Ben Strack

SEC Commissioner Hester Peirce is once again dissenting from a crypto-related decision made by the agency she helps lead.



Peirce, who has historically spoken out about her support for a spot bitcoin ETF and other facets of the crypto space, did not agree with the Securities and Exchange Commission’s decision to bring a case against LBRY, she said in a Friday statement.&nbsp;



The SEC filed a lawsuit against the blockchain-based file-sharing network in March 2021 — accusing it of offering LBRY Credit tokens (LBC) without registering them as securities.



LBRY CEO Jeremy Kauffman previously expressed concern this decision could potentially endanger the entire US crypto industry, as it would establish a precedent that could classify “almost every cryptocurrency” as security.



“The commission has brought many troubling crypto enforcement actions, but the LBRY…case has especially unsettled me,” she noted.



Read more: <a href="https://blockworks.co/news/sec-crypto-enforcement">SEC Crypto Enforcements on Track to Eclipse 2022</a>



LBRY’s approach was “more conservative” than those other projects took, Pierce said, making the SEC’s action against the company “especially puzzling.” Monetary remedies sought by the SEC — originally amounting to $44 million — were “entirely out of proportion to any harm,” she added.



<a href="https://blockworks.co/news/lbry-shutter-sec-debt">LBRY said last week it would cease operations</a>, citing its legal defeat to the SEC.&nbsp;&nbsp;



“Are investors and the market really better off now after the Commission’s litigation contributed to the demise of a company that had built a functioning blockchain with a real-world application running on top of it?” Peirce added in the <a href="https://www.sec.gov/news/statement/peirce-statement-lbry-102723?utm_medium=email&amp;utm_source=govdelivery">statement</a>. “This case illustrates the arbitrariness and real-life consequences of the Commission’s misguided enforcement-driven approach to crypto.”



A spokesperson for the SEC did not immediately return a request for comment.&nbsp;



This isn’t the first time Peirce has spoken out against SEC opposition to the crypto segment. She said during a discussion with Florida International University law students in March that <a href="https://blockworks.co/news/gensler-too-much-too-fast">enforcement should only come after regulations</a> are put in place.



Those comments came before the SEC <a href="https://blockworks.co/news/coinbase-binance-suits-different">sued Coinbase and Binance in the same week</a> in June. Those cases, which both involve alleged securities violations, are ongoing. The crypto exchanges have denied wrongdoing.&nbsp;



Peirce, in an <a href="https://twitter.com/BitcoinMagazine/status/1716471079659590111">interview</a> with CNBC Monday, said she has believed for five years that the regulator should approve a spot bitcoin ETF — noting “the logic for why we haven’t [approved one] has always mystified me.”



The SEC commissioner put forward a safe harbor <a href="https://www.sec.gov/news/public-statement/peirce-statement-token-safe-harbor-proposal-2.0">proposal</a> in April 2021 that would give developers a grace period to experiment with decentralized networks while being exempted from certain federal securities laws.



“Our disproportionate reaction in this case will dissuade people from experimenting with blockchain technology, which LBRY aptly describes as ‘technology that enables dissent,’” Peirce said Friday. “A government of a free people should welcome dissent and the technologies that enable it.”



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Hester Peirce: SEC case against LBRY ‘unsettled me’

Sebastian Sinclair

After a lengthy legal battle with the US Securities and Exchange Commission, LBRY has followed through with plans to close up shop.



In a farewell post, the company blamed its closure on a lost judgment to US regulators, adding it could no longer meet its financial obligations.&nbsp;



The development follows LBRY’s previous notice of appeal in September against a court ruling favoring the SEC, a move that was seen as a last-ditch attempt to keep the company afloat.



As a blockchain-based content-sharing platform, LBRY aimed to disrupt traditional digital publishing platforms via its decentralized protocol.



However, <a href="https://blockworks.co/news/sec-lowers-lbry-fine">the firm fell under the SEC&#8217;s scrutiny</a> for alleged securities violations concerning its LBRY Credit tokens (LBC). The company argued against classifying its token as a security.



Despite these efforts, the company was dealt a crippling blow when the court sided with the <a href="https://blockworks.co/tag/sec">SEC</a> following the agency’s lawsuit against it in March 2021.&nbsp;



Read more: <a href="https://blockworks.co/news/lbry-appeal-against-court-decision">LBRY files notice of appeal against court July decision that buckled the project</a>



The regulator initially sought $22 million from the platform, though that was scaled back to just $111,000 after the SEC acknowledged its financial struggles.



