Judge rules LBRY’s token is a security — what about XRP?

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On Monday, crypto firm LBRY Inc. lost its case against the Securities and Exchange Commission (SEC). LBRY was initially charged by the SEC in March 2021 for selling securities and failing to register with the commission.

The judge’s ruling found that investors in LBRY’s native token, LBC, were reasonably likely to take company communications as evidence that they could profit from owning its token.

It also found that LBRY Inc. would be incentivized to grow the value of its token because it had pre-mined and kept a significant stash of LBC for itself. The ruling emphasizes that even if some purchases of LBC were made to enjoy its utility in the protocol, that doesn’t mean that it’s not a security.

LBRY chief exec Jeremy Kauffman reacts to the ruling.

Read more: How Ian Balina’s SEC lawsuit may influence future crypto securities cases

Could LBRY’s case have repercussions for Ripple?

This decision has potential ramifications for protocols across the cryptocurrency space, as many teams choose to keep a portion of the initial token supply to help fund activities.

The SEC has been signaling since the DAO Report in 2017 that it could crack down on cryptocurrencies as unregistered securities. This included chairman Jay Clayton’s statement that “every ICO I’ve seen is a security” in 2018, a sentiment echoed by the current chairman Gary Gensler in 2021.

“If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that’s a security, I’m not going to go token by token, you can imagine why I wouldn’t do that. But my predecessor, Jay Clayton… said it best about three years ago that he really hadn’t seen many tokens that didn’t meet that securities test.”

However, actual enforcement actions have been relatively sparse compared to the number of cryptocurrencies theoretically under the jurisdiction of the SEC.

One high profile case that has absorbed a disproportionate amount of the SEC’s attention is the ongoing case against Ripple. This ruling against LBRY — which uses broad definitions of what is considered an offering and why purchasers would have a reasonable expectation of profits — is likely to continue to make it difficult for Ripple to assert that there was not a securities offering.

The case has been ongoing for over a year. While a judgement date is still unknown, Judge Torres is expected to decide before spring 2023.

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