens of millions of people to share content without any disruptions.” As a business, LBRY is almost certainly gone. However, the protocol itself and Odysee, the most common method of utilizing LBRY, have bright futures,” he added.
Kauffman didn’t hide his dissatisfaction with the outcome of the SEC complaint; he blamed the government’s lack of transparency for the company’s demise.
I have definitely learned not to trust the government and to be opaque. He stated, “If we had acted more secretly and less honestly, we would have been in much better shape.”
The objective of blockchain services right now is to anticipate any possible scenarios that could be seen as an illicit move, learn as they go, and deal with potential issues before they escalate due to the uneven and uncertain enforcement of digital assets.
The decision made by the court regarding LBRY may also have an impact on a pending case. The SEC’s two-year lawsuit against Ripple Labs has elements similar to those used by Kauffman’s team, such as the company’s claim that it was not given fair notice that their token was subject to securities laws.
Daugherty told Cointelegraph that because the LBRY case has been going on since 2016, it’s important to understand this argument.
“In the relevant time period, which was six years ago, very little was known about what was legal or not. He stated, “You would have to judge it based on what they knew at the time, rather than by the time the court ruled against them.”
By March 2023, Ripple’s case will most likely have been decided.
A U.S. Depository official who addressed Budrigannews on the state of namelessness said that controllers are at present in the beginning phases of grasping digital forms of money, with a significant spotlight on client security.
“The current focus is on reducing scams and protecting consumers. But other than that, I can say that we are only just beginning to comprehend and define the industry, “they stated.
Daugherty stated that LBRY should serve as an example for companies and blockchain projects regarding their legal strategy.
He stated, “The teams that are preparing protocols and tokens projects need to consider the LBRY ruling and work with lawyers who understand the ruling and what it did not rule.”
Additionally, Daugherty suggested that token-issuing projects take two primary preventative measures to avoid LBRY’s mistakes:
Before the token is sold in the United States, one approach is to decentralize it; another is to avoid promoting the token’s secondary market. That may not be sufficient on its own, but skilled attorneys can complete the picture.”
Kauffman responded, “Get out of the way,” when asked what regulators should concentrate on to comprehend blockchain and cryptocurrencies.
Regulators must concentrate solely on preventing fraud and criminal activity. He stated, “If they got out of the way and let the entrepreneurs build, blockchain could be a huge part of America’s future.”
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