LBRY vs. SEC: Is victory a game changer?

LBRY scored a win for cryptocurrencies. The Web3 platform managed to get a US judge and the Securities and Exchange Commission (SEC) to admit that the sale of its native LBC token on exchanges does not constitute the sale of an unregistered security. In other words, the sale of cryptocurrencies on the secondary market does not violate securities law in the United States, and the SEC therefore has no jurisdiction over such sales.

This is a
big win not only for LBRY, but for the cryptocurrency industry in general and for Ripple, which in turn is notoriously locked in a lengthy legal battle with the SEC. And while LBRY lost its case against the securities regulator in November, its latest appeal against this decision forced the presiding judge to provide a clarification that could end up helping. Ripple to emerge victorious in its own case.

Of course, the judge’s ruling in LBRY’s appeal is not as clear as some observers are making it seem. Because while it protects the secondary cryptocurrency market from the SEC, it does nothing to overturn the November ruling against LBRY for violating securities law by directly offering LBC tokens to investors.

LBRY Appeal scores one for Crypto

In November, LBRY – a blockchain-based file and payment sharing network – famously lost its lawsuit against the SEC, with potentially serious consequences for the cryptocurrency market and Ripple. Notably, U.S. District Judge Paul Barbadoro sided with the securities regulator, ruling that LBRY offered its LBC token as securities. This essentially means that LBRY sold LBC as if it were a speculative investment that would increase in value as LBRY’s business grew.

In conclusion, Barbadoro stated: “no reasonable factual judge could reject the SEC’s argument that LBRY offered LBC as collateral, and LBRY has no demonstrable defense that lacked equitable notice.” As a result, it upheld the SEC’s motion for summary judgment.

Speaking at the time, LBRY CEO Jeremy Kauffman said the ruling “threatens the entire U.S. cryptocurrency industry,” insofar as it sets a precedent that would classify “almost every cryptocurrency” as security. And right after the decision, the XRP price dropped from around $0.49 to $0.33, in a matter of days.

However, some of the negative implications were potentially dispelled by LBRY’s appeals hearing in New Hampshire. Speaking on Monday, January 30, the judge clarified that the summary judgment issued in November does not apply to secondary sales of LBC, as was done on crypto-exchanges and other trading platforms.

Not only that, but the SEC was eventually forced to agree with the judge’s ruling here, with its lawyers acknowledging in the filings that LBC’s secondary sales do not count as sales of unregistered securities.

Again, this is great news for LBRY, for Ripple, and for cryptocurrencies, as it sets a legal precedent that trading cryptocurrencies on exchanges does not violate securities laws. This also applies to cryptocurrencies that were initially offered by their creators as securities, meaning that exchanges will not be liable for violations by token issuers.

This is important because, as observers will recall, many exchanges responded to the SEC by opening a case against Ripple by removing XRP. However, the judge effectively ruled that exchanges cannot be held responsible for the listing of any cryptocurrency that may have been offered as an unregistered security by its issuer.

Good and bad for Ripple Case with SEC

Of course, it’s important to note at this point that this new ruling may have no direct impact on Ripple’s long-standing case with the SEC. Yes, many within the community have now concluded that LBRY’s appeal means Ripple will win, but it probably doesn’t change anything in terms of what the SEC is actually arguing in its case against Ripple.

In particular, the appeal does not annul the November decision that LBRY itself offered LBC tokens as unregistered securities. And by extension, Judge Analisa Torres – who will decide the Ripple-SEC case – could still rule that Ripple itself sold XRP as an investment (i.e. as a security), while agreeing that the sale of XRP on the secondary market is not in violation of securities laws.

As such, Ripple could still easily lose the case. That said, this week’s development raises the possibility that Ripple could lose its battle and receive a slap on the wrist (e.g. a fine), but that XRP could still be legally sold via exchanges to US residents. This would allow Ripple to continue its business and potentially encourage major exchanges – for example Coinbase – to resell XRP.

So we could even see XRP continue to rise in price even in a scenario where Judge Torres grants the SEC’s motion for summary judgment.

Closure of the case

That said, many recent developments suggest that Ripple has a good chance of winning the case.

For example, Ripple CEO Brad Garlinghouse told CNBC a couple of weeks ago that he expects the case to be concluded by the end of the first half of 2023, or by the end of the year at the latest.

“I feel very good about where we are with respect to the law and the facts,” he said, emphasizing Ripple’s trust. Such trust is not even undeserved, with many in the cryptocurrency community believing that Ripple has presented a strong case. On the contrary, many argue that the SEC has mounted a weak one, with the regulator supposedly unable to establish how Ripple developed a “joint venture” – as described in Howey’s test – that would increase the value of XRP.

In addition, Ripple managed to get 14 amicus briefs filed in court, including one from Coinbase. In contrast, the SEC managed to file only one, reinforcing the suspicion that his case is not so strong.

Not only that, but Ripple has also secured a string of small victories en route to the imminent conclusion of the case. This includes the court upholding his right to file a defense with fair notice, as well as having access to important documents and emails related to Hinman’s 2018 speech, in which the then-SEC chairman stated that neither bitcoin nor Ethereum were securities.

While none of these rulings can guarantee a favorable outcome, they at least suggest that Ripple has a better chance than LBRY and the litigation precedents. And if it succeeds, there’s no doubt that XRP will do very well as a result, with the coin potentially on track to surpass its 2018 record high of $3.40.

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