LBRY Lawsuit: Judge Questions SEC - Is it still considered a security if I issue tokens, emphasize no work or development is done?

Last March, LBRY, a decentralized video platform recommended by YouTuber Haohuan, was sued by the SEC for allegedly offering unregistered securities. After a lengthy legal battle, LBRY released the transcript of the hearing, which sparked discussions within the crypto community. The transcript includes exchanges between the SEC and the judge, as well as the SEC's explanations.

Hearing transcript: https://odysee.com/@lbry:3f/0720LBRYTranscript:7

What is LBRY?

Decentralized YouTube

LBRY is a content publishing platform known for its decentralized version of YouTube. Its early product, LBRY.TV, will be deprecated in the future, and it is now primarily operating under odysee.com, offering desktop and mobile applications.

LBRY Credits LBC

Its token is LBRY Credits, serving as one of the transaction mediums for platform profit sharing, content publishing, purchasing, and viewing. The total supply is 1 billion, and the distribution mechanism is as follows:

• 10%: Marketing, strategic partnerships

• 10%: Operational costs

• 20%: Adoption promotion plan

• 60%: Mining rewards

Previously reported, the determination of whether financial products constitute securities is based on the Howey Test, established in 1946 when the SEC sued the Howey Company. The test includes the following criteria:

1. Investment of money

2. In a common enterprise

3. Expectation of profits

4. Profits derived solely from the efforts of others

Judge's Stance: Adherence to Precedent

LBRY pointed out that although the public often tends to mock the government's incompetence, Judge Barbadoro appears to be a very intelligent person who is making an effort to understand the issues to be clarified in this case. He not only praised the LBRY team's compliance but also raised doubts that their token LBC does not fall under the third point of the securities definition.

Additionally, the judge believes that this judgment involves many complex factors and repeatedly emphasized that his job is to determine the facts of the case and whether they align with previous case law to avoid setting new precedents:

"I will let both sides know where my thinking is. I am a judge who believes in the theory of precedent. I find the ruling in the Stock Generation case is one that I must follow, unless someone convinces me that there is a problem with that ruling, I will argue this case from the perspective of the SG case."

SEC Admits LBRY Token Has Practical Applications

LBRY quoted conversations between the SEC and the judge in the lawsuit.

Judge:

"To make an extreme assumption, I understand that the SEC emphasizes that there is plenty of evidence showing that LBRY tokens have expected profits. But if LBRY just created a token, emphasized that they will do nothing, will not carry out any development, under this theory, would issuing tokens not be considered a security?"

"LBRY emphasizes that they will do nothing, and the token price is determined by the market. I think there are many speculators in the crypto space, and their judgment of price movements is not based on whether the issuer has done something good or bad in token projects."

SEC Litigator Marc Jones:

"There are definitely many cases of fraudulent tokens in the market, but..."

Judge:

"I'm not even talking about fraudulent projects. Assuming this company has already declared that they will not carry out any development to increase the token's value, would that not be considered a security?"

SEC Litigator:

"I might need to think about such a situation. There has never been a case like this before. What I mean is, speculators just don't want to believe that the whole event is a tulip mania."

"Something deliberately created, even if it's a joke coin, becomes valuable. LBRY is not a joke coin; it does have some applications, but the main purpose of issuance is still fundraising. They hold 400 million tokens and burned half, telling everyone interested in investing in the platform that the value will increase significantly when LBRY is adopted."

How to Avoid Being a Security? SEC Has No Answer

After assessing the overall situation, the judge believes that people purchase LBRY tokens for various reasons, and behaviors of buying tokens for speculation or consumption do not comply with current regulations.

He inquired how to determine if LBRY meets the securities attributes in the Howey Test when it cannot be confirmed whether users buy tokens for use or investment purposes.

However, the SEC lawyer could not provide a definitive answer, stating that he is not a policy maker and can only act in accordance with existing regulations.

Winner Yet to Be Determined

The case is still ongoing, and LBRY's official Twitter account has mostly emphasized the aspects of the lawsuit that are more favorable to them. However, Gabriel Shapiro, Chief Legal Officer at Delphi Labs, believes that the SEC is more likely to win:

The judge understands that tokens have a mixed function of consumer use and investment but still adheres to the Howey Test. He does not understand why LBRY tokens cannot function as stablecoins like PoQ. I think the "facts" of LBRY are clearer than the Ripple case, and there should be a result soon. I guess the judge will stand with the SEC because if LBRY wins, it may create a precedent for the loophole of hybrid tokens in securities law. I really hope I'm wrong.

Note: Pocketful of Quarters PoQ is the first SEC-approved ERC20 stablecoin that can provide and sell PoQ as game tokens to players without registering as securities.