LBRY’s existing debts include obligations to the SEC, its legal team and a private debtor. With no way to cover these, its assets, including its app Odysee, are being placed into receivership.&nbsp;



All board members, executives, and employees have resigned. The company’s domain, social media handles and GitHub repository will also be utilized to satisfy the debts, according to the post.



The <a href="https://blockworks.co/tag/lbry">LBRY</a> network itself remains active, given its decentralized structure. Over 1.7 million identities and 30 million pieces of content have been published to the LBRY blockchain.



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LBRY ends operations, cites feud with SEC and mounting debt

Blockchain-based content-sharing platform LBRY has filed a notice of appeal against a July court decision that sided with the SEC over alleged securities violations.&nbsp;



The <a href="https://www.courtlistener.com/docket/59774584/111/us-securities-and-exchange-commission-v-lbry-inc/">appeal</a>, filed Thursday, seeks to challenge a ruling by the First Circuit Court’s final judgment, which imposed a fine on the company and restricted it from participating in future offerings.



It&#8217;s a change of pace for the embattled company, which had previously signaled an intent to <a href="https://twitter.com/LBRYcom/status/1678866789407551489">wind down</a> operations immediately following the court’s decision two months ago.



Initially, the SEC sought a penalty of $22 million against the company, alleging that its LBRY Credit tokens (LBC) were unregistered securities back in <a href="https://www.docketalarm.com/cases/New_Hampshire_District_Court/1--21-cv-00260/US_Securities_and_Exchange_Commission_v._LBRY_Inc/1/">March 2021</a>.



The commission, however, <a href="https://blockworks.co/news/sec-lowers-lbry-fine">scaled back</a> its demands to just over $111,000 in May of this year, citing the company&#8217;s &#8220;near-defunct&#8221; status and lack of funds, Blockworks previously reported.



A request for disgorgement, commonly used to reclaim ill-gotten gains, was withdrawn by the SEC.



Even though LBRY didn&#8217;t undertake a traditional initial coin offering, it still acted like a security by keeping tokens it created early on and then selling them later, the regulator argued at the time.



The court&#8217;s decision came as a blow to LBRY and its CEO Jeremy Kauffman, who have repeatedly argued that the classification of LBC as a security could endanger the broader US crypto market by establishing precedent.



LBRY&#8217;s own decision to appeal Thursday comes amid a series of victories for crypto industry firms including <a href="https://blockworks.co/tag/ripple">Ripple</a> and <a href="https://blockworks.co/tag/grayscale">Grayscale</a>, who have also battled against federal regulatory judgments. 



Last month, Grayscale was granted a small victory in the DC Circuit Court of Appeals when a three-judge panel mandated the SEC review the digital asset management firm’s application to convert its flagship trust into a spot bitcoin ETF.



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LBRY files notice of appeal against court July decision that buckled the project

Shalini Nagarajan

The Securities and Exchange Commission (SEC) sought to revise its fine against blockchain-based content-sharing platform LBRY after taking into account the marketplace’s inability to afford the substantial $22 million penalty.



Additionally, considering LBRY’s “lack of funds and near-defunct status,” the agency chose to withdraw its request for disgorgement, or forfeiture of ill-gotten gains.



In a <a href="https://www.courtlistener.com/docket/59774584/107/us-securities-and-exchange-commission-v-lbry-inc/" target="_blank" rel="noreferrer noopener">filing</a> dated May 12, the Commission has now requested the US District Court of New Hampshire to impose a fine of $111,614.



In March 2021, the SEC filed a <a href="https://www.docketalarm.com/cases/New_Hampshire_District_Court/1--21-cv-00260/US_Securities_and_Exchange_Commission_v._LBRY_Inc/1/" target="_blank" rel="noreferrer noopener">lawsuit</a> against LBRY, accusing them of offering LBRY Credit tokens (LBC) without registering them as securities. LBRY CEO Jeremy Kauffman expressed concern this decision could potentially endanger the entire US crypto industry, as it would establish a precedent that could classify “almost every cryptocurrency” as security.



Although LBRY did not conduct an initial coin offering (ICO) or a similar public token sale, the SEC alleged that LBRY’s team retained tokens for themselves through a “pre-mine” process and subsequently released them on secondary exchanges to generate funds for their operations.



