The Most Important Case In Crypto
The SEC vs LBRY
Contributed by Joël Valenzuela, Digital Cash Network
Thursday July 21st was a big day for the LBRY platform. LBRY is essentially a decentralized alternative to YouTube. It uses blockchain technology on the backend, and its most famous app for the front end is Odysee — a video platform with 2 million daily users.
The US Securities and Exchange Commission (SEC), is suing LBRY Inc. for illegally selling securities. They argue that LBRY credits, or LBC (the token that makes the entire decentralized LBRY ecosystem run) is a security. This week’s hearing was at the US District Court in New Hampshire to determine whether there would be a summary judgment for case, or whether it would move to trial.
LBRY argued that the LBC token is critical to the operation of the protocol, and that its users have a practical, or “consumptive”, reason to buy the token — for purposes such as uploading content, buying access to content, tipping users, etc. They also argued that marketing from LBRY Inc. overwhelmingly presented the token in this consumptive light, rather than advertising it as a speculative investment instrument.
The SEC, on the other hand made some bombshell statements that should shock the entire crypto industry:
They said “utility doesn’t matter”, and that even if almost everyone is using a token as a utility, if that token has a fluctuating value on the open market, then it’s a security.
CEO of LBRY, Jeremy Kaufman, spoke outside the courthouse, speculating that the SEC’s aggression in this case is because they want to set legal precedents for the future.
“The SEC themselves acknowledged that there was substantial use of the LBRY protocol for a consumptive purpose, for a non-investment purpose. They're still alleging that this is a security. … They're being way more aggressive here than they've been in other cases, and that's part of why this is such a big deal; because if we go down, there are a lot of other companies that would go down.”
Kauffman continued in an interview after the hearing, with John Deaton:
“Every official, every person in the cryptocurrency industry should be terrified by what the SEC said in court today because they threw down, and they said, ‘if you are in the United States and you are selling cryptocurrency and you are running a cryptocurrency company, you are breaking the law. If you are a cryptocurrency developer who has sold a token, you are breaking the law.’”
The judge appeared skeptical of the SEC’s extremely broad definition of what constitutes a security. If he rules in LBRY’s favor, this is a big win because it would give blockchain companies in the US legal certainty on how they’re allowed to operate, and give the American crypto industry a chance to remain competitive globally.
If the SEC wins, however, this would be a huge blow to the crypto industry, rendering almost every crypto project a security.
A summary judgment ruling is expected to take place within the next 4-8 weeks.
Watch our video explaining the case here.
SEC vs. Ripple
In the latest news in the case of SEC vs Ripple Labs, the US judge on the case called out the hypocrisy of the SEC. The defendants have been trying to get their hands on internal documents relating to the now infamous “Hinman Speech” in which the former Director of Corporation Finance William Hinman stated:
“…based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”
The SEC, whose lawsuit against Ripple Labs for selling their XRP tokens as unregistered securities is still ongoing, claims that the statements made by Mr. Hinman should not be considered admissible evidence evidence as they were protected by attorney-client privilege. U.S. Magistrate Judge Sarah Netburn disagreed:
“The hypocrisy in arguing to the Court, on the one hand, that the Speech is not relevant to the market’s understanding of how or whether the SEC will regulate cryptocurrency, and on the other hand, that Hinman sought and obtained legal advice from SEC counsel in drafting his Speech, suggests that the SEC is adopting its litigation positions to further its desired goal, and not out of a faithful allegiance to the law.”
The official ruling ordered that the documents must be turned over.
Crypto Hedge Fund Managers Resurface
The founders of crypto hedge fund Three Arrows Capital (3AC) have finally resurfaced, after having gone missing amidst liquidation proceedings.
3AC was founded in 2012 and focused on digital asset investments. Last month they defaulted on a $675 million loan from Voyager Digital, and Sky News reported that on June 27th 3AC was issued a court order to liquidate their assets in order to pay off their debts. 3AC’s offices were reportedly vacant with mail piled up and pushed under the door when fund liquidators visited the firm to discuss the process.
3AC filed for chapter 15 bankruptcy on July 1 in order to protect their assets (which are based in Singapore) from US creditors, and Voyager Digital filed for chapter 11 bankruptcy shortly thereafter.
3AC Co-founders Zhu Su and Kyle Davies were reported missing ahead of a meeting on July 12th about the liquidation process, and have now resurfaced after 5 weeks of whereabouts unknown. They attribute their disappearance to threats of physical violence that the pair allegedly received. According to their lawyers:
“Our clients and their families have received threats of physical violence and have had to field queries from the Money Authority of Singapore in the last week or so, which has meant they have been working under a lot of time pressure.”
In an interview with Bloomberg, the pair explained that their financial pitfalls were due heavily to their close relationship with Do Kwan, co-founder of Terra (which infamously crashed in May). They say it blinded them to many red flags to do with the project, and filled them with overconfidence. They lost a $500 million investment as a result.
“If we could have seen that, you know, that this was now like, potentially like attackable in some ways, and that it had grown too, you know, too big, too fast.”
That, paired with Bitcoin’s fall below $20,000, was the perfect storm to pull the rug out from under 3AC:
“Throughout that period, we continued to do business as usual. But then yeah, after that day, when, you know, Bitcoin went from $30,000 to $20,000, you know, that, that was extremely painful for us. And that was in, that ended up being kind of the nail in the coffin.”
Celsius Files for Bankruptcy
Crypto Lending Firm Celsius officially filed for Chapter 11 bankruptcy last week. The firm paused all customers activities including swaps, transfers and withdrawals on June 12th.
In their official blog, they explain that accounts will continue to be paused until further notice:
“Most account activity will be paused until further notice. Withdrawals, Swap, and transfers between accounts will remain paused, and rewards will stop accruing as of the date of the filing. Celsius is not requesting authority to allow customer withdrawals at this time.”
The action has also affected their multi-million dollar investment partners. One such company, Canadian based Caisse, invested $150 million with Celsius and is now doing damage control. Maxime Chagnon, a pension manager for Caisse said in an email statement:
“We understand that our investment in Celsius raises a number of questions. This is something that we take very seriously and we will provide further comment at the appropriate moment. Celsius is currently engaged in a complex process that will take time to resolve.”
For more information about Celsius see our previous reporting back in June.
Inflation UP-date
New CPI numbers for the month of June show inflation continuing to trend upwards, with prices across the economy rising 9.1% since June of last year. This is an inflation rate not seen since 1981. The price of gasoline had a huge impact on the report.
Federal Reserve Chair Jerome Powell spoke on a panel alongside heads of the European Central Bank and Bank of England last week, about his predictions for the future of the US economy:
“What we don’t know is whether we will be going back to something that looks more like, or a little bit like, what we had before. We suspect that it will be kind of a blend.”
The Fed raised rates by half a point in May and then again in June by another three-quarters of a point. Their next steps are yet to be announced.
By Will Sandoval, NBTV Associate Producer, Joël Valenzuela, and Naomi Brockwell.