The SEC <a href="https://blockworks.co/news/no-ico-is-no-excuse-lbry-ruling-shows-bad-news-for-ripple">secured victory in the case</a> through a summary judgment in Nov. 2022, when a federal judge recognized that the tokens incentivized LBRY’s team to develop the network, creating the perception among investors that investing in LBC on secondary markets would yield profits.



LBRY in Dec. <a href="https://www.courtlistener.com/docket/59774584/100/us-securities-and-exchange-commission-v-lbry-inc/" target="_blank" rel="noreferrer noopener">hit back</a> at the SEC’s request for $22 million in disgorgement, saying the amount was “not a reasonable approximation of profits causally connected to the violation.”



Now, the SEC has also sought an injunction to prevent LBRY from violating Section 5 of the Securities Act of 1933, which prohibits unregistered offerings of crypto securities. This injunction will continue until LBRY meets two requirements: disposing of its LBC holdings and dissolving the company, as it has expressed intent to do in court.



The SEC argued that LBRY’s possession of LBC tokens indicates the potential for additional unregistered sales, which supports the necessity of an injunction.



“LBRY satisfies the factors for injunctive relief and there is a reasonable likelihood it will violate Section 5 again,” the agency said. Blockworks has reached out to LBRY for comment.&nbsp;



Meanwhile, LBRY contended in Dec. 2022 that an injunction is unnecessary since it’s already in the process of shutting down operations and burning existing LBC tokens, according to the filing. The SEC pointed out that these actions have not been taken yet.



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SEC Lowers LBRY Fine Significantly Due to ‘Near-Defunct’ Status

Casey Wagner

SEC Chair Gary Gensler, who has <a href="https://blockworks.co/news/gensler-crypto-wild-west">long hinted</a> that he believes most crypto tokens are securities, finally confirmed his view that everything other than bitcoin falls under the SEC’s purview, and it’s giving crypto firms fuel for their legal battles.&nbsp;



In a Feb. 23 interview with New York Magazine, Gensler confirmed what the industry has long expected: “Everything other than bitcoin” is a security, he said.&nbsp;



In response to the comment, Ripple and LBRY, two firms who found themselves going head to head with the agency over this exact issue, are calling the agency chief’s behavior out as prejudiced. <a href="https://blockworks.co/news/ripple-sec-final-briefs-provide-case-summary">Ripple’s fight with the SEC</a> is ongoing.



Gensler needs to recuse himself from all crypto enforcement action votes going forward, Ripple’s chief legal officer Stuart Alderoty <a href="https://twitter.com/s_alderoty/status/1630345920398147588?s=20" target="_blank" rel="noreferrer noopener">argued</a>. Alderoty cited the precedent established by Antoniu v. SEC, a case in which the SEC’s attempt to ban a stockbroker from working at a securities firm fell apart because a SEC commissioner had prejudged the case in a public statement.



In Antoniu, the plaintiff claimed that the commissioner’s participation in disbarment proceedings “impermissibly tainted the proceedings with the appearance of impropriety” and the court agreed, holding that the statements demonstrated that the commissioner &#8220;in some measure adjudged the facts as well as the law of a particular case in advance of hearing it.&#8221;



The court further stated that, “Accordingly, we nullify all Commission proceedings…in which Commissioner Cox participated occurring after Commissioner Cox&#8217;s speech was given and remand the case to the Commission with directions to make a de novo review of the evidence, without any participation by Commissioner Cox.”



If this precedent were to apply to Gensler’s speech, he may be prohibited from participating in future securities cases brought against digital asset firms.



The counter argument to Antoniu v. SEC is that although the commissioner in question recused himself from the proceedings after his speech, he did “participate in a routine denial of an offer of settlement,” University of Kentucky Law faculty wrote in a 2009 <a href="https://uknowledge.uky.edu/cgi/viewcontent.cgi?referer=&amp;httpsredir=1&amp;article=1318&amp;context=law_facpub" target="_blank" rel="noreferrer noopener">opinion</a>. The commissioner&#8217;s actions “did nothing to violate the well-settled prejudgment doctrine about which the court writes,” faculty added. Their analysis, however, did not set a precedent.



LBRY, the issuer behind LBC Credit Tokens, also spoke up about Gensler’s NY Magazine comments, claiming the company knew Gensler’s opinion all along.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">People called us crazy for saying that the SEC thought everything other than Bitcoin was a security, but now Gensler is saying it publicly. <a href="https://t.co/Q9wFjIsNH7">pic.twitter.com/Q9wFjIsNH7</a>&mdash; LBRY 🚀 (@LBRYcom) <a href="https://twitter.com/LBRYcom/status/1630692141419712513?ref_src=twsrc%5Etfw">February 28, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The situation comes after LBRY was handed down a summary judgment in November, which ruled in the SEC’s favor and confirmed LBC is a security. In a small win for LBRY, and potentially Ripple, in a January appeal, a judge <a href="https://blockworks.co/news/lbry-vs-sec-secondary-sales-arent-securities-may-be-good-news-for-ripple">clarified that secondary sales of LBC are not considered securities</a>.



LBRY has publicly <a href="https://twitter.com/LBRYcom/status/1617978599101042688?s=20" target="_blank" rel="noreferrer noopener">offered</a> its help to other crypto agencies facing legal challenges with the SEC, saying it will share any information it can into the process and best practices when confronting enforcement actions.&nbsp;



A summary judgment in Ripple’s case over the classification of its XRP is expected this year. The legal proceedings began in 2020.



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Impermissibly Tainted? Gensler’s Own Words Could Bar Him From Crypto Securities Actions

A judge clarified that LBRY Credit Tokens, known as LBC, are only considered securities at the time of direct sale, a ruling that could potentially bode well for Ripple.&nbsp;



During an appeal hearing in New Hampshire Monday, the judge said the <a href="https://blockworks.co/news/no-ico-is-no-excuse-lbry-ruling-shows-bad-news-for-ripple">summary judgment</a> <a href="https://blockworks.co/news/no-ico-is-no-excuse-lbry-ruling-shows-bad-news-for-ripple">handed down in November</a>, which sided with the Securities and Exchange Commission (SEC), does not apply to secondary sales of LBC.&nbsp;



The SEC sued LBRY in March 2021 for offering LBC tokens without registering with the agency. Although the LBRY team did not offer tokens to the public in an <a href="https://blockworks.co/tag/ico">initial coin offering</a> (ICO) or similar mechanism, they did keep tokens for themselves in a ‘pre-mine,’ which were subsequently released on secondary exchanges to fund operations, the SEC alleged.



In the summary judgment, the judge argued that the tokens incentivized the team to build the network, suggesting to investors that LBC would be a profitable investment on the secondary market.&nbsp;



“LBRY has — at key moments and despite its protestations — been acutely aware of LBC’s potential value as an investment,” the <a href="https://odysee.com/@lbry:3f/secvslbrysummaryjudgementruling:a" target="_blank" rel="noreferrer noopener">summary judgment</a> reads. “And it made sure potential investors were too.”&nbsp;



Monday’s ruling may be a positive sign for Ripple, which is facing its own SEC lawsuit over its XRP tokens, which the regulator alleges were distributed in an unregistered security offering.&nbsp;



Ripple has maintained that it never formally held an ICO, similar to the LBRY situation.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Ripple never held an ICO because the XRP ledger was ALREADY in existence when Ripple was formed. So, prior lawsuits against companies that held ICOs do NOT tend to show that Ripple had Fair Notice that what it was doing was illegal. Ripple is making an important distinction here.&mdash; Jeremy Hogan (@attorneyjeremy1) <a href="https://twitter.com/attorneyjeremy1/status/1401990980836986892?ref_src=twsrc%5Etfw">June 7, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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The case will be decided in a summary judgment, which both Ripple Labs and the SEC agreed to in November 2022. 



In a small win for Ripple, the judge on the case ruled in September that the “<a href="https://blockworks.co/news/sec-emails-highlighting-alleged-conflict-of-interest-set-to-take-center-stage-in-ripple-trial">Hinman documents</a>,” emails between former SEC officials regarding ether’s classification, are permissible evidence.



In April 2022, Empower Oversight, a nonprofit whistleblower organization, released more than 200 emails, including Hinman’s, obtained via Freedom of Information Act request between current and former SEC employees.&nbsp;



The group claimed the emails prove there were conflicts of interest associated with how the SEC selected enforcement actions against digital asset companies, specifically the agency’s decision not to view ether the same as XRP.



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